District forecasts five years of balanced budgets, citing new city commitment

A relieved SRC approves the $3.1 billion lump sum budget, which projects a surplus at the end of fiscal 2019 of $135 million.

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Buoyed by the promise of nearly a billion new dollars from Mayor Kenney, Philadelphia School District officials are projecting five years of balanced budgets even as they plan to enhance some services for city students.

The new figures were unveiled as District Chief Financial Officer Uri Monson presented a $3.15 billion “lump sum” budget to the School Reform Commission on Thursday, along with a five-year plan.

The SRC approved the budget by a 3-0 vote. Bill Green was absent.

“This is a step away from the years when we made dramatic closures, and that’s exciting,” said SRC Chair Joyce Wilkerson. “It’s been a long haul. There have been some tough years. This puts the city in the position to provide additional funding until the states does.”

Wilkerson was hopeful that Harrisburg can be convinced to provide more funding in the future, since “we’re in the same boat as most everybody across the commonwealth.”

The new projections are in stark contrast to the picture painted late last year, when Monson forecast a $700 million annual shortfall by 2022, due to expenditures far outpacing anticipated revenue. At one time, the deficit projection was as high as a billion dollars.

But that was before Kenney, in his budget presentation on March 1, promised that the city would back up its resumption of local control of the District with a significant infusion of new cash.

He proposed raising the property tax rate by 6 percent and reducing some planned business tax cuts, plus several other measures to raise the $980 million in additional dollars for the District over the next five years.

“Now, we are in a moment of truth. It’s time to write a new chapter in the history of Philadelphia’s schools,” said Kenney, declaring the end to an era of massive District budget cuts – largely state-imposed – and devastating consequences, such as the elimination of school counselors and nurses.

On Thursday, the mayor’s budget director revised that number downward to $966 million over five years, mostly by decreasing the percentage of the proposed property tax increase to 4.1 percent. But the total revenue raised will still approach the prior total because the Office of Property Assessment has concluded that most city homes are worth more than originally projected.

Last fall, Kenney began the process of returning the District to local control after 17 years under the state-dominated SRC. Pennsylvania assumed control of the District in 2001, declaring it fiscally and academically distressed.

Kenney said he had finally concluded that the state, which has the legal responsibility to make sure all students have access to a quality education, would not come through for Philadelphia any time soon.

“These are our kids,” the mayor said. “They are not anybody else’s kids.”

Now, with Kenney’s commitment, the picture has changed.

“Before expenditures were growing twice as fast as revenues, but now they are almost equalized,” said Monson. “That’s mostly due to the city’s proposals to provide recurring naturally growing revenues.”

In last year’s presentation, the forecast was that expenditures were increasing by 4 percent and revenue by just 2 percent. Now, Monson said, expenditures are increasing by 3.5 percent, while revenues will increase by 3.1 percent.

This will allow for additional investments, including the elimination of all “split” grades in grades 1 and 2. Those are classrooms in which students from both grade levels are combined to save on the cost of a teacher. This scenario happens when enrollment in each grade is well below the contracted maximum of 30 students, so students are put together. Now, the classes will be kept separate and class size adjusted.

In remarks before the SRC, Superintendent William Hite cited improved graduation rates and successful early literacy work – this year marked a 5 percent increase in the number of 3rd-grade students reading on grade level – to 4th and 5th grade. Other new investments include significant capital improvements and classroom modernization; 30 additional teachers for English learners; funds for more itinerant instrumental music teachers and art and music supplies; additional emotional support programs and special education vocational teachers; and increased financial support for the lowest-performing schools.

“The District is in the strongest academic and financial position it’s been in since I’ve become superintendent,” Hite told SRC members before the vote.

Of course, the City Council must approve the tax increases and other revenue measures that the mayor proposed in order for these budget projections to hold true. And the lump sum budget also assumes that Gov. Wolf’s proposed budget will be approved for FY 2019 as well as, after that, 1.5 percent annual growth rate in state funds.

There are other risks, including changes to the formula for reimbursing charter schools and the possibility that the legislature will approve a bill giving the state the power to authorize charters. These budget projections assume a slowdown in the growth of charters, which is the largest single line item expenditure in the District’s budget at close to a billion dollars. Charters now enroll about a third of the city’s students.

Another risk is the ever-escalating contribution to the state teacher retirement system, or PSERS, which has ballooned since 2011 from $50 million to more than $300 million annually. Another big cost driver is medical benefits.

Most of the annual increases in the budget are accounted for by fixed costs beyond the District’s control, such as pensions and charter payments, not by additional educational investments in District schools. By the fifth year, the total budget would increase $136 million, with $28 million of that due to new investments in schools and classrooms.

The Trump administration could upend federal education funding priorities drastically, which would also change the picture. It has already declared its intention to eliminate Title II, which is used for teacher training and development, and the new budget sets aside $17 million as a contingency fund in case that goes through. However, the much larger Title I, which sends $130 million to Philadelphia, could also be affected.

For the moment, though, Monson’s numbers project a fund balance at the end of fiscal 2018 of $135 million, about 4.5 percent of total revenues, which is smaller than recommended. That fund balance will fluctuate and dwindle to just $61 million in 2023, or 1.7 percent.

The five-year plan does not include plans for closing any schools, Monson said in answer to a question from Wilkerson.

“The city’s proposed new funding plan provides resources to accelerate and further expand progress while ensuring fiscal stability for years to come,” Monson said.

The lump sum budget provides a general summary of expenditures and priorities; more detail is available from budget documents on the District’s website.

Individual schools will be completing their budgets by March 28. There will be a budget hearing before the SRC on April 19 and one before City Council on May 9. The SRC is scheduled to adopt a final budget on May 24.

The District also approved over $250 million in bonds at a relatively low interest rate compared to recent years.

Monson said the District’s interest rate has been declining in recent years, saving over $18 million on the latest bond issue. This helps the District keep their annual debt service payments below 10 percent – one of the primary reasons that credit agencies upgraded the District’s ratings.

Moody’s assigned fairly stable ratings to the bonds, calling the outlook “positive,” but far from perfect due to “the district’s still-strained financial position and narrow reserves, exacerbated by substantial charter enrollment pressures that will persist.”

The District now has a total of roughly $3.2 billion in outstanding debt, according to Moody’s. Passing the new budget may help these bonds get a better rating in the future, which could lower interest rates for the District.

The bonds received a relatively high rating due to “the district’s strong management team,” and the “positive relationship with the City of Philadelphia, stabilized charter enrollment, and a return to investment in district classrooms after years of austerity operations.”

Moody’s also applauded the “move from SRC governance to local control in 2018, and the mayor’s recent budget proposals, which allocate permanent tax increases to the district.”

In other action, the SRC also approved the long-awaited Policy 406, which sets conditions for amending a charter before it is due to expire. Among other things, it specifies when charters must seek approval from the SRC when they make changes in educational programs, location, or name. The policy was designed last year, in collaboration with the Pennsylvania School Board Association, which makes recommendations on best practices for charter school authorizers.

The proposed policy had been amended several times, but the latest revisions still don’t satisfy the charter community, which has been complaining of overregulation. Excellent Schools PA, which represents charter schools, sent a letter to SRC members urging a “no” vote.

“The rush to amend Policy 406 coincides with a series of infringements upon charter schools including greater efforts by the Charter School Office to micromanage charter schools, charter application denials and lingering issues of unsigned charter renewal agreements,” the letter said. Nearly 20 charters have declined to sign charter renewal agreements due to disputes with the District’s charter office over the terms.

The letter said approval will “jeopardize the working relationship of charter schools, education advocates and the School District at a time when we should be coming together.”