Budget gap presents a monumental task for new leader

Alarmed that the District's budget hole has ballooned, SRC hires turnaround specialist Thomas Knudsen to manage the crisis.

by Dale Mezzacappa

Photo: Benjamin Herold

Thomas Knudsen, who until recently headed PGW, is the District's new chief recovery officer.

The School District finds itself in a historic budget hole because, in part, it had stopped employing sound business practices, according to Thomas Knudsen, the man now in charge of straightening out its finances.

Ultimately, the District will need more resources, said Knudsen.

But, he added, "You can't drive something into the ground and then assume you have the right to simply call on resources to put it back together.

"You have to demonstrate the acuity to manage with what you have, then make the argument for more."

Knudsen, a financial turnaround specialist, was hired as the District's chief recovery officer (CRO) in January.

His task is monumental. He must close a $61 million shortfall in this year's budget – and because many of the gap-closing measures taken this year were one-time devices, the District is staring at a deficit of $269 million or more next year.

After having some time to assess the situation, Knudsen said he is "optimistic we can get a functioning system."

"The issues are issues of organization, of policy execution," Knudsen said.

"A lot of the problems here have arisen from the suspension of business practices or the nonexistence of business practices."

Others are pessimistic. City Controller Alan Butkovitz, for one, questioned the District's ability to "continue as a going concern."

The gap widens

In January, School Reform Commissioner Feather Houstoun painted a catastrophic picture to a stunned crowd at an SRC meeting. She explained that the budget problem was much bigger than previously disclosed – a gap once thought to be $629 million turned out to be $715 million, and the District had only addressed $654 million of that.

Absent drastic action, she said, the District may not be able to make its July payroll.

She starkly outlined how plans for dealing with the shortfall had been poorly implemented during the fall. For instance, the central office staff was not cut in half as called for in the budget, but by only 44 percent. This was done with "no significant reorganization" and "no business process redesign," she said.

"I've never seen this level of cut in central office functions that was not preceded by a serious rethink of how people did business," said Houstoun, a former New Jersey state treasurer who also ran Pennsylvania's Department of Public Welfare.

The haphazard process, among other problems, led to "unintended consequences." For instance, it hampered the District's capacity to fulfill compliance requirements for federal grants, endangering millions more in funds, according to SRC members.

At that same meeting, the SRC hired Knudsen as CRO and acting superintendent, replacing Leroy Nunery in that position. While the SRC declined to lay blame for the mess, it reassigned Nunery and Chief Financial Officer Michael Masch.

"This gap is ominous," said SRC chair Pedro Ramos at the time. "We have five-and-a-half months to get this on a different trajectory."

The SRC detailed actions just taken to save $23 million, including a freeze on all "non-personnel" budgets in most departments, furloughs and other reductions for non-union staff, and the elimination of most summer school.

For the remaining $38 million, there are few good choices left. Options presented included eliminating school police, gifted programs, instrumental music, and spring athletics.

Commissioners said the big savings could only come from union concessions. These could include unpaid furloughs, rollback of a negotiated wage increase, worker contributions to health benefits, and additional layoffs.

As they began the delicate dance with the District's five bargaining units, officials stressed that time was short but set no timetable for reaching new agreements.

The SRC has extraordinary powers regarding labor negotiations, but it is a point of contention whether it can unilaterally mandate changes in contracts already signed. It did withhold raises for members of SEIU Local 32BJ District 1201, which represents blue-collar employees, and gave them layoff notices to take effect in a year, as its contract requires.