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District faces dilemma in prioritizing massive facilities needs

Exterior of Roosevelt Elementary School.
Emma Lee / WHYY

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

Students at Mayfair Elementary will be moving out of their cramped trailer-classrooms in the fall after the District completes an expansion of the school, paid for out of the last bond issue, which will also cover a litany of other repairs to schools around the city.

Alice Hollingshed volunteered to teach her 3rd-grade class in the original trailer 18 years ago, “not knowing I’d be here so long.” Since then, three more trailers have been added.

When the school was built in 1949, it held about 500 students, said principal Guy Lowery. The current enrollment is 1,460.

Why has it taken so long for the School District to address a clear facilities problem at a school like Mayfair? The short answer is that the needs are massive and the money is scarce. And until now, the District hasn’t had a clear roadmap for identifying the most urgent facility-related issues in each school and setting priorities for how to tackle them.

Now it does, through its Facility Condition Assessment.

The assessment, released in January, found that the District has accumulated a whopping $4.5 billion in deferred maintenance — repairs and replacements that had been postponed indefinitely.

Over the next 10 years, the District will have to spend $3.2 billion more just to avoid adding more projects to that list. The District also has $3.5 billion in debt on old bond issues that were used to pay for past capital improvement projects.

One reason the District didn’t tackle its capital needs more aggressively was an effort to avoid having debt service – the interest on money borrowed for the building projects – eat up too much of its operating budget. Now, it is at 9.8 percent.

Getting that payment below 10 percent has helped the District refinance much of its outstanding debt to lower the amount of interest it pays on old bonds. But new capital improvement projects are typically paid for out of new bond issues, which would raise the debt service payment again.

It’s a dilemma.

“We have to continue to balance the needs the District has for facilities investment with the need to not have our annual debt service cost eat up our annual operating [budget],” said Uri Monson, chief financial officer for the District.

Assessors from Parsons Environment & Infrastructure Group examined 308 facilities, including active District schools, buildings owned by the District but leased by charters or not in use, storage buildings, and large athletic fields.

The assessment used the FCI metric, which takes the money it would cost to completely repair a building and divides it by what it would cost to build a comparable building from scratch.

An FCI that is higher than 100 percent means it would be cheaper to build a new building than to repair the existing one. An FCI over 60 percent would prompt the District to consider replacement.

Overall, the assessment described all the District’s facilities as “in fair condition” and assigned the whole portfolio an average FCI of 32 percent.

However, just 23 facilities (less than 10 percent) account for over $1.2 billion of the total $4.5 billion (27 percent) in deferred maintenance. They include Penn Treaty High and Roosevelt, Lamberton, Hamilton, and Cooke Elementary Schools, all built closer to the turn of the 20th century than the 21st.

So the “fair condition” assessment reflects an average in a district with buildings in a wide range of disrepair — with some schools needing little repair and others fast approaching the point where it’s more cost-effective to tear them down and start over from scratch.

Mayfair’s FCI is 46 percent, which puts it in the yellow category, which means “should be considered for major renovation.” The cost to build a new comparable building is over $36 million, while the cost to fully repair and renovate the current building is $16 million.

Danielle Floyd, the District’s director of capital programs, said that after the expansion and electrical work is complete this summer, Mayfair’s FCI will decline below 28 percent. However, the school will still have some deferred maintenance projects, such as new windows and doors, that will have to wait until the next bond issue.

Although none of the schools exceed an overall FCI of 100, Cassidy Elementary, in West Philadelphia, has an FCI of 82.5, meaning the school is approaching the point where it would be cheaper to replace the building.

The red tier, the most severe, includes 12 schools still in use and eight athletic facilities.

However, Floyd said, the District would always prefer to prevent a school from reaching the point where it needs to be replaced and moving schools down from the red and yellow tiers is a priority in the next few years. She said the data shows the most urgent needs are the “replacement of systems,” such as heating, cooling and electrical, not building new facilities.

She added that the decision to close schools is made by a separate District “work group.” The condition of the facility may influence that decision, she said, but ultimately the primary catalyst for closing schools is poor academic performance.

Cramp Elementary in Kensington, built in 1969, is a perfect example. Its FCI is 64 percent, putting the school in the severe “should be considered for replacement/closing” category.

A couple times each day, Cramp’s building engineer, Alfonso Alford, is called to a classroom that is excessively hot or cold due to a malfunctioning heating system. The assessment flagged the heating system, and the District decided to replace the old electric boiler with a new gas boiler system, financed through the last bond issue. The new system will have classroom thermostats that allow each teacher to control the temperature in the room.

“Why is that important to our parents?” asked Cramp’s principal, Deanda Logan. “Many of our children suffer from asthma. Having it either too hot or too cold can trigger a medical issue.”

The FCI for the school’s boiler, HVAC, and heating/cooling controls are all above 100 percent, so replacing them was cheaper than repairing them.

Floyd explained that once the heating system has been replaced, Cramp’s FCI will decline from the red into the yellow. The assessment found 76 schools already in the yellow, meaning the “building should be considered for major renovation.”

Floyd said the District has set an “internal goal” of reducing the District’s overall FCI score from 32 to 25 percent.

The assessment outlined six spending scenarios, with varying levels of funding, and how they would affect the District’s overall FCI.

Spending the same amount for the next 10 years as it has for the last decade – about $100 million each year – results in the FCI rising from 32 to 47 percent. Spending $200 million per year would cover only about one-third of the new capital needs, so the overall FCI would still rise, but not as much, to 37 percent.

To reduce the overall FCI to the goal of 25 percent would require annual expenditures starting at $350 million and increasing each year up to nearly $500 million by the end of the 10-year period.

The data provided by the assessment helps the District decide on the most effective ways to spend their limited capital improvement funds.

For example, Floyd said, not only will the new heating system at Cramp reduce the FCI score, but because it’s replacing electric with gas, the District will save on the school’s utility bills, putting some money back into the operating budget.

Floyd said the District intends to seek grants and other money through public-private partnerships. But because officials don’t intend to use funds from the annual operating budget, the primary source of future capital funds will be new bond issues.

It’s been years since a moratorium was put on the state’s PlanCon program, which at one time funded school construction projects with an annual budget of $300 million. Because the PlanCon funds had to be spent on infrastructure projects with an educational component, it could have paid for some, but not all, of the District’s recent capital projects.

While Gov. Wolf proposed borrowing $2.5 billion for a new program to fund school construction projects as part of his last budget proposal, he was ultimately forced to remove it when statehouse Republicans rejected many of his proposals for tax increases.

“We can control what we borrow; we can’t control what we get in” from the city or the state, Floyd said.

The District also can’t control when repairs and replacements are needed, so the amount of money the District will need to spend on capital projects varies dramatically year-to-year.

For example, the District will have just under $200 million in new capital renewal projects to complete in 2026 — well within the $250 million the District was able to raise in its last bond issue — but just one year later, the District will need to spend $1.4 billion or add to the deferred maintenance list.

This fluctuation is the result of past District construction patterns.

The report notes that 75 percent of District schools were built before 1969, so the District “will have major spikes as numerous systems expire around the same time.”

Floyd and Monson said the last two superintendents had policies of using capital funds to construct new schools — mostly smaller high schools to replace older buildings that were under-enrolled.

Under Superintendent William Hite, capital funds have been focused on rehabbing each building’s most essential systems, Floyd said.

Monson said that these new construction projects were financed with 20-year bonds that the District is still paying for each year in its debt service payment.

“It takes a while for it to work its way out of the system,” Monson said. “It certainly still has an impact on our overall debt portfolio,” which stands at $3.5 billion.

The District pays these debts gradually, currently spending about $260 million each year on debt service, or 9.8 percent of the District’s annual operating budget. This annual percentage has come down in recent years.

“There’s a standard for most districts to have debt service payments under 10 percent,” Monson said. “It’s one of the things the ratings agencies look at.” This influences the interest rates that the District is able to get on new bond issues, which the District will need to fund future capital projects.

But new bond issues would mean a higher debt service payment.

“We’re right in that sweet spot,” Monson said, because “we did major refinancing [of existing bond debt] last fall to create some relief on interest rates.”

“We’re going to need more money from outside,” Floyd said. “Our expenditures are going to go up.” She said the facilities assessment allows the District to “get smart about looking at what we know will need to be replaced.”

Monson said the District is still making determinations about how best to raise the necessary funds in the years ahead, but keeping the debt service payment from rising above 10 percent is “a goal.”

Although the District plans to pursue further debt service relief – or the reduction of interest rates on existing debt – Monson said they’re also hoping that any upcoming federal infrastructure initiative might include funding for schools.

“Federal funding is something we’re watching very closely. We don’t know how that’s going to proceed,” Monson said. “It’s a constant balancing game between our operating needs and our capital needs. We have a lot of fixed costs we have no control over,” such as pensions, past debt, and charter payments.

“Four and a half billion dollars is big, and we acknowledge that, but that’s not going to be a deterrent for us,” Floyd said. “It’s unfortunate that we can’t get to everything that needs to be done, but we need to have an objective way to make decisions and prioritize, and that’s exactly what the condition assessment will do for us.”

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