The Philadelphia School District is planning to lay off about 20% of its workforce to balance its budget in the coming fiscal year.

In the last few days the district, which has $3.1 billion in debt outstanding, sent out notices to about 3,800 employees telling them that they will be laid off on July 1.

The fiscal 2014 layoffs will come on top of a 17% cut in the workforce in fiscal 2012 and a smaller cut in fiscal 2013.

“We view [the layoffs] as an indicator of the severe fiscal strain the school district is under and how it is very limited in its ability to raise revenues,” Moody’s spokesman David Jacobson said.

Funding is tied to state sources, and raising locally generated revenues requires state and city council approval, Fitch director Eric Friedman wrote.

Moody’s Investors Service rates the district’s debt Aa3 with an underlying rating of Ba1. Fitch Ratings gives the debt an AA rating with an underlying rating of BBB-minus. Standard & Poor’s rates the debt A-plus and does not provide an underlying rating.

All three agencies base their enhanced rating on the district’s participation with the Pennsylvania State Aid Intercept Program.

In this program, if the school district did not make an interest or principal payment when due, the state would withhold the district’s state aid and use the money to pay the paying agent. There are debt service sinking funds to make payments in the short-term.

Philadelphia lost 26% of its population from 1950 to 2000. Since then it has gained only 1.9%. The long-term decline in population and a continued weak economy has pressured the district, Moody’s analyst Geordie Thompson wrote.

In Philadelphia charter schools have rapidly grown in popularity and now enroll about 30% of the school system’s students. The district is required to provide funding proportional to student enrollment. Yet the district’s main program had been trying to maintain the same number of schools.

In March the School Reform Commission, empowered by the state to run the district, voted to approve shutting down 23 of the district’s 250 schools.

“The vote indicated the commission’s and management’s resolve to confront the district’s significant financial challenges,” wrote Moody’s analyst Michael D’Arcy.

“To be fiscally responsible, the School District of Philadelphia must live within its means,” district superintendent William Hite said before the fiscal year 2014 budget with the layoffs was approved. “The budget that is scheduled for adoption tonight in no way fits my idea of public education, high-caliber opportunities or even quality schools and programs. It falls catastrophically short of meeting students’ needs.”

Hite said he was seeking financial help from Philadelphia’s and Pennsylvania’s governments. If the district can get that help, the adopted budget could be amended.

“The layoffs of the 3,783 teachers and school support staff is devastating not only to those individuals who will lose their jobs but to the thousands of students and parents and the school communities that will suffer because of these regrettable personnel reductions and other budgetary cuts,” Philadelphia Mayor Michael Nutter said.

Nutter said he was proposing giving the district $95 million, aid that would have to be approved by the city council. State government would have to approve any state funding.

The district is also hobbled by high debt levels, Moody’s and Fitch agree. Debt ratios are above average at $4900 per capita and “very high” at more than 16% of market value, Fitch analyst Eric Friedman wrote. Amortization is slow at about 34% in the next 10 years, he wrote in October.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.