The Ypsilanti school district posted a $1.5 million deficit in fiscal year 2010, which was about $998,000 less than originally anticipated, auditors told the school board Monday.

The deficit was blamed on a mixture of state funding decreases, dropping enrollment and a larger than normal rise in retirements due to a state incentive package.

But the district also spent $3.5 million less than it expected last fiscal year, said Jeff Higgins and Nathan Troyer of Plante Moran, Inc., the district’s auditors.

“There are clearly unprecedented financial challenges,” Higgins said. “The rate of funding increases is below the rate of inflation, and it has clearly placed financial strain on districts across the state, Ypsilanti included.”

The district’s annual audit report was presented to the school board Monday.

Troyer said the district’s overall deficit currently sits at about $4.7 million, despite being listed at about $3.8 million on the audit reports. He attributed that to severance payments made in September to retired employees.

“A large number of employees retired during the year, and that liability could not be recognized (on the paperwork) until it was paid,” he said.

School board member Kira Berman asked the auditors whether they found any financial irregularities in the district’s financial statements. Higgins said auditors found three procedural violations, in addition to the deficit, which is a violation of state law.

One of the violations was related to procedures in the district’s budget office, and two were deviations from strict federal processes for the federal audit.

Vice President Linda Horne said the district has already responded to and corrected the findings. Higgins said those corrections would be reflected in the next audit.

“The understanding is they have been corrected, but those would fall under the next audit cycle,” Higgins said. “It sounds like they would be sufficient, but the district will have to file a corrective action plan with that state.”

The board also heard a draft of the administration’s deficit elimination plan after the audit presentation.

David Houle, chief financial officer for the district, said board members will be looking to get input from the community on what changes they’d like to see in operations. The draft will be available on the district’s website soon under the financial reporting section, he said.

The district must submit its deficit elimination plan by Dec. 15, designed to take it out of the red by 2015.

“We’d like you to look at the projects we have in front of us and think about how the district might better answer those questions,” Houle said. “And when you have the information, pass it along to the superintendent and we’ll see what we can do to put that information into the deficit elimination plan.”

Board President David Bates said the deficit is still a long way from being solved, but he believes the plan is a step in the right direction.

He said the state legislature needs to put a greater emphasis on education instead of cutting more funding.

“We’re quite some distance from fully resolving it, but all we can do is work forward and continue to try and solve it,” he said. “I hope the state can recognize the importance of education and increase funding in the near future.”

Kyle Feldscher covers K-12 education for AnnArbor.com. He can be reached at kylefeldscher@annarbor.com.