SACRAMENTO (CBS13) – The California State Auditor’s office has released a report sharply critical of the Sacramento City Unified School District.

The school district faces insolvency as a budget shortfall of nearly $20 million is projected for the 2021-22 fiscal year.

READ MORE: Gun Found In Desk Of Second Grader At South Sacramento School, District Says

With the district and teachers union continuing to be at odds over how to overcome the shortfall, the state auditor’s office conducted a review. The auditor’s findings were released on Tuesday.

Increased spending for teacher salaries and benefits is the primary factor for the school district’s dire financial situation, according to the audit. A new labor contract approved in 2017 increased teacher salaries by 15 percent – an additional cost of $31 million per year. Further, the auditor found that the cost of employee benefits has increased 52 percent over a five-year period.

As the auditor found, Sac City Unified has the highest total compensation for teachers among other nearby school districts – like Elk Grove, San Juan, Stockton and Twin Rivers.

Sac City Unified said, in a statement after the report was released, they agreed with the auditor’s finding. However, the district also argues that the new contract was necessary to avoid a teacher strike.

READ MORE: Call Kurtis Investigates Whether You’re Getting What You Paid For At The Pump

“It is important to understand that our Board made difficult financial decisions in 2017 to avoid a teacher’s strike that would have had a devastating impact on our students,” said Jessie Ryan, president of the Sacramento City Unified Board of Education. “We decided to not make additional cuts because they were a one-time fix with serious, long-term impacts to student learning.”

Further, the auditor found special education to be a major factor in the funding gap. The auditor says special education costs have doubled for 2017-18, accounting for 21 percent of Sac City Unified’s total spending that fiscal year.

The auditor urges the district to act quickly to implement a plan, the report states. The district says the solution lies in reducing healthcare and other labor costs.

Sac City Unified faces a state takeover if a solution can’t be found. The district is projected to exhaust its funds by October 2021.

MORE NEWS: Elk Grove Zoo Could Open By Summer 2027

Read the full auditor’s report here: