Following is an excerpt of the text of Chief Recovery Officer Thomas Knudsen's testimony before the School Reform Commission on Thursday night before its vote.
The fundamentals of our budget have not changed since we originally presented it over a month ago. We are still in enormous fiscal distress, with a $218 million shortfall projected for next year that, if unchecked,will lead to an unattainable $1.1 billion shortfall over the coming five years. And we are still in desperate need of the $94 million in new revenues currently up for a vote in City Council.
For a decade, the District’s revenues have not been consistently in line with expenditures. There were years in balance, but there have also been years when the District had to borrow just to cover its recurring costs. And during the better years, rather than pay down its debt or bring these costs more in line with recurring revenues, the District made new expenditures. Some of these expenditures were valuable, to be sure, but it was not clear that the District could afford them over the long run. Just like any of us, the District cannot live on its credit card forever.
In addition, there are structural cost issues that have gone unaddressed for a long time. For example, the District has kept the same number of buildings operating that it used when there were 50,000 more students in the system. The number of students has declined over many years, but at no time was there the political will to make difficult decisions to close buildings to keep the costs of our facilities in line with our real needs.
These kinds of issues – increasing debt burden and growing structural cost imbalances – made the District’s finances vulnerable. And so, when a shock came last year in the form of sudden and dramatic drops in revenue as federal and state budgets were slashed and the Stimulus money dried up, the consequences were extreme.
Earlier in this fiscal year, we were faced with over $700 million in shortfall. You can see the components of this shortfall up on the screen.
So we cut $63 million from our central office, reducing staff by almost a third.
We cut $37 million from operating support for schools – crucial positions like school police officers and maintenance staff.
And, most painfully, we cut $318 million from school budgets and programs. Nurses, bilingual support professionals, counselors, art, music, and athletics, intervention and after school programs – all were reduced. These cuts were especially difficult, because they were made not all at once, but several times throughout the year as more and more financial problems were uncovered. This made it almost impossible for principals to plan effectively.
Yet even these cuts were not enough to get us through this year. We had to borrow money – nearly $37 million from SEPTA to pay for transportation for our students. That money helped, but it is a cost we will now bear for years to come.
And we had to deplete our reserves, leaving us little cushion.
Like the SEPTA loan, about $169 million of the budget solutions this last year were one-time fixes, meaning that amount of shortfall would reappear as we prepared this budget, and that we would have to find new ways to deal it. That $169 million is now the largest part of the $218 million shortfall.
Shifting to the Fiscal Year 2013 budget, as I reported at the lump sum presentation, our revenues are effectively flat, with the exception of the $94 million now at issue in City Council.
At the same time, our costs have been rising.
Wages and benefits are major drivers of our increased costs. Due to
legal and contractual mandates, if we were to maintain on our current path, our wages, benefits, and pension costs would increase over $124 million in the coming year.
Part of this cost change is also 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 $55 million. Conversely, and critically, our main sources of revenue do not automatically increase as student enrollment increases.
Under the guidance the School Reform Commission issued over recent weeks, we are working collaboratively with our Charter partners to find ways to contain 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.
These two trends – flat or decreasing revenues and increasing expenditures – are self-evidently unsustainable. At some point, we were going to run out of money, and that point is now.
To create the budget before you, we began, as I believe we always must, with our mission – to provide safe, high quality schools for all students.
Our Chief Academic Officer came to us several months ago and gave us guidance – bravely, in my view – that would become the foundation of our budget process. She said that school budgets had been cut as much as they could be cut, and that the principals and teachers could not sustain another year of multiple rounds of cuts. We had to build a budget that did two things: First, protect service levels in the schools, and second, be stable and realistic enough to guard against the need to revisit budgets mid-year.
So this was our charge. Protect school budgets and try to prevent mid-year cuts.
That is what this budget does. It holds service levels for things like Bilingual Counseling Assistants, nurses, and police. It maintains critical programs like all-day kindergarten. It preserves sports, music, and art programs that remained after last year’s cuts.
These are not the service levels we would like in an ideal world, because we do not have the funding levels we would like in an ideal world. But this is a budget that does its best to preserve the things we value most in a fiscal context that is far from ideal.
In most respects, this budget is unchanged from the draft budget released at the end of April. The one significant change is that it reflects a deficit at the end of Fiscal Year 2012 of approximately $22 million. That amount represents the remainder of the current shortfall. The draft budget assumed that that shortfall would be entirely closed within FY 12. We still have some time to address this issue, because under municipal accounting rules we actually have until the end of August to close the fiscal year. We have begun a new partnership with the City’s Finance Director and Department of Revenue to aggressively collect the delinquent taxes owed the District and are still monitoring this year’s tax receipts as they come in to understand our true balance. But, because the shortfall is not currently closed, we have to represent it in the FY 12 amended budget.
What is more important is what has not changed. We are still projecting a very difficult path forward. As you can see from the chart, we have a $218 million shortfall for FY 13. There are no quick fixes to address a shortfall of this magnitude, given all the cuts that have already been made.
So, with no quick fixes at our disposal, and an unwillingness to cut schools any further, we find ourselves at this juncture with just one choice to close the gap. We must break out our credit card one last time, and sell 20-year bonds to keep our schools operating at even their bare-bones level this year.
In so doing, we must commit, and never waver from that commitment, that we will not let whatever credit we receive weaken our will to make the difficult decisions that will bring us back to long-term balance. We cannot afford, as our Chairman often says, to kick this can down the road again.
Just as this budget reflects the years of decisions that led up to it, it must be understood in the context of the years of hard work ahead of us to restore long-term financial balance.
Late last month, we proposed the first true five-year financial plan the District has had in many years. The plan calls for achieving significant savings from our operations – including dealing head-on with the excess building capacity I mentioned earlier – from labor costs, and in reduced formula-driven charter payments. It also includes that vital $94 million that is still pending in Council – the most realistic option for real revenue relief before us this fiscal year.
Let me be absolutely clear, as there has been some confusion on this point. Passing this budget is not passing the proposed five-year financial plan, on which we are still taking public comment. The vote tonight also does not determine the outcome of the negotiations ongoing with our collective bargaining units, and it does not prejudge the important and extensive public engagement processes we will undertake over the next many months to help decide how to deal with our excess buildings. Likewise, passing this budget does not in any way define the long-term future of the District’s organizational structure. That, too, will only be determined after extensive additional engagement through next fall.
What the five-year plan does offer, even in its current draft form, is a guideline for how much we can afford to spend in a given year.
I raise the broader context of the proposed five-year plan in this setting, then, only because it is important to understand that this budget is consistent with the basic spending parameters it proposes, and therefore represents not only a beachhead against any further erosion of our academic program, but also a stake in the ground to anchor us as we move toward a fiscally sustainable future.