The future of the Philadelphia School District's speculative-grade credit will be determined by four factors in the next six to 12 months, Moody's Investors Service said.
Moody's gives an underlying rating of Ba2 to the district's general obligation bonds. It also gives these bonds an Aa3 enhanced rating, based on the district's participation in the Pennsylvania State Aid Intercept Program.
The district has $3.43 billion in outstanding debt, Moody's analyst Michael D'Arcy said in his report, "Philadelphia School District: Fiscal Stabilization Requires Support of All Major Stakeholders."
The four key factors affecting the district in the near future are: the availability of additional financial resources from Philadelphia and Pennsylvania; the district's possible improved budget management; results of negotiations between management and employee groups; and the impact of service delivery deterioration on student enrollment.
As of fiscal 2012 the district received 99% of its funding from state and local revenues. The district does not have the power to tax and receives its local revenues from Philadelphia government, which assigns the tax rates for the district.
In the current fiscal year the district expects to get $140 million in additional aid from the city and state to alleviate its fiscal crisis. This would be about 6% of total operating funds. It also expects starting in fiscal 2015 to get an additional $120 million each year from Philadelphia.
How much Philadelphia and Pennsylvania cooperate in funding the district and whether they identify permanent new revenue sources for the district will be important factors in determining the district's credit, D'Arcy wrote.
Regarding, the second factor - possible improvements to the district's budget management - D'Arcy notes that the district has had to take extraordinary steps to cut expenditures in the last few years. Due to increasing charter schools enrollments (for which the district must transfer money to the schools), a winding down of federal stimulus money and rising salary and benefit fixed costs, the district faced a possible $600 million budget gap.
In response the district's oversight board cut 17% of the system's staff, resulting in 3,700 layoffs.
Further financial shortfalls led to the adoption a new austerity budget in fiscal 2014. This included the cutting of 4,000 additional staff, including all assistant principals, school secretaries and guidance counselors and many teachers.
In its budget plans the district has had a history of focusing only on the coming year and not thinking about the long-term, D'Arcy wrote. However, it drafted a five-year plan in 2012 and Moody's will be monitoring how closely it is followed.
Moody's will monitor if the district arrests its recent pattern of operating deficits and stabilize its fund balances, D'Arcy wrote. It will monitor the district's monthly liquidity levels.
D'Arcy wrote that Moody's is observing the outcome of contract negotiations with four of its five collective bargaining units. The district is looking for 10% salary reductions and significant benefit changes. However, the district is saying it plans to use any savings to rehire some of the laid-off staff members.
Finally, Moody's will examine how the district's cutbacks may lead to further exoduses of its students to charter schools. A Pennsylvania law requires that traditional public school districts transfer a share of their own revenues to fund students enrolled in charter schools. There has been a steady shift of student enrollment from the district to charters since at least 2003.
Fitch Ratings assigns an underlying rating of BB to the district and an enhanced rating of AA-minus. Standard & Poor's rates the district A-plus with the state enhancement. S&P does not have an underlying rating for the district.