Phila Schools $2.7B budget lacked fiscal controls

The Philadelphia School District overspent its budget in each of the last four years and failed to use sound financial management controls that would have signaled trouble earlier, leading to the deficit that emerged last fall, says a long-awaited report on district finances issued today.

Gov. Rendell's chief financial adviser - Budget Secretary Michael Masch - says both the administration of Chief Executive Officer Paul Vallas and the School Reform Commission, the district's governing body, must share the blame for the problems.

They lacked annual five-year budgets, quarterly reports that make sure spending stays in line with budget estimates and other fiscal controls, Masch said. They also inserted downward spending adjustments to the budget mid-year, without specifying which department was responsible for making the cuts, he said. As a result, the adjustments necessary to keep spending at the budgeted levels never happened.

"It is difficult to manage a $2.7 billion organization successfully in the absence of these kinds of standard management practices," Masch said, referring to both the district's $2.04 billion operating budget for 2006-07 and its funding from grants, many of them federal.

But he also said that most of the practices were in place before Vallas and the commission came on board in 2002 in the wake of the state takeover of the district.

They were occurring even during the three-year span of 2000 to 2002 that Masch was a member of the district's Board of Education and later the commission.

"These are not new practices. These practices were in place when I joined the school board. The problem is the School Reform Commission didn't end these practices. They didn't invent them, but they didn't end them," Masch said.

But to the district's credit, he said the overspending paid off in substantial academic improvement. More funding is needed to continue the improvement, he said.

"The school district is requesting an increase in funding comparable to what they've received on average over the last five years and are proposing to use that money to sustain reforms ...that have gotten clear beneficial results in the Philadelphia public schools," Masch said.

District officials were still reviewing the report and not yet ready today to comment.

Masch began reviewing district finances in December at the request of Mayor Street and Gov. Rendell.

The request followed the district's disclosure that it had to cover a $73 million deficit. Vallas, who as a former budget director of the city of Chicago specializes in finance, came under considerable scrutiny and criticism for the deficit and began to plan his exit in the aftermath. Vallas is headed to New Orleans at the end of the month to run its "Recovery" district.

The School Reform Commission last week approved several new financial management measures recommended by Masch in his report, including quarterly reports. Masch said he had shared his findings with the commission and the administration previous to last week's vote.

He called the new measures "very positive steps in the right direction. It would have been good if they were done sooner, but it's still good that they're being done."

Masch's report also expressed concern that individual school budgets had remained stagnant, despite rising costs in personnel and materials. He questioned whether the new reforms instituted under Vallas, including summer school, after school programs and a standardized curriculum, have emaciated money used to operate schools.

"There needs to be a much closer analysis of what is happening to school budgets," Masch said. "I am concerned (one) way we have funded new programs is by constraining the budgets of our existing schools. It's a very complicated matter."

The commission last week adopted a measure that will require the district to release detailed information about each school's budget by Monday.

The district's request for more city and federal funding this year - about a 6 percent increase - is in line with increases provided in the previous years, he said.

The state has given the district about a seven percent increase in funding each year for the last five years - a percentage point higher than the state average, he said. In the five previous years - before the state takeover and the Vallas administration - state increases came in at about 4 percent a year, he said.

The city meanwhile gave 5 percent more in each of the last five years, compared to 3 percent more in the previous five years.

The additional money resulted in considerable academic improvement, Masch said. And the district is seeking funding to do more of the same, he said.

Masch's report does not comment, however, on what level of funding the district deserves. The budget adopted by the district last week anticipates another $9 million from the city and nearly $55 million from the state not yet included in Gov. Rendell's budget. Without the money, district officials have said they will make deeper spending cuts than already planned.

It also does not evaluate individual programs to determine if money was wasted or well spent.

It does delineate items that have driven up costs in the district over the last several years. Charter schools, payments for debt service due to the district's $1.5 billion capital plan and special education costs led the list.