Some fiscally stressed Pennsylvania public school districts have devised new approaches for combating a primary pressure point: competition from charter schools, Moody's Investors Service said in a report Wednesday afternoon.
Some far-reaching proposals would send all students to other school districts and pay tuition, or to operate a public school district as all-charter.
"Some financially stressed districts have offered recovery proposals that fundamentally alter the nature of their public school district operations," said Moody's assistant vice president Dan Seymour.
"The bold plans face near-term execution challenges, but are positive in the long run as some of these districts would continue to deteriorate without significant structural changes," he said. The strong measures are more likely to lead to long-term financial and operational soundness than continuing on the existing course."
In 2012, Pennsylvania created Act 141, a state oversight program to assist distressed school districts by appointing a chief recovery officer who is responsible for drafting a recovery plan. A key strength of the state's recovery program is that the commonwealth can take over districts which fail to adopt or implement recovery plans.
Four school districts -- York City, Duquesne, Chester-Upland and Harrisburg -- are in various stages of developing recovery plans in an effort to end what Moody's called a "negative feedback loop," a form of Catch 22 in which involves the diversion of resources to charters threatens service quality at district-managed schools. This, said Moody's, further drives students to charters.
Moody's rates York Baa2; the others are unrated. All four are under Act 141, a state workout program created in 2012 to assist distressed districts by appointing a chief recovery officer.
While not under Act 141, the Philadelphia School District, which Moody's rates Ba3 with a negative outlook, is also under separate state oversight.
The four districts in the recovery program, said Moody's, use strategies aimed either at strengthening academic programs to win back students, or undergoing a structural change to significantly alter how educational services are delivered.
Some poor urban districts statewide began to lose students to charter schools after Pennsylvania authorized charters in 1997. Under the law, when a student attends a charter school, the student's public school district must pay the charter school tuition equal to the district's per-pupil costs, excluding certain fixed costs such as capital maintenance.
"The charter school movement was a very rational reaction to the inefficiencies in some public school systems," said Tom Kozlik, a director and municipal bond analyst at Janney Capital Markets in Philadelphia. "So it should not be a surprise that members of some communities and parents have pushed the charter school movement ahead in order to strengthen their children's opportunity for a better and safer education. And it also should not be a surprise that enrollments and demand are often strong."
Kozlik added: "We still think charter school credit quality, generally, should be considered among the riskiest in the municipal bond sector. Investors need to regularly and closely monitor performance in disclosure notices."
According to Moody's, Chester-Upland's charter competition has effectively lowered its enrollment to 40% of capacity. The district's recovery plan attempts to attract 3% of students from charters annually via academic improvement.
Weakness in tax-base growth and failure to maintain structural balance -- more than charter school growth -- has affected Harrisburg's district, which adopted a plan to adjust spending to match revenues while improving academics.
Gene Veno, the chief recovery officer for the Harrisburg School District, said that among the distressed districts, "the Harrisburg City School District stands as a positive exception versus other districts delineated in Moody's report."
Harrisburg has been in "moderate financial recovery" since December 2012. Last year the district reported a $10.6 million surplus.
"The district has been doing well despite a poorer, weaker tax base," said Veno, who noted that state capital Harrisburg probably has more exempt property than any other district.
"We are only at the tip of turning the Harrisburg City School District around, both financially and academically," Veno said.
"The financial success does not mean for the district to go on a spending spree, but rather stay the course on academic improvements," he added. "Much more needs to be accomplished and will as we continue working as fast as possible to see needed academic improvements occur for all students at every grade level."
The commonwealth's Department of Education in May 2013, approved the district's recovery plan, which is altogether separate from that of the city.
Duquesne originally planned to send all students to other public school districts and incur the associated costs such as tuition, placement and transportation. No other eligible district in the area would take Duquesne's students, so the district is focusing on improving academic programs to stem student outflow to charters.
In York, receiver David Meckley's five-option plan includes the proposal of converting all its district schools into charter schools. Last month a county judge approved Pennsylvania's receivership request for York.
"As a district's academic quality deteriorates, the financial consequences exacerbate an already strained credit profile," said Seymour. "Thereafter, credit pressures intensify and become difficult to reverse."
Gov. Tom Wolf, who took office Tuesday, talked at length about school funding needs during his campaign last year.