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Knudsen: 'A unique moment'

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Following is the text of Chief Recovery Officer Thomas Knudsen's statement to the School Reform Commission on Tuesday night.

Mr. Chairman, Commissioners, as you know, I sit before you at a unique moment for the Philadelphia public school system. Years of slow economic growth have cut our resources significantly, even as our expenses have continued to rise. We are, quite simply, in a financial crisis. We face a financial shortfall of $218 million in Fiscal Year 2013 – an amount that exceeds even the $186 million I presented to you several weeks ago in the Lump Sum Budget due to an adverse ruling by the State Tax Equalization Board that will cost the District more than $30 million.

These figures, moreover, assume that we will receive $94 million in revenue captured through the Actual Value Initiative proposed by the Mayor and currently under consideration in City Council. Without these revenues, our school budgets would see enormous cuts, leaving unclear what would be left in our schools if we were able to open them. Matters are that dire.

This crisis did not develop overnight, and it will not – cannot – be solved quickly or simply. For this reason, the District has undertaken its first five-year financial plan in many years, and proposed a dramatic reorganization, focused on service for schools and quality for children. We are looking at our revenues and expenses over the long term, so that we can plan carefully and set our ship on a more stable course.

What this plan tells us is that if we do not act now, our problems in the coming year will only deepen. By Fiscal Year 2017, we will be facing a cumulative deficit of over $1.1 billion – much more if AVI does not pass. But I can tell you we will never reach that point, because our credit will not support that much debt. Quite simply, if we do not take dramatic steps now to right ourselves, we will not be able to operate.

Our challenge, however, is more significant than even this enormous financial burden. Too many of our schools are persistently unsafe, and too few of our students are receiving the high quality education they deserve. Our scores on state tests have improved over the last several years, and there are many who deserve credit for fine work to that end, but we are not improving nearly fast enough for our students to compete regionally or nationally, much less globally. We still lag state, national, and urban averages by significant margins. If our children are to be able to graduate truly ready for college or career success, and ultimately ready to enter a competitive and fast-changing world where they will lead productive lives, we must ensure a system of public education that is sustainable and unrelenting about quality.

So, as you have articulated them, our goals are two-fold: First, provide safe, high quality schools for current and future students; and second, bring our finances into long-term balance and to financial sustainability.

I am here tonight to report on the draft Fiscal Year 2013 budget, and how it advances those objectives. But more than that, I am here to offer some context as to how the FY ’13 budget is part of a larger, more profound transformation effort that will span several years.

FY ’13 Budget

Fiscal Year 2013 should be viewed as a transitional year – a time when we will be laying the groundwork for fundamental change in both the academic and operational elements of our system.

With this in mind, a large part of our efforts in the FY’13 budget were intended to maintain as much stability at the classroom level as possible. Our schools have already suffered enormous cuts – more than $300 million in direct and operating support cuts last year alone – and, after careful analysis, we concluded that we simply could not cut more from the current structure without sacrificing the fundamental things that make public education meaningful: some limited music, art, and sports, alongside core educational programming and services for students with special needs. So service levels in these areas stay flat in the FY ’13 budget.

We are keeping staffing levels constant for special education teachers and coordinators, bi-lingual counseling assistants, school police, and other key staff.

I am proud to note that even as we struggle to sustain the system, however, we are finding creative ways to further our ultimate goal of offering safe, high performing options to all our students. By approaching the matching process more creatively this year, our Chief Academic Officer, Penny Nixon, was able to open over 2,000 seats in some of our highest performing schools without changing our overall school budget picture. That is the kind of thoughtful, careful management that marks the best of what we do.

The main decreases you see in staffing and resources this year over last year are either student-enrollment-driven, as with classroom teachers, or driven by fluctuations in our grants budget.

The most significant of these is the federal Title I grant budget, which funds some of our most crucial programs. Our Title I allocation is declining, as are surpluses left over from the federal Stimulus, so we are forced to make difficult decisions.

This year, we chose to maintain support for early-childhood programs, because we know early childhood education has a significant impact on the educational success of children later in life. That choice, however, meant that we had to cut summer school programs except for those who need to attend summer school to graduate [or are in particular programs funded by other grants], as well as nearly 100 supplementary counselor positions.

We are faced with these difficult choices because there is little flexibility in our revenue. State revenues, the largest share of our budget, have stayed flat with the exception of an increased reimbursement for pension payments that will only partially cover our increased costs. Our available federal funds are declining and our local revenues hinge, as I have noted, on the passage of AVI.

At the same time, our costs are rising.

Part of this is driven by increased public school student enrollment. Overall enrollment in public schools is increasing by nearly 4,000 students this year, mainly in Charter Schools. As a result our increase in charter school costs is going up by approximately $44 million. Conversely, our main sources of revenue do not automatically increase as student enrollment increases.

Under the guidance you issued over recent weeks, we are working collaboratively with our Charter partners to find ways to reduce the financial impact of Charter operations by finding Charters willing to agree mutually to more predictable enrollments, accept geographic catchment areas for enrollment, and plan for the use of former District buildings. These changes, however, will take time to work through and implement, so they will not produce significant relief for the FY ’13 budget period.

Wages and benefits are major drivers of our increased costs. Due to legal and contractual mandates, our wage, benefit, and pension costs are set to increase over $130 million in the coming year.

These two trends, flat or decreasing revenues and increasing expenditures, are self-evidently unsustainable. In the past, we have been able to implement one-time measures to bridge the gap, but there are no more easy solutions available to us. There is no scenario under which we can continue operating under our current model while delivering a safe, quality education to all our students. The system needs fundamental change.

Five Year Transformation Plan

That is why, this year, we have presented the FY ’13 budget in conjunction with a draft blueprint for the essential changes we believe we need to make over the long term, academically and operationally, if we are to achieve our goals.

The details of the draft blueprint have been made public in a number of places, so I will not go into them here. Rather, what I want to stress is the interconnected nature of the elements at work. For too long, we have separated academic and financial concerns. Students are and must be our first concern, but we ultimately do them a disservice if we allow academic and financial planning to be done in silos, or as a product of mere short-term thinking and planning. That kind of thinking is what led us to the cliff on which we now stand so precariously.

This is not a small or simple task. This kind of integrated planning demands that we have a more candid, robust and informed discussion with all our stakeholders about where our public school system is headed and why.

With your help, we have already conducted a number of discussions with stakeholders since we put the blueprint out last week, and have heard from literally hundreds of Philadelphians.

Many have been supportive. They are excited about the focus on schools as the units of change, and that teachers and principals will have more freedom to customize the school experience to fit their students needs, that we are committed to doing something about persistently failing schools, and that we are insisting on a firm financial foundation for ensuring the long-term sustainability of school improvement.

But we have also heard very thoughtful, very legitimate concern over elements of our proposal.

We are hearing a concern that, in seeking to create opportunities for innovation and creativity, we be careful not to also create opportunities for inequities, exploitative profit-making, or inappropriate political manipulation.

We are hearing a concern that we must do more to make sure that parents, students, and community members have ongoing opportunities to help shape this transformation as it evolves.

We are hearing a concern over what the closure of 40 or more schools will mean to communities and neighborhoods in terms of both access to education and potential for blight.

These have crystallized as central issues in just the first few days since we released the draft blueprint. Over the course of the coming month, I know there will be many opportunities to gain more insight into how we adjust this plan to address these and other concerns.

This SRC has set a new standard for public engagement. I want to take this opportunity to express my personal commitment – a commitment that I know the entire staff of the District echoes – to open and transparent public processes for the critical decisions that lay ahead.

Public schools are just that, public, and true transformation can only occur if we are able to arrive at a framework that incorporates the best thinking from every corner.

Our time is short. School must open in the fall and many of the changes we need to make if we are to remain solvent and sustainable must begin implementation soon. However, I believe that if all the stakeholders in our public education system come together earnestly and in good faith, we can set a framework for transformation that will serve as a steady guide for years to come.

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