Of all the issues that have bedeviled the school district in the last year - violence at South Philadelphia High School, exploding administrative salaries, questionable awarding of contracts - the one that will be most long-lasting and devastating is now upon us: the huge financial gap the district faces.

While excuses will be offered (get ready to hear about the recession, charter-school costs and pensions) the fact remains that much of the problem is self-inflicted by the superintendent and the School Reform Commission.

School leaders ignored a lesson from Financial Management 101: Don't use short-term money to fund long-term programs. In this case, the short-term money was federal stimulus funds. The long-term programs were part of Superintendent Arlene Ackerman's reform agenda, Imagine 2014: smaller class size, more counselors, expanded summer school.

Don't get me wrong, many of her initiatives make sense. But to be truly successful, reforms must be sustained over time, which means they need a long-term funding source. With the $234 million stimulus injection about to run its course, we're now doomed to repeat the feast-or-famine drama that has become so common in district history. The ones that will go hungry, as usual, are the students and their families.


Because news of the district's financial gap came to light two weeks ago while many of us were off shopping or at holiday parties, let me quickly review the unsettling facts.

Internal district financial documents were leaked showing at least a $430 million gap for the next fiscal year. One independent official with sound knowledge of municipal finances told me it could be "north of $500 million" - out of a $3 billion budget. A big chunk of that deficit is disappearing stimulus money.

Granted, Philadelphia isn't the only district that has to grapple with the impending loss of these funds. But many others found a balance in spending the money between one-time expenditures and long-term reform initiatives. Philadelphia seems to have bet the ranch on Imagine 2014 programs that require recurring funds.

The district should have known better.

The Pennsylvania Department of Education's own guidelines for using stimulus money said, "In deciding how to allocate the resources, the Department . . . recommends that school districts fund one-time expenditures that can be funded in two years and do not need to be sustained in the future."

Even SRC Commissioner David Girard-diCarlo expressed concern when the current budget was presented, saying a "potential financial tsunami of almost biblical proportion" could be coming. He still voted for the budget - which, by the way, overstated revenues by $38 million because it included a $52 million grant that was to be received over three years, not one.

Despite the tsunami on the horizon, the district built on the beach. Rather than reduce or simply maintain ambitious programs like summer school, as other districts did, it expanded the program last summer at an added cost of $21 million.

The SRC itself even added to costs by expanding charter- school enrollment without reducing costs elsewhere.

Other districts made sure to offset the cost of long-term reforms. In Charlotte-Mecklenburg, N.C., the district reduced class size in lower grades, where research indicates it matters, but paid for it by increasing class size in upper grades, where research indicates it doesn't.

Nor did the district prepare for necessary downsizing. It took little action to deal with its excess capacity of over 40,000 seats (due to declining enrollment). Now, when that action has to be taken - and it'll be highly controversial because it requires closing or consolidating schools - maximum savings won't be realized because the maintenance workers' contract requires a 12-month layoff notice. (When chief financial officer Michael Masch urged the district to give notice ahead of time to capture those savings as soon as closings occur, he was rebuffed.)


In May, when the district appeared before City Council to discuss its budget, Councilman Bill Green homed in on the very issue of what would happen when the stimulus funds ran out.

Green asked Masch if it was possible that "we will not have the money to continue Imagine 2014" after the loss of $234 million in federal funds.

"Right," Masch replied.

Obviously not happy with the answer, Dr. Ackerman took the microphone, "I don't think it's correct to think that we won't be able to implement Imagine 2014. We may have to reprioritize some other things. But in a $3 billion budget, we ought to be able to carve out" the money.

Eight months have passed and that challenge is now much bigger, largely because neither Ackerman nor the SRC has taken the tough actions this predictable crisis called for. In fact, just before the winter break, she sent a memo to her top staff directing them to come up with plans for 20, 25 and 30 percent cuts, and have them on her desk this week.

The tsunami Girard-diCarlo feared is now crashing at the shore. Time will tell whether Imagine 2014 survives.

Phil Goldsmith served as interim chief executive officer of the school district in 2000-01, and writes for It's Our Money (www.ourmoneyphilly.com). This is the first of several columns he'll write on the district's latest financial problem.

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