NEW YORK City schools padded attendance figures to qualify for a higher financial subsidy from the state, a damning investigation has found.
It comes on the heels of disclosures that teachers and principals in the same school system helped their students cheat on standardised tests.
Governor George Pataki said his investigators had found "patterns of widespread, systemic abuse" of record-keeping by New York City schools seeking more money from the state.
The city gets more than $2 billion (pound;1.24 billion) a year in education aid from New York state based on enrolments. Even with just a 3 per cent inflation in attendance figures, the cost to the taxpayers would be $300 million over five years.
The city's high-profile schools chancellor, Rudy Crews, said the problems with reporting attendance were the result of the state's refusal to provide sufficient funds. He called the Pataki report "a political hack job".
As with many controversies in New York, the dispute is tinged with politics. Mr Pataki is an ally of New York mayor Rudolph Giuliani, a vocal critic of the school system.
Yet the investigation unearthed disturbing weaknesses in the system for keeping track of students. One student who died unexpectedly was kept on the roll for a year, and even issued with report cards.
"There is systemic fraud and abuse that goes beyond mere negligence," Mr Pataki said.
A separate state report just a week earlier said that teachers and principals in 18 of New York city's 33 school districts had helped students cheat on standardised tests. Forty-three teachers, two principals and two other staff members were implicated. So far, nine have been sacked, and at least 11 others will follow.
Meanwhile, there is another investigation under way into fraud in city school construction contracts. In Philadelphia, officials have conceded that the state over-paid them more than $30 million over a five-year period for nearly 25,000 students who were truants but were recorded as enrolled in city schools, and another 15,000 youngsters who never attended.
The state of Pennsylvania is withholding millions of dollars from the city to make up for previous over-payments dating back to 1992, prompting a school spokesman, William Epstein, to complain that the cuts would "penalise today's students for something that is seven years old".