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Kevin McCorry/WHYY

Kevin McCorry / WHYY

What drives costs? Here are the Big Five

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

Each year, before any dollars from a Pennsylvania district’s budget make it into classrooms, these Big Five expenses get their share: pensions, health care, charter payments, special education costs, and debt.

Exactly how much the Big Five get varies from district to district. A small district might send just a handful of students to charters, for example, while Philadelphia sends about a third of its students. But pension and health-care costs are more consistent statewide, representing what Jeff Ammerman of the Pennsylvania Association of School Business Officials (PASBO) called “the biggest cost drivers” facing districts today.

What unites these budget demands, Ammerman said, is that “most all of them are going to be difficult to change.” Benefit packages can be renegotiated and state reimbursement laws adjusted, but this basic set of costs is here to stay. Districts must pay them – and then serve their students with what’s left.

Here’s a quick look at the Big Five:

Charter costs: State law requires districts to pay charters a per-pupil fee for each enrolled student, set by formula, and prohibits districts from using cost as a reason to deny applications to start new charters. Not all districts have brick-and-mortar charters, but cyber charters enroll students statewide; according to PASBO, every district has at least some students in charters of one kind or another. In past years, the School Reform Commission in Philadelphia, home to more than half the state’s charters, has used its special powers granted in the state takeover of the District to limit charter growth. But court challenges have weakened those powers; proposed changes in the state school code could reduce them still more.

Special education: Districts are required by law to provide the necessary services for any student classified as in need of special education. But the state provides them with what amounts to a capped special education budget each year, determined by formula. That means that districts must cover any additional special ed costs from other sources. Modest changes in state policy, including the use of a new three-tiered payment system geared to the level of a student’s disability, seek to bring those costs down for traditional district schools. But the complex and costly formulas driving districts’ special-ed payments to charters remain unchanged.

Debt service: All districts carry debt, but the recent nine-month budget impasse between Gov. Wolf and the Legislature forced districts to borrow more and also made borrowing more expensive. A PASBO survey found that the budget impasse forced districts to borrow an average of $1 million and as much as $10 million just to pay their bills, and about two-thirds of the money was used to pay back earlier loans. The credit ratings agency Moody’s reports that although no Pennsylvania district has defaulted on its debt, the budget impasse resulted in multiple credit downgrades statewide. Philadelphia spends more than $250 million a year on debt service.

Health care and benefits: According to PASBO, benefits trail only pensions as a cost driver. Statewide, Ammerman estimates that districts spend as much as $3 billion on benefits. Although they are subject to negotiation, health-care costs are projected to continue growing at about 6 percent a year nationally.

Pensions: The biggest of the Big Five, pension payments are set by a state agency, the Public School Employees’ Retirement System. As recently as 2010, such payments constituted just 2 percent of all state public school spending. But rising contribution rates, mandated by state law to make up for years of underfunding, now demand higher payments from districts. In 2013-14, school districts paid a total of 7 percent of their budgets to pensions – $1.8 billion in all. Those contribution rates are set to continue rising, and schools feel the impact of such financial constraints in classrooms. A PASBO survey found that “90 percent of responding districts have reduced staffing, and that 64 percent have increased class size.”