School District of Philadelphia - - Philadelphia County, Pennsylvania - - performance Audit Report

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SCHOOL DISTRICT OF PHILADELPHIA

PHILADELPHIA COUNTY, PENNSYLVANIA

PERFORMANCE AUDIT REPORT



MARCH 2011
















The Honorable Tom Corbett
Governor
Commonwealth of Pennsylvania
Harrisburg, Pennsylvania 17120

Robert L. Archie Jr., Esq., Chairman
School Reform Commission
School District of Philadelphia
440 North Broad Street
Philadelphia, Pennsylvania 19130

Dear Governor Corbett and Mr. Archie:

We conducted a performance audit of the School District of Philadelphia (District) to determine
its compliance with applicable state laws, regulations, contracts, grant requirements, and
administrative procedures. Our audit covered the period October 17, 2006 through May 6, 2010,
except as otherwise indicated in the report. Additionally, compliance specific to state subsidy
and reimbursements was determined for the school years ended June 30, 2008, 2007, 2006 and
2005. Our audit was conducted pursuant to Section 403 of The Fiscal Code, 72 P.S. § 403 and in
accordance with Government Auditing Standards issued by the Comptroller General of the
United States.

Our audit found that the District complied, in all significant respects, with applicable state laws,
regulations, contracts, grant requirements, and administrative procedures, except as detailed in
four findings noted in this report. For example, we found that the District’s continued lack of an
independent Safe Schools Advocate violates the law, and that it has made no serious effort to
restore the position. In addition, we identified four matters unrelated to compliance that are
reported as observations. Furthermore, our audit included an expanded examination of the
District’s school safety practices. This review resulted in three findings noted in this report.
However, because our concern that revealing them publicly could endanger the security of
students and staff, we shared some specific safety concerns related to the District’s buildings
exclusively with the administration. A summary of these results is presented in the Executive
Summary section of the audit report.



Furthermore, while our audit did not examine the appropriateness of the salaries paid to the
District’s administrators, we were nevertheless disturbed about the employment contract
awarded to Superintendent Arlene Ackerman by the School Reform Commission (SRC), which
pays her a seemingly generous salary and bonuses. The contract awarded to Dr. Ackerman
permits a compensation package that is especially generous compared to other peer school
districts or for any public official for that matter. Although Dr. Ackerman has recently
announced she will accept 20 furloughed days in response to the District’s dire financial
condition, we firmly believe that the SRC should not have allowed such generous terms in her
employment contract, especially performance and retention bonuses. Our position is unwavering
in that there are no circumstances under which bonuses are appropriate for public employees.
Specifically, the use of taxpayer dollars to reward the activities of any public official/employee is
counterintuitive to the idea of government, which is meant to serve the interests of the greater
good. Therefore, we hope that the District will avoid entering into future employee contracts
that permit the payment of these taxpayer subsidized benefits. Instead, the District should use
any extra money that would have been paid in bonuses to support its mission of providing
students with a quality public education.

On the issue of swaps (Observation #1), while we are pleased that the District has heeded our
advice to divest itself of its remaining swaps contracts, we are disappointed that the District
refuses to renounce the use of swaps in the future. Furthermore, we find the District’s
explanation of its recent restructuring to be highly disingenuous. First of all, no mention is made
of the fact that, as reported in the December 14, 2010, edition of Bloomberg Businessweek, the
District had to make a termination payment of $63 million to get out of this batch of soured
swaps deals. The fact that this termination fee is being financed over a period of eleven years is
cold comfort to the taxpayers of the District, because this merely obscures the fact that such an
enormous loss was incurred as a result of entering into the swaps in the first place.

Secondly, in April 2010, the District claimed that, despite paying $26.6 million to terminate an
earlier batch of swaps deals, the use of swaps had cost the District $25 million (currently $28
million) less than if it had issued conventional fixed-rate financing. The District’s explanation of
the latest restructuring conveniently fails to mention that, in light of the $63 million the District
just paid to terminate the most recent batch of swaps, its ill-conceived foray into swaps has
actually cost the taxpayers some $35 million more than if the District had merely issued
conventional fixed-rate debt.

Finally, we also find the District’s claim that the debt restructuring will generate approximately
$25 million of ―positive budgetary impact‖ in fiscal years 2010-11 and 2011-12 to be specious.
The ―positive budgetary impact‖ is a mere illusion that results from a combination of issuing
variable-rate debt at historically low current rates and financing the termination payments over
an extended period of time. However, variable-rate debt is highly volatile, so the low current
rates, and interest costs to the District, are nearly certain to rise in the future. In addition, the
long-term financing of the termination payments merely obscures the fact that a $63 million cost
has been incurred and must be absorbed. We view the restructuring as being designed to avoid
the pain now and to defer to the future any worries about rising interest costs and the costs of
amortizing the termination payments.

Our position today is the same as it was when we issued our first report on swaps in
November 2009. The fundamental guiding principle in handling public funds is that they should
never be exposed to the risk of financial loss. Swaps may be perfectly acceptable in the private
sector, where private citizens are free to decide how much risk they can tolerate when their own
money is at stake. But they should have no role in government, where it is the taxpayers’ money
that is at stake. Public debt should be financed with fixed interest rates that are transparent,
reliable, and easily understood by decision-makers and the public. Accordingly, we strongly
urge the School District of Philadelphia to amend its Debt Policy to unequivocally and
permanently renounce and forswear the use of swaps in the future.

Our findings, observations, and recommendations have been discussed with District’s
management and their responses are included in the audit report. We believe the implementation
of our recommendations will improve the District’s operations and facilitate compliance with
legal and administrative requirements. We appreciate the District’s cooperation during the
conduct of the audit.

Sincerely,




/s/
JACK WAGNER
March 16, 2011 Auditor General

cc: SCHOOL DISTRICT OF PHILADELPHIA
School Reform Commission Members



















Auditor General Jack Wagner

Table of Contents


Page

Executive Summary ................................................................................................................... 1


Audit Scope, Objectives, and Methodology .............. 5


Findings and Observations ......................................................................................................... 8

Finding No. 1 – The School District of Philadelphia Still Does Not Have a Safe
Schools Advocate As Required By State Law ..... 8

Finding No. 2 – The District Continues to Lack the Documentation Necessary to
Verify Its State Subsidies and Reimbursements .................................. 14

Finding No. 3 – The District Continued Its Improper Student Activity Fund
Practices ............................................................................................... 19

Finding No. 4 – Serious Internal Control Weakness Over Germantown High
School’s Student Activity Funds Could Create Opportunities for Fraud ............................................................................................... 23

Observation No. 1 – The District Continues to Finance Some of Its Debt with
Interest-Rate Management ("Swap") Agreements, Which Could Jeopardize Ta