Philadelphia schools face funding challenges under mayor's local control plan

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Philadelphia Mayor Jim Kenney is pushing for a return of local control to the city’s junk-rated school district in a move that analysts say will create funding challenges with less state support.

Kenney outlined in a speech before the city council Thursday morning plans to end the state-dominated School Reform Commission that has governed the district since December 2001 and return to a mayor-appointed school board by July 1. The Democratic mayor also vowed to have the city pay for much of a $1 billion deficit the nation’s ninth largest public school system is projected to face over the next five years.

“There will be no easy solutions for funding these resources,” said Mayor Kenney in prepared remarks. “It will require everyone to pitch in – but the alternative is far worse.”

The SRC, which was formed nearly 17 years ago when the Commonwealth of Pennsylvania took control of the Philadelphia schools, is scheduled to vote on a resolution to dissolve itself at its Nov. 16 meeting. The five-member governing body has managed all public and charter schools in Pennsylvania’s largest city with three appointees from the governor and two by the mayor. The Pennsylvania General Assembly and Philadelphia City Council control the district’s taxing authority.

"The School Reform Commission was created in 2001 as a temporary form of governance for the School District of Philadelphia,” SRC chair Joyce Wilkerson said in a statement supporting Mayor Kenney’s proposal. “Since then the School District has weathered multiple fiscal crises and leadership changes. The District now has a balanced budget, strong leadership in [Superintendent Dr. William Hite] and is making real academic progress.”

The Philadelphia School District has faced credit woes in the last decade due largely to state mandated support for a rising charter school population and incurred a structural deficit of more than $500 million from 2010 to 2014, according to a May 2016 audit from Pennsylvania Auditor General Eugene DePasquale. The district’s debt rating was raised one notch to Ba2 in September by Moody’s Investors Service, which cited “considerable improvement in the district's still strained financial position.” Moody’s also revised the outlook on the school system’s roughly $3 billion of debt outstanding to positive from stable.

“I think it is time to return to local oversight of the Philadelphia School District, but the key financial challenge of obtaining sufficient funding remains, and the city will still require state support in that regard,” said Janney Capital Markets municipal analyst Alan Schankel. “Given the recent stabilization of charter share of district students and recent Moody’s upgrade, the timing is good for end of state control.”

Philadelphia schools have an enhanced A2 bond rating from Moody’s on direct general obligation debt thanks to the Pennsylvania School District Fiscal Agent Agreement Intercept Program. The credit enhancement program allows the state treasurer to withhold state aid and make payments directly to the bond trustee.

“If the plan works for Mayor Kenney, there will be considerable discussion on how to fund the public school districts without the support of the Commonwealth budget,” said Villanova University School of Business professor David Fiorenza. “This could mean increased federal funding, a decrease in the tax abatement program given to new businesses and developers or other taxes already in place at the city.”

Kenney stressed in his speech a goal for implementing a capital improvement program in his next budget to upgrade district buildings, but cautioned that finding funding solutions will be a challenge. He said fiscal challenges at the state level mean additional help for Philadelphia with expanding the city’s local cigarette and sales taxes is “highly unlikely.” He also stressed that while payments in lieu of taxes are worth exploring, they only produce about $30 million annually for the City of Boston.

The City of Philadelphia has general obligation bond ratings of A2 from Moody’s Investors Service and A-minus from S&P Global Ratings and Fitch Ratings.

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