By Hilary Russ
(Reuters) - A new school year begins on Monday for about 134,000 Philadelphia students even though the school district - one of the largest in the United States - has no guarantees on how the city and state will deliver nearly $100 million it needs to keep operating.
Mayor Michael Nutter and the city council remain at odds over his proposal for the city to borrow $50 million from capital markets and loan the proceeds to the district.
Based on the promise of that cash influx, the embattled district rehired about 1,000 teachers and staffers laid off at the end of the last school term.
The city council meets on Thursday to take up the issue, with both sides vowing to bridge their differences.
The school district is also counting on a $45 million state grant that Governor Tom Corbett's administration won't release unless unionized teachers make concessions in a new labor pact. Their old contract expired on August 31, and talks are under way.
Even if both pieces of financial help arrive soon, they would only put a bandage on a long-festering budget shortfall for the district that serves the fifth-largest city in the United States.
The city of 1.5 million residents faces its own looming crisis in funding pensions for police, firefighters and municipal workers, a situation that could limit options for putting the school district on firmer footing.
"What's happening in Philadelphia is the worst example of what's taking place in districts across the state," said Sharon Ward, executive director of the left-leaning Pennsylvania Budget and Policy Center (PBPC).
Across Pennsylvania and the nation, public schools in many big cities have long been in decline as more affluent residents send their children to private schools or move to suburban school districts.
Philadelphia - known for the "cheesesteak" sandwich, the Liberty Bell and its rowdy sports fans - may have to make the uncomfortable choice between channeling extra revenue to the schools or funding a broader pension solution.
A downward spiral for the city's schools has worsened over the past few years as the recession prompted cuts in state education funding. At the same time, pension and healthcare costs have ballooned.
Adding to the financial woes, the number of independent, state-funded charter schools has exploded in recent years, siphoning away more students from urban school districts and the state aid that comes with them.
In Pennsylvania, the number of students attending charter schools has grown to more than 105,000, almost half of them in Philadelphia, since charter schools were first authorized in 1997.
Those forces have compounded long-running problems in the Philadelphia school district, which has been under state oversight since December 2001 because of chronic budget deficits and poor test scores.
Philadelphia's school system had a $304 million budget gap to close for the year ending June 2014 and is facing a projected cumulative $1.1 billion deficit through fiscal 2017, according to a consultant's report from August 2012.
The state opted to slash basic education funding in fiscal years 2010 and 2011 as revenue slumped, and instead used federal stimulus money as a temporary cash infusion for schools. But the federal funds ebbed, and the state still hasn't fully restored previous cuts. It's now spending less on its schools than in fiscal 2009. That year, total school funding was more than $5.8 billion, compared with about $5.6 billion this year.
To get the schools opened this year, Nutter last month proposed that the city borrow $50 million from the capital markets by selling bonds. The city would then loan the proceeds to the school district for this year's budget.
"That's the $50 million that everyone's claiming credit for and no one's actually found," said the PBPC's Ward.
Nutter wants the city to use a portion of the revenue generated by a proposed extension of a 1 percentage point sales tax increase to repay the bonds over four years. The extension, which is still awaiting final approval by the state and city, could generate at least $120 million annually.
The city council says that, rather than borrow, it would prefer to use money from the general fund to pay the loan to the district.
"They don't want to continue to pile on more and more debt, which unfortunately in a way they kind of are in this offering," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
The council would only approve the borrowing if state legislation that authorized the tax extension is changed to allow sales tax revenues to be split with the city's underfunded pension plans for public-sector workers, said Jane Roh, spokeswoman for City Council President Darrell Clarke.
As it is now, state legislation that passed in June would send the first $120 million of extra tax revenue to schools. Nutter supports the idea of splitting revenue between schools and pensions, his spokesman Mark McDonald said. But Nutter and Clarke disagree over the best way to get the state to change what it's already approved.
The city's pension plan for firefighters, police and other public employees is funded at a paltry 48 percent as of July 1, 2012; 80 percent is considered healthy.
"The pension issues, other funding issues in Philadelphia, are things that need to be resolved. But a school district that's constantly in crisis, that really doesn't have resources to educate kids - that's a disaster for the city," said Ward.
McDonald said the mayor's plan to borrow the funds is a better option for the city's finances than taking the money from the general fund. "In effect it's no cost to general fund taxpayers," he said.
The city council also says the loan could be repaid by selling unused school properties - including some of the 30 schools it closed over the last two years - through an intermediary. School district officials have been working with Nutter on a separate plan to sell the properties.
(Reporting by Hilary Russ; Editing by Prudence Crowther)