Philadelphia's new plan to take control of its public schools system could provide more fiscal certainty for the district while also pressuring the city’s overall finances, according to Fitch Ratings.

Mayor Jim Kenney announced on Nov. 2 plans to take direct control of the nation’s ninth-largest school district from the state-dominated School Reform Commission that has governed the city’s public schools for the last 16 years. The Democratic mayor outlined plans to return the district to mayoral control by July 1 and pump in significant new funding from local sources. The SRC is slated to vote to dissolve itself at its next meeting scheduled for Nov. 16.

Jim Kenney, mayor of Philadelphia, speaks in New York, U.S., on Thursday, Oct. 6, 2016.
Mayor Jim Kenney wants the city to take direct control of its school district from a state-dominated commission. Bloomberg News

“A strong public education system could be important for the city's long-term economic growth prospects and the mayor's proposal will give Philadelphia more direct control over this key local service,” said Fitch analyst Eric Kim in a Nov. 9 report. “The school district's financial position has stabilized in the past several years, but remains somewhat precarious as the most recent published estimates project cumulative operating deficits over the next five years totaling over $1 billion.”

The district is projected to have a $300 million annual deficit by the 2022 fiscal year, which Kim notes would equate to nearly 9% of spending. The school system has no independent revenue raising ability and is entirely reliant on support from Philadelphia and Pennsylvania. Fitch assigned the school district a BB-minus underlying rating, with an A-plus rating under Pennsylvania's credit enhancement program, late last year.

Kim noted that Pennsylvania and Philadelphia have have stepped up their support in recent years and provided additional resources to the district on a one-time and recurring basis. Pennsylvania’s newly enacted budget includes provisions that Kim said appear to resolve nearly $300 million of the projected deficit through an adjustment in the state’s property value assessment formula that impacts its reimbursement of district pension expenses.

“The mayor's announcement did not include specifics on how the school district would address its remaining substantial projected operating deficit, but he did indicate that additional city resources would be the key avenue,” said Kim. “The mayor and city council have raised taxes on behalf of the school district several times over the past few years. Fitch anticipates additional support from the commonwealth will be extremely limited, beyond modest growth in statewide K-12 basic education aid.”

The district is an independent legal entity with its own assets and liabilities that include debt and pension obligations, while also being entirely reliant on outside stakeholders for operating revenues. Kim noted that Philadelphia’s commitment to the district provides ongoing financial pressures and closer integration with local control could challenge the city’s expenditure framework.

“Increased spending for schools could alter the trajectory of expenditure growth and limit the city's ability to maintain or grow already limited reserves,” said Kim. “To assess rating implications for both the city and the district, Fitch will evaluate the terms of the city's proposed takeover of the school district once they are made clearer.’

Kim said Fitch focus its review on how the city finds resources to tackle the district's “significant fiscal needs” as well as whether the public schools retain some form of legal independence and responsibility for its pension obligations. He said school district debt is already factored into Fitch's analysis for the city as overlapping debt. Fitch rates tPhiladelphia general obligation bonds A-minus with a stable outlook.

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