Saying that the School District’s financial picture continues to be “ominous” and requires drastic action to balance this year’s budget, the School Reform Commission tonight made a change at the top by hiring former PGW President Thomas Knudsen to the new post of Chief Recovery Officer for six months.
Knudsen will have all the authority of a superintendent and chief financial manager.
Acting Superintendent Leroy Nunery and Chief Financial Officer Michael Masch will take pay cuts, reduced portfolios, and new titles as advisor to the SRC and advisor to the Chief Recovery Officer, respectively. Penny Nixon, who has been running the academic side as associate superintendent, will get the title of chief academic officer.
Knudsen will make $25,000 a month. He is immediately confronting a residual budget gap that had been estimated at $22 million last fall, but has mushroomed to several times that size.
Without deeper cuts, the District may be unable to meet payroll starting in July, according to SRC Chair Pedro Ramos and member Feather Houstoun, who is taking charge of budget matters for the commission.
“We can limp through May and June paying payroll and debt service,” said Houstoun. "But unless further steps are taken, we will be unable to pay people in July for work they did in June.”
Houstoun presented the stark facts to a mostly silent, standing-room-only crowd at the meeting, followed by a speech from Ramos underscoring the urgency of acting immediately.
As soon as Ramos announced the hiring of Knudsen, and the impact of Houstoun's presentation began to sink in, restive members of the crowd, many of them belonging to the District's blue-collar union, demanded to know how much he was being paid. Ramos said they could ask questions later.
By the end of Ramos's presentation, explaining the new roles for Nunery, Masch, and Nixon, some in the crowd were hooting in derision.
Houstoun's overall message was shocking: The cumulative budget gap for this year has grown to $715 million. Only $617 million in savings have been fully realized so far. Of the remaining $98 million gap, there are firm plans for just $37 million (a loan from SEPTA), leaving the District with a massive shortfall of $61 million midway through the year.
Somehow, further savings must be squeezed out, on top of those that have already caused howls of protest and reduction of services, such as layoffs of school nurses and cuts to counseling and support staff, as well as hundreds of teachers.
The biggest single category offered to address the gap: labor concessions that could save $46 million, including savings of nearly $14 million by freezing a 3 percent raise due the Philadelphia Federation of Teachers.
“This reflects a belief that we need partners within the bargaining units to address this problem,” Ramos said. “We are getting people to understand the severity of the problem, the limited choices the District has, and the importance of everyone thinking of what kind of district you want to have next fall.”
The SRC has already decided to withhold a 3 percent raise due to the much smaller blue-collar union, producing a savings of only $1.4 million.
Ramos said to a crowd that appeared stunned: "It is clear we cannot address the structural budget problems without reducing District salary and benefit costs."
PFT President Jerry Jordan reacted with anger to the thought that PFT members would be asked to make more concessions.
"We’ve done more than our share to accommodate the District," said Jordan, referring to the PFT's agreement to defer payments to its Health and Welfare Fund to help make ends meet.
The meeting was packed with members of Local 1201 of SEIU 32BJ, which represents 2,700 blue-collar workers, including skilled tradesman, building engineers, custodians and bus drivers, and maintenance workers. All have gotten layoff notices effective next fall or January 1. Their contract requires a 12-month notice.
Ramos invited Local 1201 President George Ricchezza to speak first in the public testimony segment of the meeting. He immediately expressed "frustration" at new hires at the top of the District administration and said by threatening to lay off his entire workforce - who clean and repair buildings, drive students to school, among other things - the SRC is beginning "the dismantling of the public school system."
At the close of his remarks, he accepted an offer from Ramos to "sit down at the bargaining table."
The District's financial position has worsened so drastically in part because the plan to close what was initially a $629 million gap was not fully executed, according to Ramos and Houstoun. Money was spent that was supposed to be saved because, among other reasons, departmental budgets were not frozen, they said.
As a result of that and other unanticipated expenses – including a surge in cyber charter school students that was not planned for and more early retirements than expected – the gap has grown, the SRC members said.
To save some of the remaining $61 million, plans include pay cuts for non-unionized workers ranging from 3 to 7.5 percent, depending on base salary; these staff making more than $50,000 will be required to take three furlough days and contribute towards their medical premiums.
For the rest of the budget gap, it seems clear that the SRC will be relying on labor concessions and further cuts to schools and programs. Houstoun presented what she termed a “menu of options” that included cuts to gifted, music, bilingual and special education programs. On the menu was eliminating all school police for a savings of $15.5 million – clearly not desirable or feasible, commissioners added. The SRC has already decided to cut summer school for all but a few students, sparing credit recovery for seniors.
Compounding the problem is that many of the savings this year were one-shot items, such as the loan from SEPTA to offset subsidies for student tokens and an agreement to defer payments to the PFT Health and Welfare Fund.
Hence, closing this year's gap is not the end of it by a long shot: Next year's budget problems will "dwarf" what the District faced this year, Houstoun told the packed auditorium. Current projections foresee a gap of more than $269 million unless new revenues materialize.
The sheer magnitude of the problem led to the decision to find a person with "a specific skill set and a specific set of experiences," according to Ramos, to run the show and catalyze what was later described as an operational "transformation."
Knudsen, who was present at the SRC meeting, spent 10 years successfully turning around a faltering Philadelphia Gas Works.
"The rate at which we change this, the depths at which we do this, require a specific skill set and specific set of experiences," said Ramos. Knudsen will have the authority of the superintendent and CFO, but will not be a candidate for permanent superintendent.
"His charge over the next five or six months is to attack the gap more aggressively, work inside with staff, use external resources as necessary, and both attack this year's gap and the one that threatens us next fiscal year," Ramos said.
In a meeting with reporters later, Knudsen reiterated that "this is a severe situation, to say the least." The SRC plans to put out requests for qualifications Friday for turnaround advisers to help with what he termed a "basic restructuring."
"You want to have that additional expertise in play as you are guiding what will ultimately lead to a transformation," Knudsen said.
These consultants will look at "industry-best practices" and "monetization of assets," he said. In addition, the consultants will be "helping me and SRC and department staff to get a quick handle on a future direction [for the District] and what that will mean to us in the short-, intermediate- and longer-term."
Nixon, the new chief academic officer, said that she hopes future actions won't result in more cuts to schools, which she said have already been cut to the "bare bones." Also speaking at the meeting were parents, school nurses, and others detailing the devastating effects cuts have already had on schools.
In an interview, PFT leader Jordan, who wasn't at the meeting, blasted the District for continuing to turn over schools to charter operators for "turnaround" even as it maintains that growing charter enrollment is contributing to the mushrooming shortfall. Among other reasons, the state has discontinued a "charter reimbursement" line item at a cost to the District of $110 million, meaning that these schools add to overall costs.
"As long as the District continues to spend money to increase their deficit as they did in June with creating an additional number of charter schools knowing that it’s going to increase the hole in their budget, it’s unreasonable for them to expect that any union is going to be responsible for paying for it," Jordan said.
Jordan said that "threre is enough public school choice" in Philadelphia now with more than 80 charter schools. "What needs to happen now is we need to focus on what we’re doing with the schools that are in the District and spending the resources on them instead of cutting them," Jordan said.
However, the District's school reform strategy relies heavily on a charter-District partnership and moving towards a "system of great schools" rather than a "school system."
Many in the audience shouted "union-busting" at the SRC, but Ramos said later: "One thing it’s not about is union-busting. This is about having a system that can fulfill its mission and can be sustained over some period of time."
But as a "service organization," Ramos said, the District needs "flexibility to manage its workforce" because labor costs account for the largest single chunk of the District's "fixed costs."
Listen to Benjamin Herold's radio report on the District's budget crisis for WHYY.
Notebook intern Oscar Wang contributed reporting.