Philly schools project a fiscal cliff, plan to spend $306 million in reserves to avoid classroom cuts and layoffs

The Philadelphia School District is bracing itself to hit a fiscal cliff.

Superintendent Tony B. Watlington Sr. delivered the news to the school board at a Thursday evening meeting, announcing that expenditures are outpacing revenues, and the nation’s eighth-largest school system will dip into its fund balance to stave off classroom cuts and layoffs.

Watlington and chief financial officer Mike Herbstman outlined the district’s $4.6 billion 2025-26 budget, promising hold-steady conditions in the school system, but forecasting chaos ahead absent state and city intervention next year.

Philadelphia is the only district in Pennsylvania that lacks the authority to raise its own revenue; it is dependent on the state and city for 99% of its operating budget. (Grants are separate but are also in question amid President Donald Trump’s threat of federal funding cuts.)

The district will need to spend $306 million of the reserves it accumulated thanks to COVID-19 relief funds in the coming year. For fiscal 2027, it’s projecting a $15 million deficit that would balloon to more than $2 billion in five years.

The district’s revenues are growing at a rate of about 1%; costs, like salaries, benefits, and charter school payments, are growing much faster.

There are a number of question marks hanging over the budget, too — three of the district’s unions, including its biggest one, the Philadelphia Federation of Teachers, are in contract years, and new pacts are sure to cost the district down the road. In a briefing with reporters Thursday morning, Watlington and Herbstman said they are also counting on the aid figures included in Gov. Josh Shapiro’s and Mayor Cherelle L. Parker’s budget proposals — and those final aid numbers figure to be lower, after negotiations.

And the district is currently in the midst of a facilities planning process that will result in recommendations to close some schools, colocate others, but build new or order major renovations in other cases. The system’s 216 buildings are generally old and need an estimated $8 billion in work.

(Herbstman said that any aid reductions will be absorbed by further fund balance use and are not likely to come from classrooms.)

The district’s precarious financial position is not because of cavalier spending, Watlington stressed. (The school system’s credit is the best it’s been in decades, and its central office is lean for a school system of its size, an audit has shown; after deep early-2010s cuts, central office never really staffed back up.)

“This is not because we’re big government, it’s not because we’re spending more money,” Watlington said. “In fact, we’re pretty budget neutral on most things around here.”

Instead, Watlington is emphasizing the decades of underfunding, acknowledged by the Commonwealth Court in a landmark 2023 decision that ordered Pennsylvania to fix a funding formula judged to be illegal. Some progress has been made toward adequacy, but at the current pace of state action, it will take more than a decade for Philadelphia to get the full $1 billion-plus it’s underfunded by annually.

Not using the district’s reserves is one option, Watlington said, but one he refuses to consider. The district has demonstrated modest progress — increases in student achievement, higher graduation rates, lower dropout rates, better student and teacher attendance — and Philadelphia’s kids can’t move backward, the superintendent said.

“If we did not use the fund balance, we’d quite simply have to make people and program cuts,” said Watlington. “At all costs, we must do all we can to protect the classroom.”

Accelerating academic progress must be the system’s “North Star,” the superintendent said — currently, just 21% of district students meet state standards in math, and 34% in reading.

“It takes resources, people, and a strategy — a combination of those things — to do it,” said Watlington.

Though granular details of the budget have not yet been disclosed, Watlington said the spending plan will look similar to this year’s in terms of allocations. He committed to not reinstating leveling, the controversial practice of moving teachers around well into the school year to adjust for enrollment shifts.

It cost the district $8 million this current school year to end leveling.

“Once we solve a problem, we don’t have to go back and open it back up,” Watlington said.

The school board approved the lump-sum budget unanimously Thursday night, but members made clear they’re worried about the future.

“The situation is dire,” said board member Joan Stern, a financial expert.

Members said the district can’t rest on its laurels this year, even though cuts were staved off because of the district’s fund balance. Sarah-Ashley Andrews, the school board vice president, issued a call to action on the budget and advocacy for more Philadelphia students.

“We see what it is, and we have to do something,” Andrews said.

The budget is scheduled for final adoption on May 29.

In other business, the board voted to approve a $10 million modular classroom project at Lincoln High for the 2025-26 school year. The project will allow for 22 temporary classrooms at Lincoln, which is significantly overcrowded.

It also voted to spend $11 million on major renovations at Mary McLeod Bethune Elementary in North Philadelphia.

The renovations will include fixing up the building’s exterior and interior finishes, upgrading electrical service, and building new bathrooms.

Bethune, on Old York Road, was built in 1970.

The board approved a $28 million donation from Mastery Charter Schools — but the charter network isn’t cutting a check. It’s spending that money on building improvements at several Mastery schools that operate in district-owned buildings.

The repairs will be made at Mastery Harrity, Frederick Douglass, Simon Gratz, Smedley, Pastorius-Richardson, Mann and Cleveland schools.