The 'structural deficit' that never went away

by Paul Socolar

“For the third consecutive year,” school officials declared when they went before City Council last spring, “the District is introducing a structurally balanced budget that maintains a balanced five-year budget plan at least through the 2010-2011 school year.”

The District's press release proclaimed: “This is an exceptional accomplishment for a school district that in 2001 was operating with a $115 million two-year deficit and facing a projected cumulative deficit of nearly $1.0 billion by 2006.”

Just one year after that boast, however, it has become clear that this statement was misleading. The budget introduced last spring was not “structurally balanced” – nor was the budget before that one.

What does it mean to be “structurally balanced?” It means that the recurring revenue the District takes in each year covers what it spends in the same year. It means that officials don't have to use other funds – a one-time fix, a cash advance, a special appropriation, a reserve fund – to balance the ledger.

In the years leading up to the state takeover in 2002, the District struggled with a persistent “structural deficit,” unable to keep expenditures in line with its income sources – primarily city and state tax monies. In the other 500 school districts in the Commonwealth, the elected boards of education can raise tax rates when expenses outrun income and then take their chances with the voters. In Philadelphia, the appointed Board of Education could never do that.

So the claim by Paul Vallas and the School Reform Commission that the “structural deficit” was a thing of the past seemed a truly remarkable feat.

Except it wasn't true. The deficit was just masked by one of the components of the state takeover deal, a $300 million bond issue to help tide the District over – the biggest one-time fix the District had ever had.

A large chunk of that sum was swallowed up immediately by repayment of the District's huge deficit, but the District was left with almost $200 million to help with future budget imbalances.

The cushion it provided assisted the District, under CEO Vallas and the SRC, in launching a number of costly initiatives, including smaller high schools, class size reduction, and new curriculum materials, as well as the borrowing costs for a massive capital improvement plan.

But there was another intended purpose for that $300 million. In the words of City Controller Alan Butkovitz, “This was intended to be a bridge towards future fiscal stability.”

That “bridge” was expected last at least until 2007 or 2008, according to two early five-year financial plans issued by Vallas in August 2002 and March 2003. But because of the high cost of the reforms and initiatives, the reserves didn't last through 2006.

Entering the 2005-06 school year, the balance on the borrowed funds was down to just $50 million. When District finance officials reviewed numbers after the close of that school year, they discovered the fund balance had been entirely wiped out by an unexpected $73 million shortfall in that year's budget.

With the reserves gone, the District had reached the end of a window of opportunity for achieving the sought-after financial security – the “structurally balanced” budget, the matchup of revenue and expenses. It appears no closer to that status than it was in 2002.