School funding was a prominent theme in the Pennsylvania race for governor and Tom Wolf acknowledged it in his victory speech.

Video: Problems in Pennsylvania

Ironically, he talked in York, where he lives and runs a business. York's school district last week fell into receivership.

"We have to make sure education is at the top of the list, not the bottom," he said at the Utz Arena on Nov. 4.

When Wolf, a former state revenue director, takes office Jan. 21 in Harrisburg, a half-hour's drive up the road along Interstate 83, he may experience a "what do we do now?" moment akin to Robert Redford's Bill McKay character in the movie "The Candidate."

"I understand there are different ideas as to how we deliver on the promise, but we have to invest in it, we have to work together to make sure that we deliver, and we've also got fund our education system fairly and make sure that we raise the money fairly so we don't burden, say, property tax payers," Wolf admitted that night.

Pennsylvania's problems haven't generated the financial-media headlines of, say, Detroit's bankruptcy, Illinois' crushing pension liability or New Jersey's $6.8 billion structural deficit. Still, bond-rating downgrades, an unfunded pension liability of $50 billion and budget imbalance stare at Wolf when he takes office Jan. 21.

Add school funding to the mix.

"One of the key issues that [Wolf] ran on was school funding. That's something that he really made an issue at the forefront of his campaign," Tom Kozlik, a director and municipal credit analyst at Janney Capital Markets, said in an interview. "However, in Pennsylvania we've got an issue where expenditure demand is really outpacing revenue, and I think that school districts are going to have to prepare themselves for another difficult year."

Wolf, a Democrat, wants to increase education funding, though he might encounter headwinds from an increasingly Republican — and increasingly emboldened — legislative leadership. Ditto for such initiatives as a severance tax on natural gas drilling to help pay for schools.

Republicans, despite incumbent Gov. Tom Corbett handily losing his re-election bid to Wolf, widened their majorities to 35 votes in the House of Representatives and 10 in the Senate. They replaced Dominic Pileggi of Chester with the more conservative Jake Corman of Bellefonte as Senate majority leader.

"I think there will be huge budgeting pressure on schools generally from a state funding viewpoint, but at the end of the day, there will be proper support for state funding," said Bill Rhodes, public finance chairman and practice leader of the municipal recovery initiative at Ballard Spahr LLP. "I do think that ultimately, the education funding formula will need to be revisited, but I don't think it will happen with a Democratic governor and a hardened Republican legislature, unless it's part of some grander bargain."

While Philadelphia's teetering district and its back-and-forth tussles with state leaders in Harrisburg over funding, the York City School District has now emerged as the poster child.

On Dec. 26, York County Court of Common Pleas Judge Stephen Linebaugh supported a request for receivership that acting state education Secretary Carolyn Dumaresq made three weeks earlier. Receiver David Meckley, previously the chief recovery officer under Pennsylvania's workout program for distressed school districts, now has all the school board's powers during his three-year term except for levying taxes.

"He can tell them to impose new taxes, so he has some of that power, too," said Rhodes. "The court's purview was relatively narrow."

The district filed an appeal shortly after the ruling, in which Linebaugh simply said Meckley was not arbitrary or capricious in his actions.

"[Meckley's] testimony on the financial aspects of the district and the reasonableness of the plan in restoring the district to financial stability was precise, clear, direct and convincing," the judge wrote.

With Meckley frequently at odds with the district and education unions, acting state education Secretary Dumaresq sought receivership.

"For nearly two years, Mr. Meckley has attempted to work with the school board to implement a financial recovery plan;" she wrote. "During this time, the board has consistently failed to follow the recovery plan and the directives of the chief recovery officer. It is now necessary for the district to be placed into receivership … for the benefit of the students and to return the district to financial solvency."

Meckley, 63, president and owner of Strategic Advantage Inc., could proceed with his goal of turning all district schools into charters under a privatization draft agreement with Charter Schools USA of Fort Lauderdale, Fla., a proposal the local school board tabled in November.

"It is possible that the judge's decision could lead to the privatization of the entire district to a charter school, but we expect the move to be contested." Kozlik wrote in a commentary.

According to Rhodes, Meckley's latitude could apply elsewhere "sooner or later," particularly if time limits for Pennsylvania's Act 47 program for distressed communities result in extra layers of state oversight. "In this case, it would be a municipality rather than a school district," he said.

Moody's Investors Service downgraded York district to Baa2 from Baa1 in January 2013, citing "continued difficulties in budgeting for charter school tuition expenses, which are leading to chronic deficits and a negative general fund balance without immediate prospects for rectification." Moody's said its underlying rating also reflects "an extremely weak tax base with low wealth levels and a high poverty rate, as well as a heavy debt burden."

In July, Moody's affirmed its Baa2 underlying and enhanced A3 ratings, affecting $22.7 million of debt, while maintaining a negative rating on both. In 2013, Moody's also downgraded the 44,000-population city itself, to Ba1.

Corbett in July 2012 signed Act 141, designed to help financially distressed school districts. Schools designated as in financial recovery status include: Chester-Upland, Duquesne, Harrisburg and York. Four others labeled as in financial watch status include Aliquippa, Reading, Steelton-Highspire and Wilkinsburg Borough.

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