Scranton School District officials need $17 million to balance their 2017 budget, and they still must find $29 million the district will owe at the end of the year.
The $29 million general fund shortfall, likely the largest in Pennsylvania, could eventually force the state to take control.
Districts with deficits much smaller than Scranton closed schools, eliminated arts and music programs and laid off hundreds of teachers. The state forced some of those districts into financial recovery, appointing officers to make tough financial decisions and come up with plans to restore solvency.
Scranton could be next.
“There’s a lot of work to do,” Director Robert Casey said. “It’s a scary reality.”
Board President Bob Sheridan, who said the district will not cut programs or lay off employees, has a more optimistic outlook.
“We’re working very hard without damaging education,” he said. “We could start cutting, but education will fail. ... Overall, I think it’s going to work. We’re on the right path.”
Growing deficit
Fueled by increases in pensions, health care and special education costs, along with previous reliance on one-time revenue sources, the district’s 2017 preliminary budget of $156.5 million includes $17 million more spending than revenues. Scranton, one of only two districts in the state with a calendar-year budget, must pass a balanced spending plan by the end of the month.
The 2016 budget relied on $12.5 million in borrowed money. The district pushed debt payments into the future and borrowed $2.5 million from its health care trust — a fund also created with a bond. School directors said the state will only allow the district one more “scoop and toss,” a maneuver used by cash-strapped districts and governments to borrow additional money to pay off maturing bonds and extend the debt. That means today’s expenses, such as copy paper or salaries, will be paid off years from now.
While officials will find “wish-list” items to trim from the 2017 budget, those cuts won’t be nearly enough to close the deficit. The district can only raise property taxes by 3.6 percent — the maximum allowed under the state Taxpayer Relief Act. But a tax increase would only generate about $1.4 million in new revenue, and Mr. Sheridan opposes any tax hike.
“We have an obligation to taxpayers. We need to make sure we’re doing things right,” he said. “The citizens need a break.”
Directors also hope to find savings through refinancing, offering a retirement incentive to employees, implementing a hiring freeze, discovering businesses not paying taxes and looking at changes to health insurance. It’s far from clear that any such measures will be enough.
Deeper debt
The 2017 shortfall in the budget is separate from the general fund deficit, which stood at $24 million as of the end of 2015. As of last week, the district projected an additional $5 million shortfall for 2016 — for a cumulative deficit of $29 million. Directors contacted last week by The Sunday Times said they were unaware that the district had projected any shortfall for this year. The 2015 audit also shows the district has more than $180 million in long-term debt, an increase of more than $48 million from 2014. Long-term debt reflects borrowed money still owed and does not count as part of a budget deficit, though annual debt payments are part of the budget.
The district blames its deficit on rising pension costs and a cut in education funding from the state. In 2011-12, the first year of Gov. Tom Corbett’s administration, the district saw a funding cut of more than $5 million. As state funding decreased, mandated pension costs skyrocketed. Scranton now contributes about $20 million more annually to the Public School Employees’ Retirement System than in 2011. The pension cost spike is mainly due to a stock market dive that caused pension fund investment losses and pension boosts enacted in 2001. When investments performed strongly, districts and the state paid little into the system.
Charter school costs have also increased, from $3.78 million in 2013, to a projected $5 million for next year for the 410 students attending charters.
Since 2010, the district depleted its fund balance, going from a positive $1.9 million to a projected negative $29 million this year. As of 2014-15, the latest numbers available from the state, Scranton’s deficit was second only to Penn Hills School District in Allegheny County, which had a $19.6 million deficit. Scranton’s deficit at that time was $18.9 million.
Scranton officials rarely address the deficit at school board meetings, which often are not attended by anyone from the public.
Salary and benefits account for nearly 80 percent of the district’s budget, or about $121.6 million.
Rosemary Boland, president of the Scranton Federation of Teachers, attributes much of the deficit to the district’s no-bid busing contract with DeNaples Transportation. Two state auditors general criticized the district’s transportation costs and the awarding of the contracts. In the 2008-09 and 2009-10 school years, the district paid contractors about $4.1 million more than the state allowance for transportation. The board voted earlier this year to extend the contract without bidding it.
Transportation costs for 2017 are projected to decrease from $4 million to $3.4 million, thanks to route changes and savings from the extended contract.
State recovery
Under Pennsylvania law, the state can deem a school district distressed for a variety of reasons, including when employees go unpaid, the district defaults in payments on bonds or when a district accumulates a large deficit for successive years.
Depending on the level of distress, the state may appoint a receiver to help run the district, or a chief recovery officer to come up with a plan to improve finances. Duquesne City and Chester Upland now have receivers, and chief recovery officers work with districts in York and Harrisburg.
Districts in financial watch status include Aliquippa, Reading, Steelton-Highspire and Wilkinsburg Borough.
York entered financial recovery status in 2012, after projecting a deficit of $4.3 million and asking for an advance on its state funding. Harrisburg also entered into recovery in 2012 after asking for multiple advances of funding. Recovery officers may close schools, renegotiate contracts or eliminate positions to find solvency.
The state will review Scranton’s financial situation after it submits a 2015-16 annual financial report, a state Department of Education spokeswoman said.
“It’s one way or another. We’re going to get better or go into receivership,” board Vice President Cy Douaihy said. “Quite honestly, that’s terrifying.”
Looking elsewhere
Across the state, school districts have searched for solutions to eliminate deficits. While other districts have laid off employees or cut programs significantly, Scranton has done neither.
The Erie School District in northwest Pennsylvania, with 11,500 students and a projected shortfall of $8.5 million for the 2017-18 budget, must submit a financial recovery plan to the state. Scranton has 10,100 students and a deficit of almost $30 million.
When Jay Badams, Ph.D., became Erie superintendent in 2010, the district faced a $26 million shortfall. The board laid off 200 employees and closed three elementary schools. The district also sold its noninstructional properties, such as its kitchen and administration building, to an Erie County authority for $10 million in cash. The district now leases the properties, with the deal costing much less than a bond, Dr. Badams said.
He and the board even considered closing the city’s four high schools and sending students to Erie County schools. Teachers have worked under an expired contract for three years. The two-year Scranton teachers contract, approved after a strike last year, expires in August. Scranton teachers plan to start negotiating for a new deal early next year.
Last spring, Erie asked for and received $4 million in emergency funding from the state and entered financial watch status. Erie will ask the state for an additional $28.8 million to balance its budget and improve its buildings for 2017-18.
As Dr. Badams sees many urban districts across the state struggle, he advocates for a fair funding formula that accounts for the wealth of the district, tax rates, poverty and the ability to raise revenue. While Gov. Tom Wolf signed such a formula this year, it only applies to new state funds.
Dr. Badams analyzed state funding levels for districts with average enrollments above 7,000 and median household incomes below $40,000. Based on 2015-16 funding levels, 12 districts received state funding between $3,556 and $8,762 per student. The three lowest are Erie at $4,574, Scranton at $4,114 and Wilkes-Barre Area with $3,556.
“We’ve been trying to figure out how to get the state to help us,” Dr. Badams said. “We’ve been cutting everything we can cut ... it’s just gotten to the point, and we’ve predicted this, we can only cut so much to get back to a balance. We’ve exhausted our options for one-time fixes two or three years ago.”
For districts, receiverships and recovery can involve drastic action, like tax increases and significant layoffs, said Jay Himes, executive director of the Pennsylvania Association of School Business Officials.
“It’s a painful process,” Mr. Himes said. “Sometimes you need others to be able to take that necessary action.”
Local options
Scranton has not explored recovery options or whether to ask the state for additional funding, said Superintendent Alexis Kirijan, Ed.D., who began her post last year.
The budget crisis is “not a one-time fix,” she said. “It’s an over time kind of situation where you begin to look at ways to more effectively and efficiently manage the district.”
At the same time, the district has achieved great growth in English language arts scores and added opportunities for science, technology, engineering and math classes, she said.
“Despite our funding gap and deficit, we’re doing great things for our kids,” Dr. Kirijan said.
By the end of the month, the district must pass a balanced 2017 budget. As of Friday, no budget and finance committee meetings had been scheduled. Director Mark McAndrew said he is frustrated by a lack of discussion.
“I’m very concerned,” he said. “It’s unfortunate we have to wait until December. We need to have more meetings. That’s obvious.”
Repeated efforts by The Sunday Times over the last few weeks to reach Director Bob Lesh, chairman of the budget and finance committee, have been unsuccessful. He has also been absent from the last few meetings.
Director Tom Schuster said while he wishes there would be more committee meetings, he feels confident that measures by the district, like the hiring freeze and retirement incentive, will lead to savings.
“We hope we’re going to close that gap, but we need to follow this strictly to see progress,” he said.
Director Paul Duffy said the district needs to do more than offer retirement incentives, pay close attention to contracts and better evaluate every purchase.
“I’m very concerned that if we do all of that, we’ll still fall drastically short,” he said. “I don’t want to be the person that is coming up with the solution of laying off people. That’s just the easiest solution. Anyone can do that. That’s not being a budget watchdog. That’s third-grade mathematics.”
Mr. Duffy has spoken to state lawmakers about the need for more funding and is starting to explore what has worked for other districts across the state, including by talking to the superintendent in Erie.
“There’s got to be a better way,” Mr. Duffy said.
Contact the writer: shofius@timesshamrock.com, @hofiushallTT on Twitter
