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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 by Dale Mezzacappa on Feb 3, 2012 11:31 AM
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.
Knudsen said "conversations" were scheduled with the Philadelphia Federation of Teachers, by far the largest union. PFT President Jerry Jordan has said he's resistant to seriously considering more sacrifice, especially as long as the District continues to charterize District schools that employ his members.
Despite Knudsen's actions and optimism, Controller Butkovitz didn't rule out including a warning in the District's annual report that would be seen by bond-rating agencies and impact the District's ability to borrow money.
A recovery team
Knudsen lifted Philadelphia Gas Works out of crisis and acted as its CEO for nearly 10 years.
He has no background in education, but he said that is not a hindrance because his task is to straighten out the District's "organizational" dysfunction, not determine its educational mission.
Penny Nixon, who came up through District ranks, was promoted by the SRC to chief academic officer and asked to clarify the District's core educational mission. She will have to make the case whether it must include such non-mandated areas as early childhood education, truancy and dropout prevention, re-engagement and alternative education for dropouts, and extracurricular activities.
"Penny is really addressing these questions," Knudsen said. "I've asked her to complete a design of the academic program and her portion of the business model by the end of February so we can get about designing the rest of the organization around her."
He and the SRC are hiring consultants to help with the plan for this year's budget, balance next year's budget, assist in developing a five-year financial plan, revamp the "administrative, operational, and organizational" structures, and "monetize the District's assets."
There's been no projection of the cost of these consultants. The PFT's Jordan and others criticized such spending. Knudsen, however, said that this approach represents best practice.
"There is substantial cost saving best derived by people who can view the operation [from the outside] and suggest alternatives," he said – especially when a downsized staff is working on day-to-day operations.
"We look to these outside experts to help guide the conversation. These people will pay for themselves very quickly."
The consultants he used at PGW cost "$7 or $8 million" over a seven-year period, he said, "and by the time I left had made it back three or four times over."
The biggest difference between PGW and the School District, Knudsen said, is that at the District, he has no power to raise revenues on his own. At PGW, he was able to raise rates to make ends meet, whereas the SRC must ask the state and city for additional funding.
He said that means the gap here must be closed entirely by cost-cutting measures, which makes it more difficult.
At the same time, he said, "those who would grant us [additional] resources have every right to demand that within the resource base we have now, we are the most effective – both in terms of mission delivery and cost – as we can be.
"Once we are there, I think we have the right to go to the powers that be."