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District sells, refinances bonds for improvements after Wall Street upgrades risk ratings

Credit agencies say the increased savings from open positions helped boost the financial outlook. They also issued a warning about charter school enrollment's upward trend.
  • uri monson

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It’s been a good month on Wall Street for the Philadelphia Public School District.

Last Thursday, the School Reform Commission approved resolutions to restructure $1.5 billion in existing bond debt, for a savings of roughly $140 million. The District converted some of its bonds with flexible interest rates into fixed-interest-rate bonds and negotiated lower interest rates for others.
The resolutions also authorized the sale of $250 million in new bonds that will be used to pay for school-related capital projects.
The actions came just weeks after two Wall Street bond credit rating agencies reevaluated the District’s overall financial stability and changed the outlook from “negative” to “stable.”
Uri Monson, the District’s chief financial officer, said the evaluations from the rating agencies make new bonds more attractive to potential investors.
“The ultimate goal is not to be fiscally stable; it’s educational achievement,” said Monson. “But you have to be fiscally stable in order to do the kind of investing we need.”
The District is particularly dependent on bonds to finance capital projects, such as the maintenance and repair of school buildings and infrastructure. The upcoming projects financed by the $250 million in new bonds will include new school buses, heating and cooling systems, roof repairs, and playground renovations.
The District needs to use bonds to fund these projects because of the large price tags, Monson said. “It’s a long-term investment that we pay back over time,” said Monson, “so we don’t overburden the operating budget with huge capital costs.”
Monson pointed out that the District hasn’t been able to sell new bonds to repair buildings since before the state budget impasse.
Surplus reserves
Both Moody’s and Fitch rating agencies cited the District’s growing cash reserves as a primary reason for the improvement in outlook. Moody’s described the reserves as being at a “healthier, but still narrow level.” They listed the District’s total reserves – the general fund, debt service fund, and intermediate unit -- at about $100 million by the end of last fiscal year.
One of the reasons for the growth in reserves was the District’s failure to fill more than 100 teacher vacancies last year.
In a press release, Fitch cited “expense management” as a primary reason that the District has been able to increase its reserves, although it also mentioned increased revenue from the city and state.
Fitch ascribed growing reserves to “structural expense reduction” and “certain short-term budgetary effects."
According to the agency, "The short-term effects included difficulty in hiring for a significant number of teacher vacancies.”
Fitch also cited “the District providing no healthcare benefits for retirees or dependents,” as another cause of the growing reserves.
Another example not mentioned by Fitch or Moody’s is the millions saved on substitute teacher costs after the private substitute-hiring firm, Source 4 Teachers, failed to fulfill its contractual obligations last year.
Although Fitch and Moody’s are indirectly rewarding the District for spending less money on labor costs, Fitch also noted that “further expense reductions are likely to directly affect core service delivery.” More specifically, “a difficult labor environment, with the teachers’ union operating without a contract for three years, is a negative factor.”
It’s also a factor that could be included in the category of “structural expense reduction” that Fitch acknowledges helped create the District’s larger cash reserves. Furthermore, it is a key reason that the District had so many teacher vacancies, which Fitch listed as one of the “short-term effects” that contributed to growing reserves.
The reports also lauded two recent pieces of state legislation that stipulate that bond payments can be made directly by the state treasurer, who is allowed to withhold the bond payment amount from the District’s state funding for the next school year. This prevents the District from skipping bond payments if it finds itself in a precarious financial situation.
Enrollment in charter schools
Charter schools also featured prominently in both agencies’ predictions for the future. Fitch said it viewed charter school spending as SDP’s most critical expenditure challenge.
Average annual charter school enrollment has grown by 8 percent each year since fiscal year 2012, while average annual enrollment at traditional public schools has declined by 3 percent each year, Fitch reported.
Monson said that overall enrollment across the District has begun to plateau, but charters continue to enroll more students each year.
Fitch pointed out that the District has to pay charters on a per-pupil basis, but “unlike many other states, the vast majority of local school aid is not distributed on a per-pupil basis and is not directly tied to enrollment.” So the District loses money for the students who leave for charters but does not gain state money for new students enrolled at District schools.
Last fiscal year, 30 percent of the District’s budget went to charter schools, and this amount is expected to increase in future years, according to Moody’s credit opinion.
Moody’s wrote that “continued loss of students to charter schools” could lead to a downgrade of the District’s rating. It also concluded that the “halting of migration of students to charter schools” could lead to an upgrade, as well as the “attainment of permanent revenue sources,” such as the ability to levy property taxes.
The agency’s credit opinion expressed confidence that the District’s most recent five-year-plan was financially sound. It includes “annual growth in charter expenditures, savings from the closing of two schools per year beginning in fiscal 2018, as well as additional funds for potential future labor settlements.”
Monson said that closing two schools per year was an estimate made by enrollment trends and that those trends may change in the future.
“It’s not a budget determination,” Monson said. “It’s purely a utilization condition and performance decision.”
Superintendent William Hite told NewsWorks that the planned closures would be made in response to enrollment declines in a district that expects 10,000 more students to enroll at charters over the next five years, but that the District will only close schools if its declining enrollment estimate turns out to be accurate. Hite said he would rather close schools gradually than be faced with another situation like the one that occurred during the 2012-13 school year, when the District closed 30 schools.
Moody’s concludes that “the district will remain challenged over the medium term to offset growing fixed costs, primarily charter school tuition, given its lack of authority over the property tax levy, commonwealth aid, or any of its other major revenue sources.”
The 2017 budget also includes $125 million (8.6 percent) increase in state aid and a $117 million (16 percent) increase in local tax revenue, offset by $117 million (16 percent) growth in charter school expenditures and a $44 million (8.5 percent) increase in employee benefits.
 

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