closing the educational funding gap march 12 2015

8/9/2019 Closing the Educational Funding Gap March 12 2015

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Closing the Funding Gap in

Philadelphia’s Public Schools

A Proposal

By

Sam Katz

March 12, 2015



Closing the Funding Gap inPhiladelphia’s Public Schools

A Proposal

March 12, 2015

For decades, Philadelphia’s public school system has confronted a massive resource

gap.1 Services, programs, staffing and educational supports afforded students in wealthier

school districts have often not been available to students who attend Philadelphia public

schools. SRC Commissioner Bill Green recently observed, "the fundamental problem with

the district is that we can’t get anyone to invest in us, because we can’t get anyone to

believe that if they give us the money, we will be successful. That seems to be the numberone impediment to resources.” From my perspective, this assessment is absolutely correct.

Surely, money isn’t the only thing that matters in preparing kids to become critical

thinkers, capable of competing for jobs and living self-sufficient lives and building a

foundation for good citizenship. But if money didn’t matter, would the parents in Lower

Merion, Council Rock and Radnor be spending so much more of it to educate their children?

This proposal argues for modifying tax policy and using publicly owned

assets to narrow the resource gap in public education. It recognizes the critical

role in resource acquisition of corporate and foundation philanthropy. And itargues for changing our long held practice of depending on the State to solve

this issue. Moreover, this approach says Philadelphia owns its schools, that

Philadelphia’s leadership—political, civic, clergy, labor, (notably the PFT who

are essential to the coalition that can make this plan happen) and business—

has to evidence the will to exercise that ownership, and must finally accept that

closing the educational resource gap starts at home.

Since the 1960s, political leaders have argued that Harrisburg needs to do more. But

our experience has more often been disappointing even when the City has enjoyed

significant influence in State government, which it certainly does not today. Yes, Harrisburg

needs to do more. The fight for a funding formula that recognizes the poverty-wealth

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Closing the Funding Gap in Philadelphia’s Public Schools: A Proposal

March 12, 2015 Page 2

disparity and for legislation that addresses the deficits created from student transfers to

charter schools are both critical intergovernmental issues. But I would argue our chances of

doing better improve dramatically only by demonstrating that closing the educational

resource gap is this city’s top priority. We do more first! We show Harrisburg the money!

We evidence our commitment. We act like parents and take care of what our kids need.

I believe the place to start is with local tax policy and not tax rate

increases. The local tax base is the principal source of funding all government services of

which by far the single largest is public education.2 In response to the fact that our tax

system has a significant deterrent to job creation and economic growth, we’ve implemented

numerous breaks and transactional fixes to stimulate the city’s economy. To address that,policies to stimulate investment have been layered into the City’s tax regime. These multiple

tax policies and practices inadvertently contribute to the educational resource gap. Every tax

subsidy that drives one economic activity takes a bite out of revenue that would otherwise

flow to schools. We have always formed the policy question around jobs and development.

Now it is time we asked the question, can public education meet the needs of its students

with fewer resources so that other economic interests can accomplish more?

The second element of the strategy to address the school funding gap

should focus on the municipal pension crisis. A recent PICA staff report3 frames the

issue effectively. Philadelphia’s hugely underfunded municipal pension system (a $5 billionunfunded liability in a pension system only 47% funded) is an enormous risk for employees,

retirees and taxpayers. It is also a major problem for closing the educational resource gap.

The financial and budgetary dots between the pension crisis and public education all

connect. Here’s how.

The City treats that massive unfunded pension liability like mortgage

debt. The annual costs to pay off the debt approximate $464 million. There is

only one-way, long term, to address this crisis and that is to infuse the pension

system with capital. In doing so, lowering the appropriations to amortize unfunded

liabilities will enable the City to address both the pension crisis and school-funding gap,

simultaneously.

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And the third element is philanthropy and private investment. Not so long

ago a sizable level of community philanthropy was invested in public education. Rather, we

need to engage philanthropy and private capital in supporting public educational initiatives

beyond what is afforded by the District’s operating budget. 4 There was a time when public

schools had powerful and supportive allies in the private sector, both corporate and

philanthropic. The civic and business community was organized to help schools. Today,

although there are uncoordinated important initiatives5, one would be hard pressed to

identify a similar sense of broad community spirit that supports strengthening schools.

Public finance including additional taxes, on property, sales and cigarettes, has generated

important allies, but private financial support for public schools remains in a deficit

position.

Each of these strategies, modifying tax policy, addressing the pension crisis head on

and developing a private philanthropic investment plan, collectively could help Philadelphia

narrow the school resource gap. Once underway, our messaging to Harrisburg will entirely

change and should strengthen the prospects for more financial support from the

Commonwealth, as partner. The Wolf Administration has outlined a very ambitious

program to increase educational spending. Exactly how much incremental state funding will

materialize will be known once the FY16 Commonwealth budget is approved (presumably by

June 30th). The challenge has been and will continue to be persuading the General

Assembly.

If citizens and our elected leaders considered the following, Philadelphia could make

a significant dent in closing the educational funding gap.

Tax Policy. Can Philadelphia’s schools afford to forego tax revenues to enable

higher education and hospitals among other non-profit enterprises to remain tax-exempt for

real estate tax purposes? Is the trade-off in tax revenue to continue 100% 10-year tax

abatement sustainable for schools? Should we be examining other tax incentives that incent

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private companies to locate to special zones or utilize other tax incented financing? Can tax

collection and enforcement practices be accelerated to drive more funding to education?

Can we continue to engage in a policy of transactional economic subsidy when one of the

clear impacts creates so much inequity for the school kids of our city?

What needs to change?

First, we need to change the policy of tax exemption for most non-profits.

Religious institutions, K-12 schools, social service agencies and others that address at risk

constituencies should continue to be exempt from real estate taxes. Obviously, this is

complicated but there are enough wise people to make it work. Whether we assess the valueof land and improvements so that “eds and meds” pay a rate that becomes a PILOT

(payment in lieu of tax) or follow the proposal made by Council President Clarke for a

partnership approach is a matter for study and debate. Boston, a city of 645,000, roughly

41% the size of Philadelphia, collected $25.9 million in PILOT payments (plus non-cash

“community benefits”) in FY2014.6 Philadelphia should have a target between $45-50

million annually in new tax revenue to flow from this source. It may be wise to step up to

these funding levels in a scaled manner. Clearly, some important research has been

conducted in support of opposition to PILOTs 7. There is no argument that area hospitals

and universities add greatly to the city’s vitality. But it is equally true that the population

that lives here creates the market and corresponding revenue streams for services supplied by the area health care institutions. Similarly, the cultural life, infrastructure and

transportation services, diverse neighborhoods and communities make Philadelphia a

magnet for faculty, administrators, researchers, physicians and students of area universities

and medical centers. There are real costs to make a community great and real sacrifices that

also have to be made. It is time for current property tax exemption to be fixed.

Next, we need to re-examine the tax abatement, tax incentive districts

and opportunity zones, tax increment financing, and other site and project

specific mechanisms designed and implemented when Philadelphia’s economy

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was in the tank and there was a pressing need to address job loss and economic

decline. Most studies that have been done to explore the impacts of these tax incentives

have found them to be extremely important and effective. None of these studies have ever

evaluated the impact of these tax subsidies on public education resources. It is obvious that

if the question was asked from the perspective of public education funding, researchers

might have different answers regarding whether or not these incentive arrangements should

be implemented, what their structure might look like and how long they should remain in

place. For example the ten-year property tax abatement might be valuable to create

affordable and low-income housing outside of the “gentrification zone.” But within the

widening Philadelphia zone of gentrification, real estate is red hot. The studies that have

concluded the value of tax abatement seem to assign extremely high correlation betweenabated taxes and development/investment decisions.8 Financially, the loss of these revenue

streams in the future matter to school finance. Over the past decade, property tax

abatements would have generated $44.2 million for the School District.9 I’m not arguing for

the elimination of tax abatement or the other programs intended to incent re-location and

economic development but I am convinced that too much value is assigned to real estate

expansion and tax incentives. There may be good reasons to continue to use them

selectively. But these should be predicated on today’s market conditions and should focus

on locations and construction sectors experiencing disinvestment. Far too often, tax policy

stays in force well beyond its useful life. So it is time that all of these practices come under

close scrutiny and that the mechanisms, terms and longevity be re-calibrated to currentmarket conditions and real needs.

This change in approach reflects a policy of investing in human capital as well as in

physical capital. Most experts argue that labor costs necessitate the abatement for new

construction. If we could finally address the relative competitiveness of our convention

center costs with labor, perhaps the time is right to negotiate construction labor agreements

that will enable additional tax receipts to flow to education.10 A recent column in the

Philadelphia Daily News11 reporting how much better the experience is for exhibitors at the

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Pennsylvania Convention Center creates a sense of optimism about a new collaboration with

labor to tackle this issue in the interests of strengthening funding for schools.

Finally, the City needs to address the absurd and embarrassing

performance of its tax collection system. Several years ago, this was made a top

priority. There has been much progress to report on collecting current tax obligations.12 Yet

more than $1.2 billion of uncollected taxes and obligations due the City and School District

remain outstanding. In excess of $820 million (68%) of this amount is owed in real estate,

water and gas bills.13 The underlying value of the real estate on which these delinquencies

remain outstanding is in the billions of dollars. In view of this incredible disconnect, experts

in the real estate market and professionals in the tax collection business believe thatPhiladelphia could realize between $250-$400 million in collected taxes on this unpaid

delinquent inventory. There are simply no excuses for not aggressively taking the steps

necessary to collect. Yes, this is complicated but it is also the lowest hanging fruit. We need

to make collecting collectible taxes a top revenue priority. This situation also needs to be

cleaned up. Those delinquencies that are irrevocably uncollectible should be written off. A

major initiative on this through tax lien sales, for example, could seed fund the educational

endowment and kick-start private sector philanthropy. It would also send a powerful

message to tax deadbeats that Philadelphia is no longer willing to look the other way when it

comes to collecting delinquent payments. It is unlikely that the skills and enforcement

culture is sufficiently present within City government to do this (or else it would havealready been done). This may be an area where third party engagement, for example

through wholesale tax lien sales and outsourced collection entities, could prove very fruitful.

Given that the City realizes no current revenue from tax exempt, tax abated, tax free

zoned and tax delinquent properties, it would be smart to define a ten year period during

which all of the new revenue generated from reforms in these areas be dedicated solely to

the School District. A goal of $75 million annually recurring locally generated funding—not

requiring tax increases--is achievable.

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Pensions. Reforming pensions is an important goal and the PICA report has offered

some excellent recommendations.14 The General Fund includes $687 million15 in FY15 to

fund our municipal retirement system, making it abundantly clear why we can’t adequately

finance infrastructure, lower wage taxes or adequately support public education. Only one

strategy will make a dent on this crisis and that is to infuse the pension fund with cash.

Selling bonds is an inflexible funding tool and the capital markets are skittish about this

option that, if widely exercised, could flood the markets. Relying on annual appropriations

has undermined our capacity to address other needs. Awaiting a federal or Commonwealth

bailout is a pipe dream given that most state and municipal pension systems are deeply

underwater. If you question that assertion one only needs to look at the situation in

Pennsylvania where, combined, the State employees and teachers pension funds have a totalunfunded liability of $50 billion,16 and where State annual appropriations to retire that

liability are woefully inadequate. 17

What we can do to generate cash for the pension fund is look to resources the city

owns. We can sell or otherwise monetize profitable operating assets, the businesses that

Philadelphia simply does not need to be in. I have long supported the sale of PGW for

precisely this purpose and reason. Perhaps City Council partnering with a new

administration can structure an approach that will generate an infusion of cash from a

public-private partnership.18 We should all be agnostic about the legal structuring that

enables monetizing these assets but we need to be purposeful in pursuing this. And we don’t

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need to own our gas business19 anymore than we need to own our airport, our water

business or the parking business. All of these can and will command excellent valuations in

the municipal infrastructure marketplace and their sale or lease can generate the significant

cash needed to address the pension problem. If these operating business are not

municipally owned or operated, will we still turn our faucets on and get water, get gas to

cook and heat, be able to fly in and out of PHL and find places to park our cars? Everyone

knows the answer is that we most certainly will.

Consider this simple math. For every dollar transferred to reduce unfunded pension

liability, the City can reduce its annual appropriation by 8-9 cents. For every billion dollars

used to reduce the liability, annual appropriations would be reduced by $80- $90 million. IfPGW can generate $600 million net of funding its employee pensions20, pay off PGW debt

and fund certain reserves, Water, Airport and Parking should be expected yield at least an

additional $2.2-$2.6 billion in net proceeds.21

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If the City’s pension fund experienced an infusion of $3.0 billion22, 60%, or nearly

$280 million would be cut from the $465 million cost of amortization unfunded liability.

Take a sizable portion of those savings and dedicate it to schools and an additional $180

million to invest in the future of the children of this city would be available. The balance

might be used to increase pension fund amortization, invest in much needed infrastructure

or help enable wage tax reductions. Some have suggested that this strategy represents a

one-time benefit. That is wrong. These amortization costs are recurring annually. These

savings would materialize annually as well.

I recognize that opponents to these proposal will use politically charged messages like

“privatization”, “threats to workers”, “higher utility rates”, “loss of development incentives”,“the great things that the largest non-profits do for the city” and more. There are valid

arguments and concerns to be considered, debated and addressed. The lease, sale or

partnership of these services is a very difficult strategy, no doubt. There are many issues to

be addressed with employees, their unions, regulation, rates and charges, legislation, the

FAA, the PUC, etc. But when a community makes a huge commitment to invest in the

education of its children and in its economic future, there is nothing but hard and complex

choices to make. The alternative? Wait for Harrisburg to finally come through. And that is a

bet we should not be willing to make.

Philanthropy. We ask much of the charitable institutions and philanthropicindividuals of Greater Philadelphia. But it would be myopic to fail to observe that the

charitable landscape has undergone an extraordinary transformation. The Annenberg

Foundation has moved to California. The Pew Charitable Trust has re-defined its mission as

a public charity. The Lenfest Foundation has donated much of its considerable resources.

Harsh economic conditions have imposed great demands on a shrinking asset base of local

charitable institutions. Certainly there are wonderful examples of generous giving, both

institutional and individual, to support a variety of educational initiatives throughout the

city. A read of the recent study commissioned by the William Penn Foundation23 shed

interesting light on the imbalance of charitable needs (in this instance in the arts) and the

supply of philanthropic resources. It is likely that this imbalance is even more acute in basic

education and other human service needs.

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Philadelphia needs a massive endowment to generate significant annual income

streams to enable the School District to take on important projects beyond the basics. These

might include leadership development, professional development, after school programs,

and a host of options too numerous to list here. To create such an endowment will require

articulating a powerful vision and mission for public education, building confidence in the

leadership team empowered to execute on that vision and a universal acceptance that a new

level of community philanthropic responsibility is part of the equation. Only the investment

income of such an endowment should be incorporated in educational budgets. Might it be

possible to see that endowment grow to $1 billion over ten years and provide supplemental

support for schools in perpetuity? The city could kick start such an effort by dedicating the

collections from its currently uncollected tax delinquencies. Earlier, I suggested that theremight be as much as $400 million that could be generated (e.g. through a tax lien sale).

Investing what is collected through aggressive initiatives in this endowment would send a

powerful message and give such an initiative a much-needed launch. If the use of the

endowment earnings was driven by analytics of what really works, a successful marketing

program should enable securing support for this endowment fund beyond the geographic

confines of Greater Philadelphia.24

What is the rationale and how might the math work for such a dramatic

change in priorities and funding? Anyone who has read this memorandum to this

point is likely thinking about all of reasons, obstacles and political factors that render thisthinking impractical in Philadelphia. I’ve been here all my life and know that getting even

little things done is a big deal. But this is a new time of bold thinking, optimism and

demographic change. The momentum we’ve built is only sustainable if we bend the poverty

curve. Will Philadelphia move towards a 35% rate of poverty or towards a 25% rate? The

answer to that question will determine whether we can sustain a viable future for the city. If

anyone knows of a way to do that aside from creating an educated workforce and citizenry,

I’d love to hear it. But history shows that the path to success in every generation where

poverty has afflicted any demographic group has been through education and opportunity.

This plan envisions $250-$300 million annually in incremental locally generated

funding, for public education. I’m convinced that rather than relying on any mayor’s

political skills with Harrisburg, though certainly valuable, that Philadelphia propose a new

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bargain to leaders in the State capital, one in which we demonstrate a re-set of our priorities,

that we want to be the nation’s leaders in educating our students. We need Harrisburg as a

partner on many fronts. This time Philadelphia is taking the lead. We’re putting our money

where our mouths are. We’re asking to match us to the maximum extent possible. I can’t

predict what that might look like dollar wise. But consider that if that added $100 million in

new state money to the $25o million in new municipal money and $50 million in private

philanthropy, the School District of Philadelphia would have additional resources of $400

million, $4 billion over 10 years.

There is also the need for a public debate about delivering educational

services, about public, charter, magnet, parochial, home, cyber and otherschools and platforms through which our city’s children learn. That is a

conversation for another moment and one I look forward to joining. But the

compelling argument I am hopeful of making here is that by prioritizing in financial terms a

major turnaround for today’s 230,000 (and growing) public school population with $400

million new dollars annually we would make a major “close the gap” move. The imagination

ignites with what strong leadership, well supported political, by parents and private

In addition to moving the needle on the educational resource gap, this set of

proposals would:

! Fully fund the pensions of employees and retirees of the Gas Works, the

Water Department, the Aviation Fund and the Parking Authority;

! Eliminate the pension crisis confronting Philadelphia’s municipal

employees, retirees and taxpayers;

! Kick start a renewed level of civic, business, and philanthropic commitment

to strengthening public education in the city;

! Stimulate a debate about re-structuring tax incentivized economic

development policies;

! Start a conversation and (hopefully, a negotiation) about how to bring

down the cost of labor in construction so as to free up abated and other

incentivized tax allowances to become available for public schools;

! Free up additional funds in the General Fund budget of the City to be used

for infrastructure investment and wage tax relief;

! Enable Philadelphia to demonstrate its renewed commitment to funding

education;

! Change the dynamic in our State government relationship; and





! Enhance our self-image and global image as a 21st century city ready to

address its educational and financial challenges.

Conclusion. This is an election year. A focus on polls, the horse race, media buys,

independent expenditures, and negative campaigning often overwhelm issues. But

campaigns can be highly valuable when they generate debate around our most important

needs and concerns. The 2015 Mayoral campaign is our best opportunity to clarify the kind

of city we want Philadelphia to be.

Philadelphia can no longer afford and should not be content with incrementalism.

There are thousands of young people facing a fork in the road, students in failing schoolsand families with school age children and lots of choices.

We’re their parents, not just to our own kids and grandkids, but to all of the kids in

this city. We, all of us, need to take care of their futures. We have important decisions to

make, hard ones requiring serious sacrifices.

Time is not our children’s ally. Let’s focus on moving the needle and solving this

deficiency.

I hope you’ll post your comments and reactions at www.citizensam.net and that you’lltalk to your network about these and other ideas.

Thanks for engaging.

closing the educational funding gap march 12 2015

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