Michael Masch explains District finances, disputes charge of 'bad fiscal policy'
By the Notebook on Jan 15, 2013 08:05 PM
The Notebook interviewed former Chief Financial Officer Michael Masch after his departure from the District on its fiscal predicament and the plans for addressing it. At the time of the interview, the District was preparing to borrow $300 million to cover its operating costs.
Since leaving the District, Masch has disputed the view put forward by District officials that the District’s financial troubles were due to “bad fiscal policy,” as said often by School Reform Commission chairman Pedro Ramos.
Masch is about to start a new job as a vice president at Manhattan College in New York City.
Why is it that the Philadelphia schools seem to be in a perpetual budget crisis?
First, let's be clear that the problem is not that the District spends more than it gets. There is a perception that the District is constantly in deficit -- that the District is constantly spending more than it has. That's not correct.
The problem for the District is that once it achieves a balanced budget in a particular year, it has a very difficult time maintaining budget balance in the next year. In many years, the District looks at its current level of spending, mandated spending increases, and the level of funding that the city, the Commonwealth and the federal government propose to provide in the coming year, and the District is forced to conclude that -- without some kind of corrective action -- a deficit is going to occur.
So the District warns the public of the problem, and then it takes corrective actions. Spending gets cut to help close the gap. Funding increases are lobbied for and sometimes achieved. Eventually the corrective actions are implemented and the problem is fixed. But as the process plays out, the public receives the impression that the budget is always out of balance. Often, the public does not realize that the forecast problems eventually got solved.
Hasn’t the School District been over-spending and borrowing to make up the difference? Has the District been paying for recurring expenses "on credit"?
Not usually, but sometimes. It is not the normal, typical state of affairs, but it has happened.
In 2002, the District issued a $317 million "deficit financing bond" and spent the proceeds to help balance its budgets in 2002 through 2006. This was part of a financial rescue plan for the District that was jointly developed and implemented by the City and the Commonwealth under Gov. Schweiker and Mayor Street.
Since then, there have been no proposals to balance the annual operating budget with long-term debt until this year.
In 2012, the SRC also agreed to implement a set of non-recurring budget-balancing initiatives when certain parts of the District's original 2012 gap-closing plan had to be discarded or the target for savings from certain initiatives had to be reduced.
With the agreement of the mayor and City Council, the District funded student TransPasses in 2012 using a $37 million loan from SEPTA, rather than eliminate TransPass service. When $57 million in hoped-for additional state aid that was in the 2012 gap-closing plan did not materialize, the District carried out a bond refinancing to achieve comparable 2012 savings, on a one-time, non-recurring basis. These were extraordinary one-time measures, not typical of the District's normal approach to budgeting.
Both of these initiatives were responses to the tremendous difficulty the District experienced this year in attempting to cope with an unprecedented 15 percent year-over-year decrease in state and federal funding.
Why did the District's FY13 budget plan have a gap?
In 2013, the District has a budget gap because of five problems:
- The loss of non-recurring 2012 budget balancers including a $37 million SEPTA loan and the $60 million in one-time bond refinancing savings.
- Growth in the District's costs in areas including salary increases, benefit increases, resumption of payments to the PFT Health and Welfare Fund (not made in 2012), pensions, and charter schools.
- No $31 million surplus from the prior year to cover current year costs.
- The need to make real estate tax refunds due to assessment appeals.
- A freeze in most state funding, locking in and making permanent the deep cuts instituted in 2012.
Why does the District's new FY13 to FY17 Five Year Financial Plan project $1.1 billion in deficits for the District over the next five years?
The District's current Five Year Plan assumes that the state budget cuts instituted in 2012 will remain in place, with no increase in state funding through 2016, except to cover a portion of the forecast growth in pension costs for District employees. After the requested 2013 tax increase, the Plan also assumes that there will be only very modest annual increases in local funding through 2016.
But even if the School District institutes not a single new program, and fails to restore any of the cuts that were made in 2012, some School District costs will grow over the next five years, for items like medical benefits for District employees, pensions, utilities, and other items where cost increases are not within the School District’s control. If costs grow while revenue stays flat, a growing budget gap emerges.
Assuming virtually no revenue growth, the District's Five Year Plan can only produce a balanced budget by making additional deep cuts in spending, over and above the deep cuts that were already instituted in 2012.
Are the assumptions in the District's Five Year Plan reasonable?
The current District FY13-FY17 Five Year Financial Plan proposes to achieve a balanced School District budget over the next five years by closing one-third of the District’s schools and seeking a cut of 10-15 percent in the wages and benefits of all District employees. It also assumes that over the next five years, 40 percent of all public school students in Philadelphia will be attending charter schools, up from 25 percent today.
Moreover, the plan does not restore any of the half-billion in cuts to school budgets that were instituted in 2012 to cope with the reduction in funding in 2012.
Some of the changes proposed in the Five Year Plan are needed and reasonable. The District does need to close some schools, given how much enrollment has declined in District-operated schools over the past decade as charter schools have grown. And the District should allow high-performing charter schools to grow. And District workers can make some sacrifices, like contributing to their health-care costs, which they do not do currently.
But in the end, the current Five Year Plan is forced to be more extreme than is reasonable in the spending cuts it seeks because the Plan begins with the unreasonable assumption that none of the cuts in state spending imposed on the District in 2012 should be restored, and no increases in funding should occur for the next several years.
This critical assumption forces the District to make other assumptions that are extreme and unreasonable, like the demand that District workers take a 10-15 percent cut in pay and benefits. This kind of cut is not being implemented in the suburban school districts with which the SDP competes for teachers. Since Philadelphia teachers currently make comparable pay to suburban teachers in their early years of teaching, and significantly less thereafter, a cut of this magnitude would put Philadelphia at a permanent and significant disadvantage in competing to attract and retain effective teachers in the regional teacher labor market.
It is worth noting that the Commonwealth did not make a similar demand of state employees in the new state worker contracts that were recently negotiated. Those new state labor contracts provide for a 4 percent increase in wages over the period from 2013 through 2015, not a wage cut.
In general, the School District’s Five Year Plan has an implicit double standard when it comes to the City of Philadelphia and the Commonwealth of Pennsylvania. It is impossible to raise taxes on state residents or cut worker pay at the state level, but there is no problem doing these things at the local level, even though Philadelphia is one of Pennsylvania’s poorest communities and has one of the state’s highest local tax burdens.