Philadelphia School District's responses to its difficult financial situation may lead to even worse financial problems down the road, Moody's Investors Service said.

The district, which has a Ba2 underlying rating with a negative outlook, said on April 25 that its proposed budget would lead to an array of substantial cuts. The district says it needs an additional $216 million to maintain what it describes as its already insufficient level of services, district superintendent William Hite said.

"Short of the $216 million our schools will go from insufficient to just empty shells that do not represent what I would consider functioning schools," he said in an April 25 release.

The district is proposing a budget of $2.49 billion, which does not include the needed $216 million funding.

Without the $216 million the school system would have to cut 1,000 staff, increase class sizes, and make other cuts, Hite said. Average high school class size would increase to 41 students. This would add to the very large cuts the district made in the past few years.

To adequately address student needs, the district is seeking an additional $440 million in the coming fiscal year. The $216 million figure is included in the $440 million.

The portion of the city's public school students attending charter schools has increased from 11% in 2004 to 32% in 2013, according to Moody's analyst Dan Seymour. State law dictates that the district has to transfer money to charter schools for each student that chooses to attend them.

The district does not control its own finances and instead depends on the state and city government.

If the district does not locate the $216 million and is forced to make its anticipated cuts, it would be a "credit negative because a further deterioration in education services will likely result in additional student flight to charter schools and other alternatives, which could further increase the district's expense for educational alternatives," Seymour said.

"One potential source to help close the fiscal 2015 gap is a 1% city sales tax that is scheduled to sunset this year and may be reauthorized to provide revenues to the district," Seymour said. However, this sales tax would only generate $120 million.

Moody's gives the district's bonds an Aa3 enhanced rating, which incorporates the state's funding intercept program for its bonds.

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