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District restructures debt amid concerns about future

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

A few hours before the marathon afternoon meeting on Wednesday dominated by passionate discussion of minority contracting, the School Reform Commission held a short, businesslike session to approve a resolution restructuring its debt. And while everything was presented as routine, pro-forma, and in the District’s best interest, it drew attention to some jaw-dropping information that is hardly secret but is not often discussed.

For instance, the District carries $3 billion in debt, and 10 percent of its operating budget goes to debt service – its annual pricetag has soared to $253 million of $2.4 billion. State law guarantees that the District pay off this debt no matter what; it has no option to delay doing this so it can, say, keep qualified teachers in every classroom.

And both Chief Financial Officer Michael Masch and the commissioners said it is likely that the District’s overall revenues will decline precipitously next year, given the expiration of the federal stimulus funds and Harrisburg’s takeover by Repubicans promising more austerity and no new taxes.

I will not pretend to have read the resolution, which is more than an inch thick. Masch said, in an understatement, that the restructuring was a "complicated transaction."

The District was authorizing nearly $426 billion in bonds, renewing $300 million in letters of credit that would have expired in the spring, and terminating $360 million in interest rate management agreements otherwise known as "swaps." According to Masch, terminating the swaps – desirable now because the conditions that made them advantageous a few years ago are no longer in effect – cost $63 million. But, he said, this will save the District $19.4 million in interest in the current budget and $5.7 million in FY 2012.

The entire deal, he said, will save $52 million "in present value savings over the life of the bonds."

Well, maybe.

Under SRC questioning, it came out that these savings are based on "assumed interest rates" and not guaranteed. Commissioner Joseph Dworetzky pointed out that the District is adding to the principal, and might wind up with a higher rate. "How are we protecting ourselves?" he asked.

Masch and financial adviser Andre Allen said that "close monitoring" of market fluctuations will be necessary.

"I’m going to be candid," Masch said. "We can’t guarantee zero catastrophic event risk. But that’s not the norm."

Beyond that, the District’s $3 billion in debt, Commissioner David Girard-diCarlo pointed out, is an awful lot.

Masch agreed, and blamed most of it on a building spree by former CEO Paul Vallas.

"I would prefer the debt load we inherited was lower than presently," he said. Even though debt service now constitutes 10 percent of the operating budget, he said "we still have substantial deficiencies in our physical plant. … We’re between a rock and a hard place, our fixed debt being what it is and our physical plant being what it is. We’ll have to make hard choices going forward."

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