As expected, City Controller Alan Butkovitz included a warning Tuesday about the Philadelphia School District's finances in a report that could result in higher borrowing costs for the district.

The comprehensive annual report, sent to bond-rating agencies and bondholders, includes a paragraph expressing reservations about the district's financial viability.

The school district, the controller's office said, "has experienced continued operating funds losses, is projecting significant budget shortfalls for fiscal years 2012 and 2013, and is uncertain about its ability to achieve cost savings and obtain additional funding to overcome these budget shortfalls. These conditions raise substantial doubt about its ability to continue as a going concern.."

For weeks, Butkovitz had been warning the district that his independent auditor's statement was likely to include cautionary language. The statement will be included with the district's basic financial statements for the fiscal year that ended June 30, 2011.

Butkovitz said he hoped Thomas E. Knudsen, the district's new chief recovery officer, could solve the daunting financial woes.

"I hope he can pull this out," Butkovitz said. "This is not a negative on him. But the numbers as they are presented do not indicate that the school district has a plan in place to make it well into the next fiscal year."

The district released a statement saying that it was meeting its financial obligations, would continue to do so and was focused on the challenges of the next fiscal year, as well.

"The School Reform Commission is prepared to take all necessary steps to assure that the District is operationally viable and that its schools are ready and able to support student success in the classroom," the district said.

Mayor Nutter, who has made the school district and its finances a top priority for his second term, said the district's "financial challenges" have been no secret, but the city now has a better understanding of the district's real fiscal condition.

"The key here is that the SRC [School Reform Commission] and Chief Recovery Officer Tom Knudsen are keenly focused on those financial challenges and are working with me and my Administration on a daily basis to address those challenges," Nutter said in an e-mailed statement. "We will ensure financial stability, fiscal discipline and continued operations of the School District of Philadelphia on behalf of our children, their parents, teachers and the City of Philadelphia."

On Friday, the district said it must find ways to save $38.8 million by the end of June. The district also will face a funding gap of at least $269 million in the fiscal year that begins July 1.