City controller says Philly School District must cut $400,000 per day

City Controller Alan Butkovitz expressed serious concern Wednesday about the Philadelphia School District's continued financial viability.

And he estimated that the district would have to cut $400,000 per day between now and June 30 just to erase a projected deficit of at least $61 million as it wrestles with continuing problems in matching expenses to declining revenues.

"I think long-term, they are going to have to come up with real solutions," Butkovitz said in an interview addressing the district's bleak financial outlook.

In a letter he sent to Thomas E. Knudsen, the district's new chief recovery officer, he wrote: "Unless the School District management can provide compelling evidence to alleviate this doubt, our Independent Auditor's Report will include an explanatory paragraph to reflect our conclusion of substantial doubt [about the district's ability] to continue as a going concern."

And if the district cannot explain by Friday how it will make up a projected deficit this fiscal year, Butkovitz said, he would include a warning in the district's annual financial report that could hamper the district's ability to borrow money and sell bonds.

The Independent Auditor's Report, prepared by his office, is included in the district's comprehensive financial report sent each year to bond-rating agencies and bondholders. The target date for the report is Feb. 10.

Butkovitz said that the last time a controller had made a formal finding that questioned the financial viability of a government entity was in the early 1990s, when then-Controller Jonathan Saidel issued a warning about the city's finances.

The financial tumult, Butkovitz said, led to structural changes in city government and the creation of the Pennsylvania Intergovernmental Cooperative Authority (PICA) board that has oversight over city finances.

Butkovitz said his letter to Knudsen was a warning to give the district the chance to avoid having the negative information included in its annual report.

In a statement released in response to the Butkovitz letter, the district said management would address each of the controller's concerns.

"It is important to note that there has been no finding that the district cannot continue as a 'going concern,' " the statement said. "The district continues to meet both its debt service obligations and payroll.

"The controller's letter is further confirmation of the difficulties the district faces; those difficulties having been discussed by the School Reform Commission (SRC) last week. The SRC has the authority and the determination to correct the current course and intends to do so."

Mayor Nutter's office said he concurred with the district's statement and had no further response.

Butkovitz's letter follows the SRC's disclosures last week that although the district in October had projected a $22 million funding gap, the amount it needs to bridge by June 30 had swelled to at least $61 million.

The commission last week named Knudsen, a financial turnaround specialist, to the unprecedented post of recovery chief. Knudsen, who steered the Philadelphia Gas Works into the black, will work under a $150,000, six-month contract.

Commission member Feather O. Houstoun, who chairs the SRC's finance committee, has said that the district, which has cut individual school budgets, eliminated positions, and laid off staff, was facing stark choices. Among the items on the table: Cutting all spring sports, all instrumental music, all gifted programs, and half the district's psychologists.

In his letter to Knudsen, Butkovitz questioned the "district's continued ineffectiveness in solving its growing budget gap" and its "limited authority to further cut costs."

Butkovitz praised the involvement of Houstoun, a former New Jersey state treasurer, and called Knudsen's appointment "a positive step." But he said the challenges the district faced in closing the gap this fiscal year were daunting.

"There are only a certain number of days left," he said.

The prospects for the next fiscal year are gloomy as well.

As a result of deferred expenses, one-time savings that have already been realized, and projected growth in debt payments and other costs, Houstoun said, the district is looking at a spending gap of at least $269 million for the fiscal year beginning July 1.