School district assailed for poor financial steps

Posted: June 05, 2007

The Philadelphia School District overspent its budget in each of the last four years and failed to use sound financial management controls that would have signaled trouble, leading to the deficit that emerged last fall, says a long-awaited report on district finances issued yesterday.

But the report also finds that the overspending paid off in substantial academic improvement, and both state and city officials said yesterday that more funding was warranted to continue the improvement.

Although much of the blame for the deficit has fallen on the shoulders of district Chief Executive Officer Paul Vallas, Gov. Rendell's top financial adviser and author of the report - Budget Secretary Michael Masch - said yesterday that the blame also lies with the School Reform Commission, the district's governing body.

The district lacked annual five-year budgets, quarterly reports that ensure that spending stays in line with budget estimates, and other fiscal controls, Masch said in his 43-page report. It also inserted "on-paper" spending adjustments to the budget without specifying which department was responsible for making the cuts, he said. As a result, adjustments necessary to keep spending at the budgeted levels never happened.

"It is difficult to manage a $2.7 billion organization successfully in the absence of these kinds of standard management practices," Masch said, referring to both the district's $2 billion-plus operating budget for 2006-07 and its funding from grants, many of them federal.

But he also said that most of the controls were lacking before Vallas and the commission came on board in 2002 following the state takeover of the district.

The problems were occurring even during the three-year span of 2000 to 2002 that Masch was a member of the district's Board of Education and later the commission.

"The problem is, the School Reform Commission didn't end these practices. They didn't invent them, but they didn't end them," Masch said.

But both state and city officials said yesterday that the report supports the district's case for more funding.

"Do we think what the district has done in the last five years is worth sustaining and advancing?" Masch asked. "Both the governor and I believe that it is."

City Education Secretary Jacqueline Barnett said Mayor Street also believed that the report demonstrated the need for more city funding.

Neither Rendell nor Street has said how much more he is prepared to seek for the district.

Masch began reviewing district finances in December at the request of Street and Rendell. The request followed the district's disclosure that it had to cover a $73 million deficit. Vallas, a former budget director of the City of Chicago, came under considerable criticism for the deficit and began to plan his exit in the aftermath. He is headed to New Orleans at the end of the month to run the schools there.

The commission hired an auditor and instituted tighter financial controls, limiting Vallas' authority to spend money.

Last week, the commission approved several financial management measures recommended by Masch, including five-year financial plans and quarterly reports.

He called the new measures "very positive steps in the right direction."

Commission Chairman James Nevels, in a statement yesterday, called the report "a constructive effort" to help the district and said that some of the problems identified by Masch already were addressed by the commission in November after the deficit emerged.

"There is no question we can and will do more to establish better accounting processes and provide the highest level of comfort to our funders and the public," he said.

Vallas acknowledged that the district should have had a five-year plan, but said the real problem was lack of revenue.

"I'll share responsibility for having spent more money than we took in, but there's no denying the results were significant," he said. "We elected to err on the side of kids. A more accurate forecast might have resulted in us cutting more."

The district's request for more city and federal funding this year - about a 6 percent increase - is in line with increases provided in previous years, Masch said.

The state has given the district about 7 percent more each year for five years - a percentage point higher than the state average, he said. In the five years previous to that, state increases came in at about 4 percent a year, he said.

The city gave 5 percent more in each of the last five years, compared with 3 percent in the five years previous to that.

Masch's report does not indicate what level of funding the district should have. The budget adopted by the commission last week anticipates $9 million more from the city and nearly $55 million from the state, which is not yet specified in Gov. Rendell's budget. Without the money, district officials have said they will make deeper spending cuts than anticipated.

The report also does not evaluate individual programs to say whether money was spent well.

It does delineate items that have driven up costs in the district over the last several years. Charter schools, payments for debt service due to the district's extensive school-building plan, and special-education costs led the list.

Masch said that when he was head of the school board finance committee, he brought the poor fiscal management practices to the attention of the district.

Masch, who has been recommended as a candidate for the district's CEO job upon Vallas' departure, declined to comment on whether he was interested in the job.

"That's not a subject for this discussion," he said.

To read the report on Philadelphia school finances, go to

Contact staff writer Susan Snyder at 215-854-4693 or

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