Next year’s shortfall estimated at $186 million

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

The School District faces a shortfall next year of $186 million on a projected $2.5 billion budget, Chief Recovery Officer Thomas Knudsen told the School Reform Commission on Thursday – and that grim number assumes that nothing goes wrong.

That figure will pay for a bare-bones educational experience for students, said Knudsen and SRC member Feather Houstoun in an interview. “That level of expenses is enough to open the door and conduct the essential mission of the District, which is education delivered in the classroom,” Knudsen said.

Houstoun told the several hundred people at the SRC meeting that the process ahead would be "painful," but that the SRC felt it best to be transparent.

Knudsen presented the so-called “lump sum budget,” explaining that the District is projecting $274 million more in costs from this year, largely due to increases in salaries, benefits, and what he termed a "whopping" rise of $110 million in debt-service payments. Salaries will rise $42 million and benefits $72 million, largely due to one-time payouts to those who retired or were laid off last year.

But the District’s revenues are not keeping pace. Knudsen projects that revenues will rise by $142 million – and that is if City Council approves a change in property tax valuation that will bring in $94 million for the schools.

If Council rejects the change – and opposition is already mounting – the shortfall will balloon to $280 million. And the $186 million figure also assumes that Knudsen will be able to close a remaining $26 million gap for this fiscal year.

This also assumes that the General Assembly will pass Gov. Corbett’s budget as is. Changes in the basic education subsidy or other line items, in the formula for funding charter schools, or enactment of a voucher program could push the shortfall into the $400 million range, Knudsen said, especially if coupled with a City Council rejection of the property tax revaluation.

Knudsen and Houstoun, chair of the SRC budget subcommittee, said that they would try their best to fill the budget hole without cutting further into school programming.

“Obviously, there are many many things we’d like to supplement,” said Houstoun. “But the first thing [we’re trying to accomplish] is not having people think about budget all the time. That is really destructive to classroom climate."

Both said they couldn’t see how the budget can be balanced next year without getting some labor concessions.

“Clearly, there will have to be discussions with labor,” Knudsen said. He demurred when asked whether the SRC would use its power to impose contract terms on the unions.

“Right now we’re not going anywhere near that conversation,” he said.

The $186 million figure is $45 million higher than what the District projected in January. Knudsen said that they added $20 million in expenses related to maintaining a “portfolio” of schools, which he did not enumerate. Presumably, this is related to turning over low-performing District schools to charter operators and/or granting some charter schools the right to expand.

At the same time, several factors are at work that could change the picture somewhat for the better. Knudsen said that the District has started working with the city to step up its property tax collections to get more timely payments and capture more delinquencies. And the figure for next year doesn’t yet include any efficiency savings identified by the Boston Consulting Group in its whirlwind six-week stint advising the District.

Knudsen said they hope to realize annual efficiencies of $90 million eventually, but are still working on the specifics of what can be saved next year in the transition to a different administrative and operational model.

The best they can do for now, Houstoun acknowledged, is present a plan that will assure some stability for schools, which this year endured two rounds of mid-year cuts in personnel and materials budgets.

“The SRC is committed to having schools operate not in a fiscal fire drill,” she said. “We saw schools having to cut deeper in January because they were not asked to cut in September. This is about providing as much certainty and stability in schools as we possibly can.”

One thing the SRC is not planning for is more money from the state. This year, Philadelphia lost nearly $300 million in state aid and federal stimulus money.

For next year, Knudsen said, state aid to Philadelphia that is available for classroom use rose slightly, by about $16 million. That figure doesn’t count an increase in state pension contributions.

Other districts hit hard by this year’s draconian state budget cuts in education, which totaled $1.1 billion, are lobbying for more state funds, as are advocates from Philadelphia. Houstoun reiterated that the SRC’s main job is to restore its reputation in Harrisburg first.

“I think the most important thing the SRC can do right now is build a reputation for financial stability, transparency, strong governance and decision-making, and earn back what unfortunately is, I suspect, the inaccurate but frequent view of the School District," she said. "That has to be our first priority….that’s the best we can do to build support in the General Assembly and governor’s office for public education in Philadelphia.”