Amid $61M crisis, Phila. SRC overhauls leadership

Facing a fiscal crisis of previously unimagined proportions - it must cut $61 million by June and isn't sure how to get there - the Philadelphia School District's governing body on Thursday tore up its leadership structure and named a "chief recovery officer" to get the battered organization through the next six months.

In plainer, starker terms than it had ever used before, the School Reform Commission laid out the district's financial woes to the public in a dramatic meeting Thursday night.

Commissioner Feather Houstoun, who chairs the SRC's finance committee, said the situation was much worse than people realized.

"We're basically going to limp through May and June. We'll cover payroll. We'll cover debt service because we absolutely have to," Houstoun said. Without intervention, "we're going to have such a pileup of cash deficit that we're basically not going to be able to pay people in July for work they did in June. If we haven't fixed this and have a credible plan for next year and the next year, we may not even be able to go to credit markets."

And with 51/2 months before the end of the school year and little left to cut, the only options left on the table are bad ones - possibilities include cutting all spring sports, all instrumental music, all gifted programs, half the district's psychologists.

SRC Chairman Pedro Ramos, who as head of the old school board oversaw a financial crisis that led to the state's taking over the district in 2001, said the scope of the current problem was "unprecedented in my adult lifetime."

The SRC on Tuesday named Thomas Knudsen to the new title of chief recovery officer - he will function both as superintendent and chief financial officer. Knudsen, who previously led a turnaround at the Philadelphia Gas Works, will work under a $150,000, six-month contract.

Knudsen said he shared the SRC's "sense of urgency and alarm."

"This is a severe circumstance, to say the least," he said at a news conference after his appointment was announced.

Penny Nixon, formerly associate superintendent for academics, becomes chief academic officer. She will report directly to the SRC.

Leroy Nunery II, the former acting superintendent, and Michael Masch, former chief financial officer, will both stay on as special advisers but will take pay cuts.

Nunery will report directly to the SRC and focus on examining how business and academic services are delivered to schools - essentially heading an effort to decentralize some district operations. Masch will report to Knudsen and continue to work on financial matters.

How did the district get in such straits? Hundreds of millions in federal stimulus dollars went away, but officials knew that was going to happen. Big chunks were stripped away with cuts in state funding, but it was clear that a Republican governor was not going to help Philadelphia the way previous administrations had.

Ramos took his seat in October and quickly became aware that some of the savings the district had banked on weren't materializing, he and Houstoun said in an interview Thursday.

Higher-than-expected charter school enrollment and a voluntary early retirement program that ended up costing the district money, not saving it cash as originally planned, also hurt.

When the district moved in December to cut school budgets by $10 million and lay off more than 100 employees, including some school nurses, it wasn't enough.

"They should have occurred sooner," Houstoun said of the cuts.

Was it a leadership problem?

Houstoun, formerly New Jersey state treasurer, said the district had gotten used to years of rising revenue. It was "deeply traumatized" by the problems of the last year - the budget and the dramatic, painful exit of former Superintendent Arlene C. Ackerman.

"Clearly," Houstoun said, "the leadership team didn't get it done."

But organizations rarely face the deep, fast-moving problems the district faces, and the former leadership team "did do more than a lot of others could do under the same circumstances," Ramos said.

Still, "the will to do it just wasn't there," Houstoun said. "The discipline to go and do even more after what they faced just wasn't conjured up. The diagnosis is: You've got to act, you've got to act fast. You've got to decide immediately if you're not going to be able to pull it off . . . and that just didn't happen."

Ultimately, though, "only the SRC can approve a budget," Ramos said.

Joseph Dworetzky, the longest-serving member of the SRC, praised Nunery and Masch.

"This should not obscure the extraordinary effort that they have made and continue to make," Dworetzky said.

The SRC stressed that even if the organization was stabilized, more pain was coming in fiscal year 2013.

There will be a "structural gap" of $269 million on day one, Houstoun said. Some of that is due to wage and benefit cost increases, and some is due to debt-service payments.

But some is because of the way the district has found savings this school year and in the past. It has often relied on things like loans and deferred payments.

"It's like paying your household bills with credit cards and home-equity loans," Houstoun said. She was visibly distressed as she broke the stark fiscal news to an audience that was clearly stunned and angry.

The coming months represent an "extraordinary set of circumstances" for the district, Ramos said, and will affect the district's ability to attract a new, permanent superintendent and remain viable.

Though much of the gap-closing plan remains unclear, some changes were decided Tuesday night: The district's 500 nonunionized employees will not get a planned raise; they will take furlough days and start sharing the costs of their health-care premiums. Employees who make more than $75,000 will see pay cuts.

Summer school, which grew considerably under Ackerman, will be cut to the bare minimum - only credit recovery for students just shy of graduation and programs funded by grants will run.

Further reductions in school-based services are possible, the SRC indicated. It could cut psychologists and eliminate all spring athletics, instrumental music, gifted programs, and bilingual counselors. It could cut school police to save $15.5 million.

Asked how likely those school-based reductions were, Houstoun demurred.

"It's too early to talk about that," she said.

Nixon said those cuts would be devastating.

"Parents are looking for safe schools first," she said, and extracurriculars are the reason many children come to school.

Nixon's promotion was, for some, a bright spot in an otherwise somber meeting. She has risen through district ranks, working as a principal, regional superintendent, and most recently as associate superintendent for academics.

"She has really distinguished herself in a positive way," Ramos said.

But the work she and others must do will be excruciating, he said.

Ramos and Houstoun indicated that in terms of cuts, much was up to the district's five unions. Houstoun said she had identified $46.3 million in potential labor givebacks - including furloughs, recission of pay hikes, layoffs, and benefit contributions. Negotiations have not begun.

The SRC, under Act 46, has the power to impose terms on its unions in times of fiscal distress. But Ramos said he did not want to use it. "What we want to do is bargain to a resolution that works for everybody," he said.

In a statement, Mayor Nutter said the SRC "has taken swift and decisive action to address a very serious fiscal problem. . . . I strongly support this carefully considered plan, and I applaud the naming of Thomas Knudsen as chief recovery officer."

The SRC's actions drew swift criticism from many, including the hundreds of employees who packed the contentious meeting. Many were members of Local 32BJ, District 1201, the union representing 2,700 bus aides, cleaners, building engineers, and mechanics. All have been sent layoff notices; their raises also were withheld.

"What I see here is a dismantling of the public school system," said George Ricchezza, 1201 president.

Jerry Jordan, president of the Philadelphia Federation of Teachers, Thursday night called the district's financial picture "very, very alarming," and said he was frustrated by the district's changing deficit numbers. "Who do I trust?" he asked.