Can Philadelphia borrow to save its schools?
Philadelphia will borrow $50 million to fund the opening of its school system on September 9th. Reuters reported:
The city of Philadelphia will borrow $50 million in the capital market for its cash-strapped public schools so they can rehire about 1,000 furloughed employees and open on time on Sept. 9, Mayor Michael Nutter said on Thursday.
It’s not clear, however, that Philadelphia can assume debt for the school. I discovered this while reading the Philadelphia school district financial statement (page B-93):
[T]he School District is a separate and independent home rule school district of the first class formally established by the Philadelphia Home Rule Charter (the “Charter”) in December of 1965. The Philadelphia Home Rule Charter Act, P.L. 643 (the “Act”) expressly limits the powers of the City by prohibiting the City from, among other things, assuming the debt of the School District or enacting legislation regulating public education and its administration except only to set tax rates for school purposes as authorized by the General Assembly of the Commonwealth.
Philadelphia schools relied on $840 million of city property tax revenues, $440 million of federal grants and $1.3 billion of state aid in 2012. The school district is overseen by the state.
Philadelphia Mayor Michael Nutter has been in a battle with Pennsylvania’s Governor Tom Corbett over the amount of state aid that will flow to Philadelphia schools. Corbett has been insisting on substantial labor changes and has been withholding state funds. The Philadelphia Inquirer reported:
Gov. Corbett emphatically rejected on Tuesday a request to release $45 million in state funds, the latest twist in the ongoing battle to resolve the Philadelphia School District’s financial crisis.
Corbett’s budget secretary, Charles Zogby, said the money would not be available until the teachers’ union signs a contract that includes substantial “fiscal savings and academic reforms.”
“The law is clear,” Corbett reiterated during an appearance in Chester. “Until that takes place, there can be no release of funds.”
Corbett’s comments were made shortly after an all-star roster of the city’s state and local elected officials stood together in City Hall and urged the governor to release the money.
The district has been counting on $124 million in union concessions and savings to help close a $304 million deficit. The current contract expires at the end of this month and negotiations are continuing.
The dispute over the $45 million state grant comes as Mayor Nutter and City Council wrestle over another piece of the $140 million package hashed out in Harrisburg last month to address the district’s shortfall.
The state plan calls for the city to borrow $50 million against future collections of the city’s extra 1 percent sales tax, which was to expire next June, and turn the money over to the schools.
If it is legal, there is still the question of whether Philadelphia can afford to borrow in the bond market to fund the school district, which is a separate fiscal entity. The city has some fiscal space to borrow, but not a lot. Moody’s rated Philadelphia A2, a mid to low investment-grade rating. Moody’s wrote this on June 13:
The A2 rating also reflects our expectation that financial flexibility will remain relatively constrained over the course of the city’s current five-year plan, due to rising pension and contractual salary costs coupled with limited revenue-raising ability. The rating also incorporates Philadelphia’s sizeable economy and tax base, weak demographics and above-average unemployment levels, modest property value growth, and a heavy burden of tax-supported debt and unfunded pension liabilities.
Labor and pension costs drive right to the heart of Philadelphia’s fiscal challenges. They mirror the challenges of the school district. Governor Corbett is trying force the issue of labor changes by withholding state aid.
The Philadelphia school situation is just the tip of the iceberg for the city’s woes. The city must rein in its spending and pension costs, in addition to work with the state to get the school system fiscally stable. This will take take negotiations with city workers and likely some labor unrest that may mirror Chicago last fall. Governor Corbett must be careful not to fan the flames and let Mayor Nutter attempt to resolve the labor difficulties. Getting the city on a sound basis will require some big struggles. Drama is not helpful.