Schools will need to borrow $300M
With the release of its five-year fiscal plan, which would cover operations through the 2016-2017 school year, the School District of Philadelphia has moved one step closer to obtaining the $300 million necessary to close its budget deficit and ensure operations for this school year and beyond.
The filing of the five-year plan is necessary for the district to receive bond issuance assurance from the state’s Public School Building Authority, which will convene a meeting on the matter later this month.
District Chief Recovery Officer Thomas Knudsen — the author of this final five-year fiscal plan, the recently approved district budget and the five-year reorganization blueprint which was publicized in the spring — said that district hasn’t yet received the funds, but all indications are that it will, as long as the School Reform Commission approves the five-year plan.
“We are confident that we will receive the funds, although there have been no guarantees,” said Knudsen, who noted that he is still putting together all of the required paperwork to complete that part of the transaction. “We need to indicate to the bond holders and demonstrate to them that within the limits we have right now — including the factors that we can control — that we can bring a balance between expenses and revenues.”
The $300 million in debt financing is an unpleasant outcome the district was forced to consider, especially after it received less than the estimated $97 million it was to get from the city in tax receipts from the Actual Value Initiative. The district had factored the full $97 million into its earlier budget forecast.
“In regard to City Council, the difficulty we have there is that we had been anticipating receiving $94 million on an annual basis, and that’s what the mayor had in his budget for us this year,” Knudsen explained. “Of course, we only got $54 million which caused us to rethink our options.”
Obtaining that $300 million will be costly. According to the five-year plan, the district will pay $22 million per year to finance the loan, increasing the district’s debt service by a considerable margin. Knudsen’s plan didn’t spell out how many years it would take for the district to repay the loan.
Although unpalatable, Knudsen said there were simply no other options.
“The last [budget] deficit financing was done in 2001, and generally, deficit financing is not something the financial markets want to support,” Knudsen said. “[Bond holders and investors] are looking for structural balance, where revenues equal expenses.
“Debt financing is something you have to do when the circumstances work against you.”
In the five-year plan, Knudsen outlined the painful austerity measures already undertaken by the district, including closing dozens of low-performing, underutilized or unsafe schools; trimming more than $264 million in various personnel cuts; managing to cut $67 million from the central office’s budget and recouping a further $42 million in deep cuts to school security and police personnel, maintenance staff reductions and the elimination of several support staff positions.
Knudsen’s five-year plan highlighted the recently-completed negotiations with the Service Employee’s International Union local 32BJ — a contract that led to a union giveback of more than $100 million — as a model of how the district can bargain in good faith while fostering a sense of ownership among employees.
That agreement requires SEIU 32BJ members to donate a certain percentage of their wages to the district, with most employees paying in roughly $20 per pay period.
“We recommend asking more of our employees to come to the table and contribute directly to the educational program of the school district, as the members of our largest blue collar union did this summer,” Knudsen wrote in his letter that accompanied the five-year plan, which noted that employee contributions will amount to roughly 10 percent of the district’s budget. “We know this will mean real sacrifices for hard working professionals who are already being asked to do more with less, under difficult conditions.
“We do this because without such assistance, this financial plan cannot succeed, as the bulk of our expenses are in personnel costs.”
An unanticipated hit to the district’s finances came in the form of the hyper-expansion of cyber charter schools, which receive the same per-pupil funding as traditional public schools – with an estimated 38 percent of that money coming from local tax revenues. These cyber-charters also operate without the infrastructure overhead of maintaining several hundred buildings.
“These charters, which are authorized by the Commonwealth, not the SRC, are able to scale up quickly…other districts across the region and country have developed successful models for district-run cyber schools that are much less expensive for districts’ bottom-lines than charter schools,” the five-year report read. “The school district expects to develop this in-house online option for students and anticipates that it will reduce the number of students migrating to cyber charter schools versus the current projections for cyber charter growth, in which cyber charter seats are projected to grow from about 5,900 in fiscal year 2013 to 10,750 in fiscal year 2017.
“In this manner, it is projected that a district-run cyber school would save $14 million over the five-year planning period.”
Although this five-year plan is not a budget, almost all of the recommendations and numbers included therein are nearly identical, but the five-year plan goes several steps further in identifying other revenue streams the district could utilize.
Those streams include the collection of $48 million in delinquent local tax revenues and an additional $150 million, attributable to a liquor-by-the-drink tax and a so-called “unearned income” tax which targets the interest accrued on investments. The plan also calls for the district to recover $28 million from the sale of unused district facilities identified in the Facilities Master Plan.
Knudsen and the SRC believe this level of transparency – releasing to the public the blueprint, budget and this five-year financial plan – coupled with the series of recently-completed community meetings will show the district is sincere in delivering to students the best education possible.
“Everybody in district management understands the difficulties that our financial situation poses. I would say in terms of academic achievement, [Chief Academic Officer] Penny Nixon and [incoming superintendent] Dr. Hite are go to attempt, and I hope succeed in, providing the very best education they can under these limitations,” Knudsen said, “with the understanding that we will be going to all of our service partners in the state and city to seek more revenue.
“We have demonstrated they we are operating lean now, and hope they consider giving us more revenues,” Knudsen continued. “With that, enhancement to the [academic] program would be possible.”