THE SCHOOL DISTRICT OF PHILADELPHIA

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1 THE SCHOOL DISTRICT OF PHILADELPHIA OFFICE OF THE SUPERINTENDENT 440 NORTH BROAD STREET, SUITE 301 PHILADELPHIA, PENNSYLVANIA WILLIAM R. HITE, JR., Ed.D. TELEPHONE (215) SUPERINTENDENT FAX (215) VIA AND HAND-DELIVERY Honorable Darrell L. Clarke President, City Council of Philadelphia Room 494, City Hall Philadelphia, PA Dear Council President Clarke: I am writing to follow up on several topics raised in advance of and during City Council s hearing on The School District of Philadelphia s budget for (FY16) last week. Further to the final series of questions at the hearing, and to your information request of May 20, 2015, I wanted to take this opportunity to: (1) set forth year-by-year the amount, source, and duration of additional revenues provided by the City over the past four years; (2) provide a supplemental response to the inquiry about how these revenues were used; and (3) detail the sequence of events related to our (FY14) budget. Responses to additional questions and information requests from the Council Members during the hearing are set forth in the enclosed memo and attachments. 1. Additional local funding provided since FY11 As we reiterated during the hearing, we are deeply appreciative of the additional local funding that City Council has authorized since (FY11). As detailed below and in the enclosures, these funds enabled us to avoid making further devastating cuts to programs and services for students and schools as we continue to grapple with a structural deficit caused by increases in fixed and mandated costs that outpace revenue growth. The chart below sets forth the source, duration, and amount of additional funding provided by the City since FY11. [Note: As we indicated during the hearing, there were no local tax increases that went into effect in FY14.] Through the efforts outlined below, the City has increased recurring, annual local funding to the School District by approximately $327M since FY11. This total does not include one-time funds or forgiven costs.

2 Page 2 Table 1. Additional local funding since FY11 Year Source Duration Amount (FY11) Local revenue to the District declined slightly in FY11, mainly due to a drop in delinquent tax revenues. There was a tax amnesty in FY10, which resulted in an increased amount of delinquent taxes collected in FY10 and a decrease in the amount collected in FY (FY12) Real Estate tax increase Recurring $60.1M Increase of City grant from Recurring $10.3M $38.6M to $48.9M Parking revenue increase Recurring $6.2M (FY13) Use and Occupancy tax increase Increase of City grant from $48.9M to $68.9M Recurring Recurring $20.1M $20.1M (FY14) Increased collection of delinquent property taxes compared to FY13 collections Grant (funded by borrowing against sales tax proceeds) Forgiveness of Office of Property Assessment costs TBD $14.7M One-time $27M Recurring $2M (FY15) Increased collection of delinquent property taxes compared to FY13 collections TBD [Note: Delinquent property tax collections for the School District in FY14 were $64M. The City is projected to collect $63M in delinquent property taxes for the School District in FY15. The School District s proposed budget for FY16 assumes is $63M in delinquent collections for FY16.] $13.6M Sales tax extension Recurring and capped $120M/year Cigarette tax (enabling legislation passed by City Council in June 2013 and by General Assembly in September 2014) Recurring for five years; revenues projected to decline annually beginning in FY16 Grant (funded by borrowing against sales tax proceeds) One-time $30M $49M for FY15; projected to grow to $60M for FY16

3 Page 3 Table 2. Total local funding (tax and non-tax) by year since FY11 FY11 FY12 FY13 FY14 FY15 FY15 FY11 833,698, ,012, ,897,086 1,064,526,520 1,192,277,000 *328,578,456 *This total does not include one-time funds. Excluding forgiven costs, the total is $326,578,456 (i.e., the approximately $327M referenced herein). 2. How the School District has used the additional local funding While local revenues to the School District increased by approximately $327M from FY11 to FY15 (see Table 2 above), the School District s major cost drivers charter schools, pensions, non-pension benefits, and debt service increased by $462M during this same interval (see chart below). Additionally, the School District s state revenue declined by approximately $119M from FY11 to FY15, and a variety of competitive grant funds ended during this period. Due to the combination of increasing mandatory expenses and declining state revenue and grant funding, the School District has needed to use the additional local revenues to prevent the further decline in services to students and schools, rather than to support new investments. Although the School District has been forced to make a series of painful budget cuts over the past four years, 1 those cuts would have been much more significant without the additional local funding. Local&Revenue&Increases&v.&Growth&in&Mandatory&Expenses& $250' $222.4& Expenditures& Millions&($)& $200' $150' $93.7& $100' Revenues& $50' $0' $153.3& Expenditures& $5.0' $20.6& $127.8' $44.0& Revenues& $42.4' $92.2' $24.5& $63.3' $93.5& Revenues& $149.3& Expenditures& $12.2' $24.7& $112.3' $133.2& Revenues& $55.0& Expenditures& FY12' FY13' FY14' FY15' FY16' $3.4' $29.6& $22.0' Revenue&& TBD& $84.9& Expenditures& $6.9' $34.0& $40.8' 1 1 These cuts have included reduced teaching and school-based support staff; reduced guidance counseling services; reduced school nursing services; reduced funding for books and supplies; reduced advanced course opportunities and extracurricular activities; reduced central office support to schools and principals; reduced labor expenses (three unions have agreed to concessionary contracts to mitigate further reduction in services to schools); and utilization of all of the School District s fund balance.

4 Page 4 The additional local funding helped to restore and maintain classroom teaching positions, thereby preventing increases in class size or additional split classes serving multiple grades; restore school support positions including assistant principals, guidance counselors, and secretaries; restore itinerant music instruction; restore interscholastic sports to schools in the fall of 2013; avoid increasing the walking distance for high school students from 1.5 to 2 miles in the fall of 2014; and avoid further reductions in cleaning and maintenance services for schools. FY15. The table below sets forth the changes in our major expenditure categories from FY11 to Expenditure category FY11 FY15 Projected Difference: FY11 to FY15 District Operated Schools 1,540,791,073 1,380,589,238 (160,201,835) Charter Schools 430,200, ,557, ,357,417 Debt Service (excludes refunding) 212,071, ,509,149 62,438,096 Other Non-District Operated Schools 104,422, ,800,474 4,377,714 Administration 104,181,311 73,919,072 (30,262,239) Total Expenditures 2,391,666,400 2,593,375, ,709,152 While funds from operating budget sources are fungible, the additional local funding helped to avoid any steeper reductions in major expenditure categories other than fixed or mandatory expenses i.e., primarily, our expenditures on behalf of District-operated schools. If the additional local resources provided since FY11 were allocated proportionally across our major operating budget expenditure categories that support District-operated schools, the breakdown would be: (FY12) Additional local funding (cumulative, compared to FY11 Proportional allocation among major spending categories base, and including one-time funds) $76.4M $50.8M for instruction (teachers, assistant principals, music, alternative education, etc.) $1.5M for instructional support (professional development, educational technology, etc.) $4.6M for pupil & family support (counselors, nurses, athletics, etc.) $16.0M for operational support (facilities, transportation, school police, etc.) $3.5M for administration (staffing and contracts to support District and charter schools)

5 Page (FY13) (FY14) (FY15) Additional local funding (cumulative, compared to FY11 Proportional allocation among major spending categories base, and including one-time funds) $116.8M $79.2M for instruction (teachers, assistant principals, music, alternative education, etc.) $1.1M for instructional support (professional development, educational technology, etc.) $7.0M for pupil & family support (counselors, nurses, athletics, etc.) $24.2M for operational support (facilities, transportation, school police, etc.) $5.3M for administration (staffing and contracts to support District and charter schools) $160.5M $109.8M for instruction (teachers, assistant principals, music, alternative education, etc.) $.8M for instructional support (professional development, educational technology, etc.) $9.1M for pupil & family support (counselors, nurses, athletics, etc.) $33.3M for operational support (facilities, transportation, school police, etc.) $7.5M for administration (staffing and contracts to support District and charter schools) $331.4M $225.0M for instruction (teachers, assistant principals, music, alternative education, etc.) $.9M for instructional support (professional development, educational technology, etc.) $14.9M for pupil & family support (counselors, nurses, athletics, etc.) $73.7M for operational support (facilities, transportation, school police, etc.) $16.9M for administration (staffing and contracts to support District and charter schools) In addition to changes in expenditure amounts by category and proportional allocations of additional local funding, we wanted to provide information previously shared with City Council about how the School District s expenditure allocation has shifted since FY11. As set forth in the charts below, during this interval there has been a significant reduction in the portion of

2 FY11 to FY15 Projected Expenditures by Cost Category Breaking out pension costs, the distribution is: FY11 to FY15

6 Page 6 funding spent on central administration and District-run schools and a significant increase in charter school, debt, and pension costs. 2 FY11 to FY15 Projected Expenditures by Cost Category Breaking out pension costs, the distribution is: FY11 to FY15 Projected Expenditures by Cost Category 2 Undistributed budgetary adjustments are distributed for the purpose of the charts; FY11 debt service assumes that all of the proceeds from the bond refunding went to reduce debt service expenses.

7 Page 7 Attached as an appendix to this letter is a recent analysis by Education Resource Strategies (ERS), funded via a state grant, that examined School District revenues and expenditures from FY08 through FY14. The five main findings of the analysis are that: 1. The School District s operating budget has declined significantly more quickly than its enrollment has declined, resulting in a reduction in its per-pupil funding. 2. After pass-throughs and non-operating expenses, the School District spent $1.75 billion, or $12,724 per pupil, educating pre-kindergarten through 12 th grade students in Districtoperated schools in FY14. This per-pupil funding level is 17% lower than the FY11 level ($15,369) and 5% lower than the FY08 level ($13,384). 3. The School District s expenditures are 19% below ERS peer district median and 17% lower than School District expenditures in FY11 after adjusting for inflation. 4. The School District s staff benefits costs are high and rising: Benefits represent 36% of teacher compensation costs, only one-fifth of which is reimbursed by the state. The School District s share of benefits costs is up 32%, or nearly $8,000 per teacher, since FY In the face of reduced revenues, growing benefits costs have led to radical cuts in virtually all functions, including critical supports for teachers and school leaders. School leader roles are more complex with fewer resources and less central office support. In summary, the School District continues to experience a structural deficit, whereby annual increases in fixed or unavoidable costs outpace increases in revenues. As a result, we have needed to use the much appreciated additional local funding to avoid further cuts to current service levels, rather than to make investments in the programs and services that we know are essential to improved educational outcomes for students. 3. Timeline related to FY14 ( ) budget During the budget hearing last week, City Council requested an overview of the sequence of events related to the (FY14) budget. Set forth below are the major events related to the FY14 budget. March 28, 2013: The School Reform Commission adopts a lump sum FY14 budget seeking $120M in additional state funding, $60M in additional local funding, and $133M in labor concessions to address a $304M deficit.

8 Page 8 April 29, 2013: City Council holds a hearing on School District s FY14 budget, including a presentation by School District of the significant reductions in staffing and programs that will be required if additional funding is not secured. May 30, 2013: The School Reform Commission adopts a FY14 budget making $304M in spending reductions, including mass lay-offs and program reductions. June 7, 2013: The School District sends lay-off notices sent to approximately 3,800 employees, including entire staff categories such as assistant principals, guidance counselors, secretaries, and noontime aides, as well as close to 700 teachers. June 20, 2013: City Council enacts the City s FY14 budget and revenue measures, including a $2/pack cigarette tax for the School District that requires state enabling legislation. 3 Pursuant to the adopted budget, the additional resources to be provided to the School District for FY14 consist of $2M in forgiven Office of Property Assessment costs and a projected $14.8M in additional delinquent tax collections (compared to two years earlier). June 30, 2013: The Pennsylvania General Assembly enacts legislation providing that the additional 1% sales tax for Philadelphia be extended, rather than allowed to sunset as of June 30, 2014; the first $120M of funding from the additional 1% sales tax be allocated to the School District, with funding above $120M being allocated to the City for pension relief; receipt of the $120M be conditioned on certification from the Secretary of Education that the School District has taken certain steps toward fiscal stability, educational improvement, and operational control; and the City be authorized to do a borrowing against future sales tax proceeds to fund a one-time grant to the School District, with the borrowing repaid through the first $15M of collections from the 1% sales tax in s In separate legislation, the General Assembly provides for a one-time grant of $45M to the School District, to be paid via the City and funded via federal forgiveness of a debt owed by the state; payment of this grant is contingent upon a similar certification from the Secretary of Education as required for the sales tax proceeds. July 1, 2013: Lay-off of approximately 3,800 School District staff members become effective. July through early August 2013: City Council raises concerns about the FY14 state funding package, including use of the sales tax extension for a purpose other than municipal pension relief and a state funding package that depends upon locally-generated revenue. As alternatives to the state s proposed local borrowing of $50M repaid with future sales tax proceeds, Council President Clarke proposes that the City purchase the 3 The General Assembly passed the enabling legislation in September 2014, allowing the School District to receive partial-year cigarette tax revenues in FY15.

9 Page 9 School District s surplus properties for $50M and Councilwoman Sanchez proposes that the City give the School District a one-time grant of $50M utilizing the City s fund balance. August 8, 2013: The School District indicates that it will not be able to open schools on time in September due to insufficient staffing (i.e., having only a principal and classroom teachers in each school) unless it receives assurances of $50M in additional funding from the City by August 16, August 15, 2013: Mayor Nutter announces that the City will borrow $50M for the School District. The School District announces that schools will open as scheduled on September 9, 2013 and begins the process of recalling some staff members. October 16, 2013: Governor Corbett announces that the state will release the $45M grant to the School District. The School District announces that it will use the funds to recall additional essential staff members including teachers, guidance counselors, and assistant principals. October 17, 2013: City Council authorizes a grant of $50M to the School District that is contingent on the City buying all of the District s surplus property for $50M. 4 October 30, 2013: Mayor Nutter and Council President Clarke jointly announce a process whereby the School District will work with the Philadelphia Industrial Development Corporation (PIDC) to market and sell surplus school properties. November 2013: The School District begins working with PIDC to market and sell surplus school properties. Through this process, the School District nets $22.6M in building sale proceeds in FY14 and $18.1M in FY15. June 19, 2014: City Council enacts legislation authorizing a borrowing of $27M against future sales tax proceeds to fund a one-time grant to the School District. 5 As I expressed during the hearing last week, we are in a much better place with respect to fiscal stability and management than we were several years ago. We have received a series of clean audits with no material findings, we are finishing this fiscal year with a small surplus, and we have posted all of our financial information online via the City s Open Data initiative. We understand and appreciate the desire by our funders, both locally and at the state level, for funding to be accompanied by accountability. In addition to annual audits performed by the City 4 Note: The School District had $48.7M of bond defeasance costs on its inventory of surplus property. 5 In September 2014, City Council enacted separate legislation authorizing an additional borrowing of $30.1M against future sales tax proceeds to fund another one-time grant to the School District.

10 Page 10 Controller s Office, the School District is currently undergoing a regular performance audit by the Pennsylvania Department of the Auditor General. As I shared with you earlier today, I have asked Auditor General Eugene DePasquale if he would be willing to address any specific areas of concern of City Council Members in the course of his office s performance audit and he said he would do so. We welcome the opportunity to provide additional information in the course of this process. In closing, I want to thank you and the members of City Council for your continued support of Philadelphia public school students. We hope that, equipped with this additional information, City Council will again provide needed resources for our schools. Sincerely, William R. Hite, Jr., Ed.D. cc: Mayor Michael A. Nutter All Members of City Council All Members of the School Reform Commission

Preliminary Five-Year Plan (FY17-21) and Lump Sum Statement (FY16-17)

Preliminary Five-Year Plan (FY17-21) and Lump Sum Statement (FY16-17) March 24, 2016 The School District of Philadelphia s Presentation of the Preliminary Five-Year Plan for FY17-21 and Fiscal Year 2017