Erie School District's financial monitor wants state oversight to end. What's next?

More than three years after it adopted its state-mandated financial improvement plan, the Erie School District is poised to leave it behind.

The district's newly named financial administrator is recommending that the Pennsylvania Department of Education release the district from the plan — in place since May 2019 — and remove the district from financial watch due to its projected long-term financial stability. The department is expected to act on the recommendation soon.

The removal of the district from financial watch would be "more recognition that this financial crisis is finally behind us," Erie schools Superintendent Brian Polito said.

The Pennsylvania General Assembly required the district to follow the financial improvement plan in exchange for the district receiving $14 million in additional and recurring state aid, starting in 2018, to stay solvent. The state also placed the district under financial watch to more closely monitor its finances.

The Erie School District's state-appointed financial administrator, Erie manufacturing executive Jim Ohrn, recommended the district get removed from financial watch in an "exit review report" he submitted to the Department of Education officials when he and Polito traveled to Harrisburg on Sept. 15.

Polito in November petitioned the Department of Education to take the Erie School District off financial watch, but the state first had to appoint a new financial administrator for the removal process to advance. Under the law, the financial administrator must recommend for the financial watch to end before the state Department of Education can act.

The financial administrator position had been vacant since the district's original financial administrator, Charles Zogby, a former state education and budget secretary, abruptly departed in February 2020 after nearly two years in the $148,000-a-year job. After he was appointed in 2018, Zogby created the financial improvement plan that went into effect in May 2019.

Gov. Tom Wolf appointed Ohrn the district's financial administrator effective Aug. 15. Ohrn, whose full-time job is chief financial officer of Custom Engineering in Erie, spent a month reviewing the district's finances to ensure that it had met the benchmarks for removal from financial watch that Zogby established in the original 64-page financial improvement plan. Ohrn is not receiving the full state-mandated salary of $148,000, but is getting paid an hourly rate of $77.81, which is based on that salary, according to the state Department of Education.

Ohrn said in his report that the 10,000-student district has achieved enough financial stability to have "a structurally balanced budget" each year over the next five years ― the key criterion for the Erie School District's removal from financial watch, according to state law. For a budget to be structurally balanced, a school district's revenue must equal or exceed its expenses, with the district using no one-time funding or debt refinancing to balance its budget.

Erie School District a model for the state?

The removal of the Erie School District from financial watch would be a historic moment for the district as well as the state. A total of 12 of the state's 500 school districts — including Erie's — are under some kind of state oversight with the state Department of Education due to unstable finances. The Erie School District stands as the first of any school district in the state to get the financial oversight lifted, Polito and Ohrn said.

"It is very important for the district," Ohrn said of getting removed from financial watch, "but also a very important event for the department."

In his report, Ohrn projected the district will remain financially stable even as it accounts for higher inflation and the possibility of reduced funding in the annual state budget. Ohrn said the district has the capacity to raise taxes to offset any deficits and could reduce some programs if necessary.

"In recent years, the District has adopted a variety of financial best practices in order to be a responsible steward of the investments made by the Commonwealth and local residents on behalf of children who attend Erie Public Schools," Ohrn said in his 17-page report, which includes another 21 pages of financial data and exhibits. "In some cases, these practices were included in the financial improvement plan, and in other areas the District has gone beyond the plan's requirements to further improve long-term finances.

"The partnership between the Commonwealth and Erie City School District has allowed the District to stabilize its budget and reinvest in areas cut back over a number of years prior to oversight. The improvements made by the District are a model for other school districts throughout the Commonwealth, and the District should be viewed as a successful example of a financial turnaround.

"Based on the findings of this report, the Financial Administrator recommends that the Secretary remove the Financial Watch status from the Erie City School District. In addition, the Financial Administrator strongly recommends that the District continue to monitor its short- and long-term finances, and to adjust its plans as needed as conditions continue to change in the future."

Department of Education aims to finish review 'shortly'

With his report submission to the state, "I see green lights. I don't see red lights," Ohrn told the Erie School Board at a meeting on Sept. 14, the day before he and Polito traveled to Harrisburg. "I think we are very close to bringing this to a head."

The acting secretary of the state Department of Education, Eric Hagarty, will make the final decision on whether to accept Ohrn's report and remove the Erie School District from final watch. The department, or PDE, is studying Ohrn's report, department spokeswoman Casey Smith said.

"PDE commends Erie City School District for its efforts to improve the financial and academic health of the district," Smith said in an email on Thursday. "PDE and the Acting Secretary are reviewing the financial administrator’s report and hope to complete that review shortly."

If the Erie School District failed to follow the financial improvement plan, it would have risked a state takeover, in which Polito would have had to answer to the financial administrator rather than the Erie School Board. If the financial administrator were to take over the school district, that person would assume the authority of the School Board in all respects except for the authority to raise taxes, according to the state law that created the financial administrator position for the Erie School District.

The removal of the Erie School District from financial watch "brings control of the district totally back to the locality, where I think it should be," Ohrn said in an interview.

He would be relieved as financial administrator once the district is removed from financial watch.

Ohrn, 71, has also a member of the school district's outside financial advisory team, created 10 years ago under the superintendent at the time, Jay Badams, to help the district deal with its protracted financial crisis. Polito, a certified public accountant and the superintendent since 2017, was the district's chief financial officer under Badams and has met regularly with the advisory team.

Even if the Erie School District were removed from financial watch, it would still have to submit cash-flow data and other information so the state Department of Education can continue to gauge the district's financial health, Ohrn said.

"We have a responsibility, now that we have the resources, to do the right thing with them," Ohrn said.

Erie School District's long road to financial recovery

The Erie School District blamed much of its financial crisis on underfunding from the state. But as Zogby's financial improvement plan pointed out, administrative decisions prior to Badams taking office contributed to the budget crunch.

With the school district heading toward insolvency about six years ago, Badams, Polito and others joined with state elected officials in pushing for more state aid. About 100 students and community members traveled to Harrisburg to rally in support of the Erie School District in June 2016. Badams around the time also said he was considering closing one or more of the city's high schools to save money.

The push for more state funding got a boost in 2016, with the election of Millcreek Township Republican Dan Laughlin to the state Senate, representing Erie County. Laughlin, of Millcree, R-49th Dist., helped navigate the district's funding request through the GOP-controlled General Assembly. State Rep. Pat Harkins, of Erie, D-1st Dist., is another current state officeholder who advocated for the additional funding at the time.

In June 2017, as the district waited on whether it would get additional state aid, it closed two elementary schools and merged three of its four high schools at Erie High to save money and help eliminate a $9.5 million deficit.

In October 2017, the General Assembly passed the legislation that authorized the Erie School District get $14 million in additional state aid every year starting in 2018.

The $14 million in additional state aid allowed the district — with a current budget of $267 million — to balance its budget while setting aside millions of dollars to update its curriculum, add programs and undertake a massive project to improve its 15 buildings and build a new Edison Elementary School.

The district received another enormous boost in the 2022-23 state budget. The package increased the district's state subsidy by about $17.2 million — $15.8 million more for basic education and $1.4 million more for special education.

And in yet another boost, the district received a total of $97.5 million in pandemic-related aid from the federal Elementary and Secondary School Emergency Relief Fund. The district has used that money primarily to buy laptops and upgrade heating and ventilation systems, though it also allocated some of the funds to pay for additional mental health specialists and other staff to help students recover from the pandemic.

All the additional funding, Polito said, has put the Erie School District on the path of improvement and released it from its protracted struggle to fight off insolvency. Polito recalled how, before the district received the $14 million increase, it was behind on paying some of it bills and had a negative fund balance of $4.7 million in 2016.

The situation was so dire that the district's independent auditors warned about a potential financial collapse in the audit report for fiscal year that ended June 30, 2016. "The District has suffered recurring losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern," the report said.

Today, the Erie School District not only has enough money to cover its bills and other basics. It also has enough money to revamp its buildings and curriculum and end the 2021-22 school year with a $35 million fund balance. Ohrn's report said the district can transfer some of that money to pay for more program upgrades and building improvements — another sign of the extent of its financial recovery.

"It has been quite a journey," Polito said.

Contact Ed Palattella at epalattella@timesnews.com. Follow him on Twitter @ETNpalattella.

This article originally appeared on Erie Times-News: Erie School District financial recovery: Monitor wants end to oversight