Phila. school deficit projection alarms city controller

Mayor Michael Nutter
Mayor Michael Nutter
Posted: July 09, 2012

At first, the Philadelphia School District's 2012-13 deficit was projected to be $218 million. On Friday, its leaders announced the system is now as much as $282 million in the hole.

The district will have to finance hundreds of millions just to get through the school year, and is nearing the ceiling on how much it can borrow.

That worries City Controller Alan Butkovitz, who said the district has relied on "optimistic" projections.

"The numbers are beginning to get pretty close to what they were before the city's financial collapse in 1990," Butkovitz said. "This administration did not create these problems, and they're trying very hard to never say die, but as you walk around the streets, you have to admit that there's an air of unreality about this."

Butkovitz's bleak pronouncements angered Mayor Nutter, who called them politically motivated. "It is a tough mountain to climb," Nutter said of the district's financial situation. "But if we all do our jobs and stay focused on what's important, then the district will be back to financial health. It will take hard work. It will take leadership. It will take effort. It will take some risk-taking. We need to rally around supporting schools."

Make no mistake, Butkovitz said: The people in charge of the schools' purse strings appear to be doing everything they can to avert further crisis. But that might not be enough.

"I've got a lot of confidence in [chief recovery officer Thomas] Knudsen and this administration, but they don't have control of the situation," said Butkovitz, who has been critical of the district in the past. "The leaders are walking a difficult tightrope. They are trying to make plans that make sense, but they don't have in their hands the power to implement all the solutions."

That is, Philadelphia is unique among all Pennsylvania districts - it has no taxing authority and relies on other government agencies to give it the funds to operate.

That's why, in part, the deficit ballooned from $218 million to between $255 million and $282 million. School leaders had planned on $94 million in new city money - the amount Nutter had proposed would come through the Actual Value Initiative, his tax-reassessment plan - but a skeptical City Council delayed AVI and ultimately gave $40 million, some of that with conditions.

The conditions that resulted in the shortfall's being adjusted up "add to the burden and the challenge that we face this year, and it really does make achieving the very large savings that we need in fiscal '14 to reach structural balance that more difficult," School Reform Commissioner Feather Houstoun acknowledged Friday.

And while Knudsen and the SRC have a five-year plan to restore the district to fiscal health, it contains multiple question marks, things that will require political will that could be lacking.

The district is banking on $156 million in salary and benefit savings from its five unions, for instance, and it has said publicly that it has the legal authority to impose terms on the unions if agreements can't be reached.

But earlier this year, SRC Chairman Pedro Ramos and a lawyer hired by the SRC made the rounds in Harrisburg, asking legislators to pass a stronger law that would give the commission the absolute right to cancel contracts because they believed the existing law might not hold up in court, The Inquirer has reported.

Those efforts were halted when Philadelphia lawmakers, who had been kept in the dark and who were opposed to such a law, got wind of them and Ramos' efforts became public.

A large part of the district leadership's plan for averting a deficit that could balloon to $1 billion by 2017 is overhauling the district's structure - shrinking the central office, closing up to 64 schools, and organizing the rest into "achievement networks" that could be run by outside organizations such as charter management groups.

That plan has encountered heavy early resistance from the public, and the SRC has said it's still under consideration and won't be voted on until 2013.

But "if they think that the management companies are going to be a vehicle for overcoming the unionized workforce, that is a very difficult thing to accomplish in Philadelphia," Butkovitz noted.

State funding, which once made up more than half of the district's budget, has shrunk under Gov. Corbett's administration. The SRC's five-year plan calls for only a tiny boost in state aid - 1 to 2.5 percent - and not until fiscal 2016 and 2017.

"They have not been very successful at moving other branches of government toward what they think their recovery plan has to be," Butkovitz said of district leadership.

And while much attention has been given to the district's deficit for the coming school year, little has been paid to the fact that the district finished the 2011-12 year with a $21 million shortfall.

That shortfall was to be closed by June, but that didn't happen. Knudsen said Friday that he hoped that a more aggressive property-tax collection system will close that gap soon. If the money is collected by August, it can technically be applied to the 2011-12 year, Knudsen said.

Butkovitz isn't reassured.

The remaining $21 million gap from the previous school year "is a concession that the outside world is much harder to get under control than optimistic forecasts called for. That is a warning that whatever the assessment is for the next year, the likelihood is that the outcome will be worse than the assessment."

Knudsen said Friday that the SRC, which recently authorized $500 million in short-term borrowing - money unrelated to the overall deficit but necessary to provide cash while the district waits for funding that won't arrive until later this summer - will remain viable.

"We are OK going forward into the summer and the fall," Knudsen said. "We have the resources we need to continue to operate the district."

It's a difficult spot, Butkovitz acknowledged.

"How will they make it to June? Will they make it by not paying vendors on time? I still see this as a potentially disastrous outcome in the next year," the controller said.

Nutter dismissed that notion, and said Butkovitz's comments could create a "self-fulfilling prophecy, and undermine the great work that's being done."

"I think it's pretty silly to question whether the district has long-term viability," Nutter said. "That's just dumb. Of course we're going to have schools for our children. I have no idea what he's talking about. Responsible adults never let children suffer, and I certainly won't."

Contact Kristen Graham

at 215-854-5146, or on Twitter @newskag. Read her blog, "Philly School Files," at

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