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SRC approves $300 million bond sale to plug deficit

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

by Benjamin Herold for NewsWorks, a Notebook news partner

The School Reform Commission approved a massive bond sale Wednesday that will generate a $300 million cash infusion to city schools this year, but officials cautioned that the new revenue is not cause for celebration.

“I’m glad that we were able to get this financing done,” said SRC Chairman Pedro Ramos. “I couldn’t be more unhappy that we’re in a situation where it’s necessary to do a borrowing for the purpose of merely paying our bills.”

The money generated from the bond sale will be used to fill a massive budget deficit that still looms over the current school year, even after hundreds of millions of dollars in budget cuts.

And although Ramos praised District staff and their external aides for securing favorable conditions, the borrowing will still come at a heavy cost: Paying off the debt will cost the District $22.2 million a year from 2014 to 2034, and officials stressed that the District will likely not be able to borrow to cover basic operating expenses again for the foreseeable future.

“This is not a moment of celebration. This is a moment to recognize the dire financial circumstances in which the District finds itself,” Ramos said.

Borrowing to meet operating expenses is done only in extreme circumstances. The District last did it as part of the state takeover deal a decade ago.

More than 50 investors placed initial orders for the District bonds, said Christina Ward, the district’s deputy chief financial officer for financial services. The 20-year bonds were issued through the Pennsylvania State Public School Building Authority.

Officials said the strong interest in the bonds reflected positively on the District’s recent efforts to get its financial house in order.

“We’re very pleased that the markets recognized that the District governance has come to terms with what we need to do,” said Commissioner Feather Houstoun, referring to the recent adoption of an austere five-year financial plan that calls for reining in labor costs, closing dozens of schools, and keeping spending at bare-bones levels.

A “state intercept” program was also a big factor in the successful bond sale, said both Houstoun and Ramos. Should the District prove unable to make necessary debt service payments, the state will withhold money from the District and divert it directly to the bondholders under this program.

“Even in the worst of economic times, bondholders are secure,” Ramos said.

SRC approval of the bond sale came a week after the originally scheduled vote. The delay was the result of superstorm Sandy, which closed the financial markets for two days last week.

The infusion of new operating funds for the current school year should mean that schools will be shielded from the kinds of midyear budget cuts that wreaked havoc last year, Houstoun said. Some of the money could be saved until next year.

But a cumulative budget deficit of more than $1 billion over the next five years still looms over the District.

“We are going to have some extremely difficult decisions we’re going to have to make this year about reining in expenses,” said Commissioner Wendell Pritchett.

“We don’t have any choice.”