Former CFO responds to criticism

Thomas Knudsen (left), the district's "chief recovery officer," and former district CFO Michael Masch (right), who is now a "special adviser" to Knudsen. (Sarah J. Glover / Staff Photographer)

I wrote yesterday about former Philadelphia School District CFO Michael Masch's appointment as vice president and CFO of Manhattan College in New York. Masch took issue with the piece, and wrote the following response, which I am posting in its entirety below. It's the first time that Masch has spoken out against criticism of his financial stewardship of the district.

Here's what Masch had to say:

"I was disappointed and surprised to see that, in the Inquirer’s 1/14/13 Philly School Files piece about my new position at Manhattan College, the decision was made to once again repeat some of the false claims that have been made about my record of service to the School District of Philadelphia as its Chief Financial Officer from 2008 to 2011. 

I would like to make it clear that at the time I left the School District’s CFO position in January 2012, the District did not face "massive budget problems that, if uncorrected, would have left the district unable to pay its bills within a few months," as your piece alleges. 

At the time I left the District CFO position in January 2012,

  • 91% of the District's massive $715 million FY12 budget gap had already been closed through initiatives identified and implemented by the management team I was a part of -- $654 million in gap closing measures had been successfully and fully implemented as of January 2012.  (See the School Reform Commission’s own January 19, 2012 public presentation on the FY12 SDP budget for verification of this claim.)
  • Additional initiatives had been identified by my team and were in the process of being implemented sufficient to close most of the remaining gap.  (Again, see the SRC 1/19/12 presentation for verification.)
  • The District had a fully-functioning five year plan model able to identify the available options that could be implemented to keep the School District’s budget balanced over a multi-year period after FY12.  (This model was used by the Boston Consulting Group team once they arrived at the District, but it was not created by them.)
  • The District also had a fully-developed emergency deficit financing plan prepared to insure the District would not face a cash flow crisis if other gap closing measures turned out to less than completely successful.  Again, this plan was devised by the School District finance team prior to January 2012, before either Tom Knudsen or the BCG team were engaged by the District.

One of the fundamental responsibilities of the School District of Philadelphia’s Chief Financial Officer is to project the levels of funding the District is likely to receive in the future and devise and propose to the Superintendent and the School Reform Commission a spending plan that fits within those projected funding levels 

Revenue projection is more difficult at the School District than at other government entities because the District lacks both independent taxing authority and any level of guaranteed funding from its three primary funders – the City of Philadelphia, the Commonwealth of Pennsylvania and the Federal Government. 

Accordingly, many times the District’s CFO is required to present the Superintendent and the School Reform Commission with a revised budget plan for the District once final funding levels have been established  each year by the District’s funders.

This lack of any guaranteed predictable funding level is what makes it appear that the Philadelphia schools are constantly in budget turmoil, particularly since the District has certain costs that grow from year to year due to factors outside the District’s control, such as its annual pension funding obligation (which is determined by the Commonwealth), employee health benefit obligations (determined by the health care market – the District revised its health plans in 2010 to reduce annual medical benefit costs by about $30 million, but since then health care cost inflation has continued to push up per employee premiums), per pupil payments to charter schools (these are also determined by state law), and utility costs (not consumption, which the District has managed aggressively, but the actual cost per unit of water, gas and electricity consumed).

Therefore, given that District budgets only represent forecasts and must repeatedly be revised, the best measure of the District CFO’s performance is what actually happened to the District’s finances – not the budgets, which in the end are never more than planning and forecasting documents, but the actual results.

I was responsible for the School District's finances for three full fiscal years – FY09 through FY11.  In those three years the District realized annual Operating Budget surpluses in every year -- $28 million in FY09, $28 million in FY10, and $31 million in FY11.  These were the best financial results achieved by the District in well over a decade.  (And please note that that these were the District’s Operating Budget results only – they do not include Federal Stimulus grants that were received and spent by the District in FY10 and FY11, which were not included in the District’s Operating Budget, but rather in a separate Categorical Grants Budget.)

As we all know, the Philadelphia School District faced a massive budget problem in FY12.  It is not true that the District failed to anticipate this budget problem, and it is not true that there was no plan to deal with it.  I predicted the FY12 budget gap over a year in advance (see the inquirer reporting of my warnings to the SRC on this subject, published on May 27, 2010) and the District spent many months preparing to deal with it.  That is why most of the FY12 budget gap was closed before the FY12 fiscal year even began – because the District had spent months preparing to cope with the FY12 budget gap and close it.

The critical question is:  WHY did the School District face a massive budget gap in FY12?  The primary answer is: an unprecedented single year 14% reduction in state Operating funding. 

This reduction was massive and unprecedented.  In preceding decades, there had never before been a year in which state funding for public schools had ever declined, let alone by such a large percentage. 

Despite claims to the contrary by some state officials, the FY12 School District budget crisis was not solely or even primarily the result of the District’s loss in FY12 of Federal Stimulus funding.  The School District always understood that Federal Stimulus funding would only be available for two years.  If Federal Stimulus had been the only funding lost to the District, the FY12 budget gap would have been significant but manageable.   But the District ALSO suffered in FY12 from the loss of $229 million in 100% state funding, including $119 million in charter school reimbursement, $36 million in state funding for full-day kindergarten, $27 million in state funding for remedial instruction, and tens of millions in other funding. 

These cuts in state school funding were deep and disproportionate, falling most deeply on Pennsylvania’s poorest school districts.   (The average reduction in state funding for all Pennsylvania school districts in FY12 was 6%, compared to Philadelphia’s 14% loss.  Other poor districts like Reading, Johnstown, Scranton, and Lebanon also received disproportionately high percentage cuts.)

Bad as things were in FY12, it is important for the people of Philadelphia to understand that the massive financial problems facing the School District today are not a continuation of FY12’s budget crisis.  The problems resulting from the District’s massive loss of funding in FY12 were largely dealt with in FY12 through the spending cuts the District instituted that year.  Faced with a forecast FY12 budget gap of over $700 million, the District ended FY12 with a deficit of “only” $28 million.  So most of the District’s FY12 gap was eliminated in FY12.

So why is it, then, that in FY13 the District’s leaders, who have criticized the District’s alleged “bad fiscal policies” of the past, have adopted a budget that does not even attempt to balance?  In FY13, the District’s official adopted budget calls for the District to spend $200 million dollars more than the District anticipates taking in in revenue.  Moreover, the District's current five year plan anticipates that the District will spend $78 million in excess of revenue next year.    This is a situation quite different from FY12, when the District forecast a potential deficit and then took action to eliminate that deficit before it happened.  This is actual planned and sanctioned overspending, at a level never seen before in the School District’s history.

These planned FY13 and FY14 School District deficits are not occurring because District spending is growing at disproportionate rates or because the District is undoing any of the cuts it made in FY12.  These planned deficits are the result of the District’s acceptance of the Commonwealth of Pennsylvania’s decision to freeze its funding for the District at the reduced levels of FY12 over a multi-year period, providing no increases in funding to cover any of the District’s mandated annual cost increases (e.g., health care, utilities, charter payments) other than a portion of the state-mandated increase in the District’s pension payments.

In the short run, the District has eliminated the gap resulting from its planned FY13 and FY14 spending in excess of funding through the issuance of a $300 million deficit borrowing which papers over the budget gap for two years, at an additional annual cost to the District of $22 million a year over the next 20 years.  From FY15 on, the District anticipates closing its budget gap by closing dozens of District-operated schools and asking District employees for a 15% cut in compensation, while at the same time massively increasing the number of seats in Philadelphia charter schools, even though the District’s own consultants – the Boston Consulting Group – have found that each additional charter seat costs the District about $7,000.

What is missing from this current School District financial plan is any expectation that funding for the District will grow at even the modest rate needed to cover mandated and unavoidable growth in the District’s costs.   Not even on the table is any contemplation that funding might be received to reverse some of the devastating cuts to the District’s instructional programs that were implemented in FY12. 

This is not a viable or sustainable “fiscal policy.”   Growth in mandated costs, massive charter growth and zero funding growth is a formula that forces the School District to contemplate unreasonably deep cuts in District-operated schools that cannot help but impair the ability of those schools to deliver an effective education to the students in their care.  In inflation-adjusted terms, per student state funding for Philadelphia’s schools is lower than what the District received from the Commonwealth in 2004.  That should be unacceptable to the District, and a cause for advocacy, not resignation.

I left the School District because it was clear both to the District’s current leadership and to me that I could not support these current District fiscal policies and a parting of the ways made sense.   But as a lifelong Philadelphian who cares deeply about our schools and our children, I hope the District’s current leadership will reconsider the path they are presently on, change course and adopt a more rational and balanced path to fiscal stability than the District’s current five year financial plan.  We need a revised plan that combines reasonable annual levels of funding growth with less drastic spending cuts, fewer school closures, and more moderate charter growth that focuses only on growing charters with above-average academic performance.    

I acknowledge that the District’s current leadership has a daunting task before it, and for the sake of everyone in our city I wish them great success.  What I refuse to accept is a mischaracterization of the work done by myself and so many others who labored very responsibly and tirelessly to maintain sound School District fiscal policies – and sound School District fiscal results – before the current leadership assumed their current positions."