RA TINGS: (See "Ratings" herein) NEW ISSUE - BOOK-ENTRY-ONLY In the opinion of Bond Counsel, under existing statutes, regulations, rulings and co,irt decisions, assuming the School District complies with its covenants relating to certain requirements of the lnternai Revenue Code of 1986, as amended, interest on the Notes will not be includible in the gross income of the holders thereof for federal income tax purposes, and will not be a specific preference item for purposes of computing the federal alternative minimum tax imposed on individuals and corporations. Under the laws of the Commonwealth of Pennsylvania, as enacted and construed on the date hereof, the Notes are exempt from Pennsylvania personal property taxes. and interest on the Notes is exempt from Pennsylvania personal income tax and Pennsylvania corporate .'let income tax. See "TAX MATTERS" herein. $400,000,000 The School District of Philadelphia, Pennsylvania Tax and Revenue Anticipation Notes, Series of 2004-2005 Dated: Date of Delivery Due: June 30, 2005 The Tax and Revenue Anticipation Notes, Series of 2004-2005 ("Notes") will bear interest at the annual rate shown below. The Notes are issuable as fully registered notes and, when issued, will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("OTC"), which will act as securities depository for the Notes. Purchases of beneficial ownership interests in the Notes will be made in book-entry-only form in the denomination of $5,000 or any whole multiple thereof. Principal of and interest on the Notes is payable directly to Cede & Co. for redistribution by OTC to its participants and in tum to purchasers of the Notes ("Beneficial Owners") ais described herein. Purchasers will not receive certificates representing their ownership interests in the Notes purchased. J.P. Mo][gan Trust Company, National Association, Philadelphia, Pennsylvania, is acting as sinking fund depository, registrar and paying agent ("Fiscal Agent"). The Notes are not subject to redemption by the School District prior to maturity. The Notes are equally and ratably secured, until paid or until deposits for such payment have been made into the Sinking Fund (as herein defined) by a pledge of, a secwity interest in and a lien and charge on the taxes and revenues of the School District to be received from the date of issuance of the Notes until the maturity thereof; provided, however, that the School District h,L~not included in such pledge, security interest, lien and charge the daily deposits of School District tax revenues into the sinking funds established for the School District's fixed rat~ general obligation bonds. The Notes are payable from funds required to be deposited by the School District in the Sinking Fund established under the Resolution (as ]herein defined). See "SECURITY FOR THE NOTES." Amount Due $400,000,000 June 30, 2005 Interest Rate 3.00% Yield 1.61% Price 101.319% This c:over page co111tainscertain information for quick reference only. It is no! a summary of this issue. Investors must read the entire· Official Statement to obtain information essential to the making of an informed investment decision. The Notes are offered when, as and if issued to the Underwriters, subject to approval as to legality of issuance by Blank Rome UP and Booth & Tucker, LLP. both of Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the School District by the Office of the General Counsel to the School District and for the Underwriters by Dflworth Paxson UP, Philadelphia. Pennsylvania. It is expected that th~ Notes will be available for delivery in definitive form in New York, New York on or about July 13, 2004. ,i\rACHOVIA SECURITIES Dated: July 7, 2004 ~ PNCCAP1TALMARKETS N1> dealer, broker, salesperson or other person has been authorized to give any information or to make any representations, other than those contained in this Offic:ial Statement, and if given or madt: such other information or representations must not be relied upon. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale, of the Notes by any person in any jurisdiction in which it is illllawful to make such offer, solicitation or sale. The information set forth herein has be1mobtained from sources which are believed to be reliable but is not guaranteed as to accuracy or completeness. The information and the opinions expressed herein are subject to change without notice, and llldther the delivery of this Official Statement nor any sale made hereunder shall, under ,my circumstances, create any implication that there has been no change in the operation~ of, or information concerning, The S,;hool District of Philadelphia since the date hereof, or the date as of which specific information is given, if earlier. Thti order and Ji>lacementof materials in this Official Statement, including the Appendices, are not to be deemed to be a determination of relevance, materiality or importance, and this Official Statement, including the Appendice:§,must be considered in its entirety. IN CONNECTION WITH THE OFFERING OF THE NOTES, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WIIlCH STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERV/ISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT PRIOR NOTICE. TABLE OF CONIENTS INTRODUCTION ................................................................. . The Sc:h,JolDistrict of Philadelphia, Pennsylvania .... I Authority for Issuance and Security for the Notes ..... 1 Purpose of the Noles ................................................ 2 Description of the Nott:s........................................... 2 Tax Exemption ........................................................ 2 Professionals Involved in the Offering ..................... .2 Offering and Delivery of the Notes ........................... 3 Continuing Disclosure Undertaking_........................... 3 Other foformation 3 ···················································· DESCRIPTION OF THE NOTES ............................................. 3 General 3 No Red;;;iipiio~.P~i~i.io.1i~~rity:::::::::::::::::::::::::::::4 BoOK-ENTilY-ONL Y SYSTEM 4 6 Sinking FunIT 9 10 Negotiable Instruments........................................... 10 Certain References ................................................. 10 ADDITIONAL INFORMATION 10 Continuing Disclosure ·u;1d~rtakiii°g .......................... 10 Other Information ·························· 10 APPENDIX A - ScHOOL DISTRICT OF PHILADELPHIA APPENDIX 8 DISTRICT PAGE INTENTIONALLY LEFT OFFICIAL STATEMENT relating to $400,000,000 The School District of Philadelphia, Pennsylvania Tax and Revenue Anticipation Notes, Series of2004-2005 INTRODUCTION The purpose of this Official Statement, inc:luding the cover page and appendices hereto, is to provide information concerning The School District of Philadelphia ("School District") in connection with the issuance by the School District of$400,000,000 aggregate principal amount of its Tax and Revenue Anticip.ition Notes, Series of20042005 ("Notes"). Thi:s introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualillied by, more complete and detailed information contained in the entire Official Statement, including the cover pag,e and appendiices hereto, and the documt:nts summarized or described hemin. References to section headings in this introduction are references to such sections in the body of this Official Statement following this introductil[)II, The offeri111gof the Notes is made only by means of this Official Statement and is subject in all respects to the information contained herein. All estimates a,rd assumptions of financial and other information are based on information currently available, tJ!rebelieved to be reasonable and are 1tot to be construed as assurance:, of actual outcomes. All estimates of future performance or events constituti.ng ''forward-looking statements" may or may not be realized because of a wide variety of economic and other circumstances. Included in such forward-looking statements are amounts and other inf ormatio11from budgets for the current fiscal year. The School District of Pbiladelphia The School District is a separate and independent home rule school district of tl:.e first class established by the Philaddphia Home Rule Charter ("Home Rule Charter"). The School District is the only school district of the first class in th,~ Commonwealth of Pennsylvania ("Commonwealth" or "State"). The School District is the largest school district in the Commonwealth, and the eighth largest in the nation in enrollment. See "['HE SCHOOLDISTRICTOF PHILADELPHIA"and "SCHOOLDISTRICTFINANCIALPROCEDURES" in APPENDIXA for a description of the School District and its organization, governance and financial procedures. Authority for Issuance and Seturity for the Notes Th,! Notes are is.sued pursuant to the Local Government Unit Debt Act, Act No. 185, approved July 12, 1972 P.L. 781, as amended and re-enacted by Act No. 1996-177, approved December 19, 1996, 53 Pa C.S.A. §8001 et. seq., as amendt:d ("Act"), and a resolution of the School Reform Commission of the School District adopted on July 7, 2004 ("Re:mlution"). Th,~ Notes are t:qually and ratably secured, until paid or until deposits for such payment have been made into the Sinking Fw1d (as here:in defined), by a pledge of, a security interest in, and a lien and charge on, the taxes and revenues of the School District to be received from the date of issuance of the Note:; until the maturity thereof, except as ckscribed herein. See II SECURITYFORTHENOTES.11 1 The School District may levy taxes only with the authorization of the General Assembly of the Commonwealth ("General Assembly") or the City Council of the City ("City Council") as described in "THE SCHOOL DISTRICTOF PHILADELPHIA,PENNSYLVANIA - Local Tax Revenues" in APPENDIXA. Purpose of the Notes The proceeds of the Notes will be used to pay certain of the current operating expenses of the School District prior to the receipt of School District taxes and certain other School District revenues to be received during Fiscal Year 2005 and to pay the costs of issuance of the Notes. See "SCHOOLDISTRICTFINANCIALPROCEDURESCash Management" in APPENDIX A. Pursuant to the provisions of the Act and the Resolution, the Notes are payable from taxes and revenues of the School District to be received during the period when the Notes will be outstanding in Fiscal Year 2005. See "SOURCESOF SCHOOLDISTRICTREVENUE"in APPENDIXA. Description of the Notes Denominations. The Notes will be issued in denominations of$5,000 each or any whole multiple thereof. No Redemption Prior to Maturity. The Notes are not subject to redemption prior to maturity. Registration and Transfer. J.P. Morgan Trust Company, National Association, Philadelphia, Pennsylvania, will act as sinking fund depository, registrar and paying agent ("Fiscal Agent" or "Paying Agent"). As registrar, it will be responsible for maintaining the books for registration, exchange and transfer of the Notes. The Notes may be transferred upon the registration books of the School District, upon delivery of the Notes to be transferred to the Fiscal Agent, together with a written instrument or instruments of transfer, in form and with guaranty of signature satisfactory to the Fiscal Agent, duly executed by the registered owner or by his duly authorized attorney-in-fact or other legal representative, containing written instructions as to the details of the transfer of such Notes. The Notes are issuable as fully registered notes and when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DfC"), which will act as securities depository for the Notes. Purchases of beneficial ownership interests in the Notes will be made only in book-entry form. Transfers of beneficial interests in the Notes will be accomplished by DTC's participants ("Participants") or others who act for the owners of such beneficial interests, in accordance with DTC procedures and applicable state law. See "BOOK-ENTRY-ONLYSYSTEM." Payment. So long as the Notes shall be in book-entry-only form, the principal of, and interest on, such Notes are payable by check or draft mailed to or wire transfer to Cede & Co., as nominee for DTC and the registered owner thereof. DTC in tum will immediately credit the accounts of the Participants. The Participants will credit the payments to the owners of beneficial interests in the Notes in accordance with standing instructions and customary practices between DTC and the Participants. For a more detailed description of the Notes and the provisions relating to book-entry, see "DESCRIPTION OF THE NOTES"and "BoOK-ENTRY-0NLYSYSTEM." Tax Exemption The legal opinion of Blank Rome LLP and Booth & Tucker, LLP, Bond Counsel, will include an opinion to the effect that under existing statutes, regulations, rulings and court decisions (i) assuming compliance by the School District with covenants relating to certain requirements of the Internal Revenue Code of 1986, as amended, interest on the Notes will not be includible in the gross income of the holders thereof for federal income tax purposes, and (ii) the Notes will be exempt from Pennsylvania personal property taxes and the interest on the Notes will be exempt from Pennsylvania personal income tax and Pennsylvania corporate net income tax. See "TAX MATTERS." Professionals Involved in the Offering J.P. Morgan Trust Company, National Association, having a corporate trust office in Philadelphia, Pennsylvania, is the Fiscal Agent for the Notes. Certain legal matters incident to the authorization, issuance and sale of the Notes are subject to the approval of the legality of issuance of the Notes by Blank Rome LLP and Booth & 2 Tucker, LLP, both of Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the School District by the O!ffice of the General Counsel to the School District and for the Underwriters by Dilworth Paxson LLP, Philadelphia,, Pennsylvania. Phoenix Capital Partners, LLP and Public Financial Management, Inc., both of Philadelphia, Pennsylvania, are acting as Financial Advisors to the School Distriet in connection with the authorization and issuanc:e of the Notes. Offering Hd Delivery of the Notes 111e,Notes are offered when, as and if issued, subject to the opinion on certain legal matters relating to their issuance by Bond Counsel, and the satisfaction of certain other conditions. It is anticipated that the Notes in definitive form will be available for delivery in New York, New York, on or about July 13, 2004. Continuing Disclosure Undertaking In order to enable the Underwriters to comply with the requirements of Rule l:lc2-12, as amended ("Rule 15c2-12"), promulgated under 1he Securities Exchange Act of 1934, as amended, the School District and the Fiscal Agent will mter into a Continuing Disclosure Agreement ("Disclosure Agreement"), dat,!d the date of delivery and payment for the Notes, providing for the disclosure of the occurrence, if any, of certain events material to the Notes. The Disclosure Agreement will constitute a written undertaking for the benefit of the registered owners from time to time of the Notes. See "ADDITIONALINFORMATION·· Continuing Disclosure Undertaking" and Appendix C. Other Inforllllation Ce1tain information concerning the School District is on file with a nationally recognized municipal securities infonnation repository ("Repository"). Certain additional information relating to the School District's operations and financial affairs is available from the School District upon request. See" ADDITIONALINFORMATION." The! School District's financial statements are audited by the City Controller of the City ("City Controller"). This Official Statement speaks only as of its date, and the information contained herein is subject to change. DESCRIPTION OF THE NOD:S General Th,! Notes will be issued in the aggregate principal amount of $400,000,000, will be dated the date of issuance tlu:reof and willl mature on June 30, 2005. The Notes will bear interest, payable at maturity, at the rate of 3.00% per annum, calculated on the basis of actual days elapsed in a 365/366 day year. Principal of and interest on the Notes will be payable upon presentation of the Notes at maturity at the designated office of the Fiscal Agent in Philadelphia, Pennsylvania. The Notes will be issued as fully registered notes and, when issued, will be· registered in the name of Cede & Co., as nominee of DTC. Purchases of beneficial interests in the Notes will be made in book-entry-only fonn (\.'\rithoutcertificates) in the denomination of $5,000 or any whole multiple thc!reof. As provided in the Resolution, under certain circumstances, such beneficial interests could be exchanged for one or more fully registered notes of like principal amount and series in the denomination of $5,000 or any whole multiple thereof. So long as the Notes shall be in book-entry form, the principal of, and interest on, such Notes are payable by check or draft mailed to or wire transfer to Cede & Co. as nominee for DTC and the registered owner thereof for redistribution by DTCto the Participants and in tum to owners of beneficial interests in the Notes as described under "Bo0K-ENTRY-0NLY SYSTEM." The Resolution and all provisions thereof are incorporated by reference in tht: text of the Notes, and the Notes provide that each registered owner, beneficial owner, Direct Participant or Indirect Participant (as such terms are hereinafter defined) in DTC, by acceptance of a Note (including receipt of a book·entry credit evidencing an interest therein), assents to all of such provisions as an explicit and material portion of th.e consideration running to the School District to induce it to adopt the Resolution and to issue such Note. Copies of the Resolution, including 3 the full text of the form of the Notes, are on file at the designated corporate trust office of the Fiscal Agent in Philadelphia, Pennsylvania. No Redemption Prior to Maturity The Notes are not subject to redemption prior to maturity. BOOK-ENTRY-ONLY SYSTEM The information in this section concerning DTC and DTC's book-entry system has been obtained from DTC. The School District and the Underwriters take no responsibility for the accuracy thereof and make no representation as to the accuracy of such information. The DTC will act as securities depository for the Notes. The Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued in the aggregate principal amount of the Notes, and will be deposited withDTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC'). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: "AAA". The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual purchaser of each Note (the "Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued. To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 4 Conveyance of notices and other communications by DTC to Direct ParticipantB, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Notes may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Notes, such as redemptions, defaults, and proposed amendments to the Resolution. For example, Beneficial Owners of Notes may wish to ascertain that the nominee holding the Notes for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. R,edemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC's practice is to determin1! by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the School District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. 's consenting or voting rights to those Direct Participants to whose accounti: Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative ofDTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of fimds aod corresponding detail information from the School District or the Fiscal Agent, on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts cf customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Fiscal Agent, or the School District, subject to my statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the School District or the Fiscal Agent, disbursement of such payments to Direct Participants will be the responsibility ofDTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Partic:ipants. DTC may discontinue providing its services as depository with respect to the Notes at any time by giving reasonabl1! notice to the School District or the Fiscal Agent. Under such circumstances, in the event that a successor depository is not obtaine,d, Note certificates are required to be printed and delivered. The School District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Note certificates will be printed and delivered. NEITHER THE SCHCOL DISTRICT NOR THE FISCAL AGENT WILL HAVE ANY RESPONSIBILITYOR OBLIGATIONTO 1HE DTC PARTICIPANTS, THE INDIRECT PARTICIPANTS OR Tiffi BENEFICIAL OWNERS WI1H RESPECT TO (1) TI-IE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (2) THE PAYMENT OF ANY AMOUNT DUE TO ANY DTC PARFCIPANT, ANY INDIRECT PARTICIPANTOR BENEFICVU,OWNER IN RESPECT OF THE PRINCIPAL OF OR INT:<:RESTON THE NOTES; (3) TI-IEDELI\iERYOF ANYNITTICETOANYDTCPARTICIPANT, ANY INDIRECT PARTICIPANT OR BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TI~RMS OF THE NOTES TO BE GIVEN TO NOTEOWNERS;OR (4) ANY CONSENTGIVEN OR OTHER ACTION TAKEN BY DTC AS NOTEOWNER SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE NOTES, AS NOMINEE OF DTC, REJHil,AI>ELPHIA.................................................................................................................................... 1 Board ofEducation ...........................................................................................................................................................l Current Governan,~e of the School District ..................................................................................................................2 School Reform Commission ...........................................................................................................................................2 Adrninistration ..................................................................................................................................................................5 Key Operating and Financial Officers of the School District.. .................................................................................6 Cash Flow Tables .............................................................................................................................................................7 Cash Flow Discussion ...................................................................................................................................................23 Outstanding Debt .............................................................................................................................................................24 Debt Practices ................................................................................................................................................................... 24 lntt:rt!st Rate Management Plan ....................................................................................................................................26 SCHOOL DISTIUCT FINANCIAL PROCEDURES .................................................................................................•............................ 29 Budgetary Process ..........................................................................................................................................................29 Basis of Accounting .......................................................................................................................................................30 Ba•:i•:of Reporting ...........................................................................................................................................................30 Cm:h Management ............................................................................................................................................................ 31 Financial Control Procedures ........................................................................................................................................31 Tax Collection .................................................................................................................................................................32 School Auditor ................................................................................................................................................................32 Charter Schools ...............................................................................................................................................................32 Pension Plan ....................................................................................................................................................................33 Com:ulting and Educational Service Contracts .........................................................................................................34 SOURCES OF SCHOOL DISTRICT REVENUE ...................................................................................................•............................. 34 Commonwealth Subsidies .............................................................................................................................................34 Lo,~f1lTax Revenues ......................................................................................................................................................36 SCHOOL DISTRICT EXPENDITURES .................................................................................................................•............................. CERTAIN FINANCIAL lNFORMA TION OF THE SCHOOL DISTRICT .........................................................................•................... 40 SCHOOL DISlRlCT LABOR RELA110NS ........................................................................................................................................ 47 41 Su1mmary of Operating Results ....................................................................................................................................41 Operating Budgeit Revenues, Expenditures and Changes in Fund Balances .......................................................43 49 LEGAL PROCEEDINGS ....................................................................................................................................................................... 49 Gen,!ral ..............................................................................................................................................................................49 Education Audits ............................................................................................................................................................50 Desc!gregation Litigation ...............................................................................................................................................50 School Funding Litigation .............................................................................................................................................52 Litigation Challenging Declaration of Distress. .........................................................................................................52 Charter School Litigation ..............................................................................................................................................53 Mis,;ellaneous .................................................................................................................................................................53 INSURANCE .••.......•............................................................................................................................•.......................•.......•.......•.......• (i) PAGE INTENTIONALLY LEFT APPENDIX A THE SCHOOL DISTRICT OF PHILADELPHIA The: School District is a separate and independent home rule school district of the first class established by the Home Rule Charter. It is the largest school district in the Commonwealth, with Fiscal Year 2004 enrollment at approximately 210,100 students, including 21,700 charter school students. Fiscal Year 2005 projects total enrollment of207,700 which includes 25,075 charter school students. The School District is the eighth largest in the nation in enrollment and employs approximately 24,250 professional and nonprofessional persons. The boundaries of the School District are coterminous with the boundaries of the City of Philadelphia, Pennsylvania ("City"). Tl:w School District is an agency of the Commonwealth, created to assist in the administration of the General Assembly's duties under the Constitution of the Commonwealth to "provide for the maintenance and support of a thorough and efficient system of public education to serve the needs of the Commonwealth." As an agency of the Commonwealth, the School District is governed by the School Code and the Home Rule Charter (to the extent not inconsistent with Section 696 of the School Code) and is subject to the juriBdiction of the Secretary of Education. The School District also serves as the agent for Intermediate Unit No. 26 (" IU''), an entity established by the Commonwealth to provide programs in special e,ducation, special education transportation, non-public school services and related manageme,nt services. The Governing Body (hereinafter referred to) constitutes the Board of Directors of the IU; the boundaries of the IU are coterminous with those of the City and School District. All lU services are performed by the School District pursuant to contracts between the School District and the lU. The City was authorized to adopt the Home Rule Charter provisions establishing the School District as a home rule school district by the First Class City Public Education Home Rule Act, approved August 9, 1963, P.L. 643 ("Homt: Rule Act"). The Home Rule Act expressly limits the powers of the City with respect to the School District by prohibiting the City from, among other things, assuming the debt of the School District or enacting legislation regulating public education or its administration, except in respect of setting maximum tax rates for school purposes as authorized by the General Assembly of the Commonwealth. Thus, the School District is a distinct legal entity separate from the City. The Home Rule Act and the Home Rule Charter vest in the School District titk to all property of the School District, real and personal, tangible and intangible, all easements and all evidences of ownership in part or whole. The Home Rule, Charter requires the Board to levy taxes annually, within the limits and upon the subjects authorized by the General Asst:mbly or City Council, in amounts sufficient to provide funds for operating expenses, debt servi1;echarges and for th1:costs of any other services incidental to the operation of the schools. The School District's Fiscal Year is July 1 to June 30, and is identical with those of the City and the Commonwe:alth. The term "Fiscal Year," whenm. followed by a year, refers to the Fiscal Year ended June 30 of that year. For example, "Fiscal Year 2005" refers to the Fiscal Year ending June 30, 200~i. Board of Education Except during a period of distress following a declaration of distress by the Secretary of Education of the Commonwealth with respect to a school district of the first class, the School District is governed by the Board, which consists of nine members appointed by the Mayor of the City from a list of persons nominated by an Educational Nominating Panel established according to provisions in the Home Rule Charter. The Board is responsib:le for the administratiion, management and operation of the School District. A-1 Pursuant to the Home Rule Charter: (i) members of the Board are appointed by the Mayor for four-year terms commencing on May 1 of the year a Mayor's term of office begins; (ii) members serve no more than three full terms and the balance of an unexpired term; (iii) members are required to serve at the pleasure of the Mayor; and (iv) the Board, the Mayor and City Council are required to meet publicly at least twice during the school year to discuss the administration, management, operations and finances of the School District in order to develop and adopt their activities for the improvement and benefit of plans to coordinate public education in Philadelphia. The duties of the Board include formulation of educational policy, the adoption of the annual operating budget, the capital budget and a capital program, the submission of an annual request to the Mayor and City Council for authority to levy certain taxes, and the incurrence of indebtedness of the School District. The Board regularly monitors proposed changes within the overall budget framework, including, for example, personnel transactions and contractual commitments. Current Governance of the School District In 1998 and 2001, the Public School Code of 1949, as amended ("School Code"), was amended to include criteria for a determination by the Secretary of Education of the Commonwealth (the "Secretary of Education of the Commonwealth") that a school district of the first class is distressed and the effects of such a determination. Pursuant to the School Code, if the Secretary of Education of the Commonwealth declares a school district of the first class to be distressed, the powers and duties of the Board shall be suspended, and a five member school reform commission shall be appointed, which shall exercise the powers and duties of the Board. On December 21, 2001, then Governor Mark Schweiker and Mayor John F. Street announced that they had reached an agreement which would establish a partnership between the Commonwealth and the City to address the School District's financial and academic needs, and that the School District would be declared distressed. The School District was declared distressed by the Secretary of Education of the Commonwealth effective December 22, 2001. A school reform commission (the "School Reform Commission") was established, and the School District is currently governed by the School Reform Commission. The School Code provides that the members of the Board continue to serve during the time the School District is governed by the School Reform Commission, and that the establishment of the School Reform Commission shall not interfere with the regular selection of the members of the Board. During the tenure of the School Reform Commission, the Board will perform those duties, if any, delegated to it by the School Reform Commission. At the date of this Official Statement, the School Reform Commission has not delegated any duties to the Board. References in this Official Statement to powers and duties of the Governing Body or actions taken by the Governing Body shall, unless expressly stated otherwise, following the declaration of financial distress by the Secretary of Education of the Commonwealth and until rescinded, mean the School Reform Commission, and at all other times shall mean the Board. School Reform Commission Powers of the School Reform Commission. During the period of distress, all of the powers and duties of the Board granted under the School Code or any other law are suspended and all of such powers and duties are vested in the School Reform Commission. The School Reform Commission is responsible for the operation, management and educational program of the School District, including all financial matters relating to the School District. In addition to the powers and duties vested in the Board, including the power to levy taxes and incur debt, the School Reform Commission is vested with the following additional powers and duties under the School Code during a period of distress following a declaration of distress by the Secretary of Education of the Commonwealth: (1) to suspend or dismiss the superintendent or any person acting in an equivalent capacity; (2) to appoint such persons and other entities as needed to conduct fiscal and performance audits and other necessary analyses; (3) to enter into agreements with persons or for-profit or nonprofit organizations to operate one or more schools; ( 4) subject to the School Code, to approve the establishment of a charter school or the conversion of an existing school to a charter school pursuant to the provisions of the School Code; ( 5) to suspend or revoke the charter of a school pursuant to the School Code; (6) to suspend the requirements of the School Code and the regulations of the State Board of Education (subject to the provisions of the School Code pertaining to charter schools); (7) to employ A-2 professional and senior management employees who do not hold state certification, if the School Reform Commission has approved the qualifications of the individual and at a salary established by the School Reform Commission:; (8) to enter into agreements with persons or for-profit or nonprofit organizaLons providing educational or other se1vices to or for the Sc:hool District; (9) notwithstanding any other provisions of the School Code, to close or reconstitute a school, including the reassignment, suspension or dismissal of profes,ional employees; (10) to suspend professional employees without regard for specific provisions of the School Code relating, among other things, to seniority; (11) to appoint managers, administrators or for-profit or nonprofit organizations to oversee the operations cf a school or group of schools; (12) to reallocate resources, amend school procedures, develop achievement plans and implemmt testing or other evaluation procedures for educational purposes; (13) to supervise and direct principals, teachers and administrators; (14) to negotiate any memoranda of understanding under a collective bargaining agreement in existence on April 27, 1998; (15) to negotiate new collective bargaining agreements; (16) to delegate to a person, including an employee of the School District or a for-profit or nonprofit organization, powers it deems necessary to carry out the purposes of Article VI (School Finances) of the School Code, subj,!c:tto the supenrision and direction of the School Reform Commission; and (17) to employ, contract with or assign persons or for-profit or nonprofit organizations to review the financial and educational programs of school buildings and make recommendations to the School R,eform Commission regarding improvements to the financial or educational programs of school buildings. Section 696 of the School Code also vests the School Reform Commission with the powers of a special board of control granted under Section 693 of the School Code. A special board of control has the power to require a board of dir,!ctors of a sc:hool district, within sixty da.ys of the day the special board of c:ontrol assumes control, to revise the :,chool district's budget for the purpose of dfecting such economies as it deems necessary to improve the school district's financial condition as follows: (1) to cancel or to renegotiate any contract other than teacher contracts to which the board or the school district is a party, if such cancellation or re-ni!gotiation of contracts will effect needed economies in the operation of the school district's schools; (2) to increase tax levies in such amounts and at such times as is permitt1!d by the School Code:; (3) to appoint a special collector of delinquent taxes for the school disllf'ictwho need not bt: a resident of the school district and shall exercise all the rights and perform all the duties imposed by law on tax collectors for school dfotricts; the superseded tax collector shall not be entitled to any commissions on the tax,!s collected by the special collector of delinquent taxes; ( 4) to direct the special school auditors of the departmt:nt or to appoint a competent independent public accountant to audit the accounts of the distressed school district; (5) to dispense with the senrices of such nonprofessional employees as in its judgment are not actuallly needed for the economical operation of the school system; and (6) to suspend, in accordance with the provisions of Section 1124 of the School Code, such number of professional and temporary professional employees as may be necessary to maintain a pupil-teacher ratio of not less than twenty-six pupils p1!rteacher for the combined elementary and secondary school enrollments. Collective Bargaining Agreements and Labor Relations. Pursuant to Section 696 of the School Code, during any period that the S,~hool District is subject to the School Reform Commission's control, all school employeei, are prohibited from conducting a strike. Any employee violating this provision will be subject to decertification. In addition, Sec:tion 696 of the Sc.boo) Code provides that no distressed school district shall be required to engage in collective bargaining negotiations or enter into memoranda of understar,ding or other agreements regarding a.ny of the following issues: (1) contracts with third parties for the provision of goods or services, including educational s,!rvices or the potential impact of such contracts on employees; (ii) decisions related to reductiom, in force; (iii) staffing patterns and assignments, class schedules, academic calendar, places of instruction, pupil assessment and teacher preparation time; (iv) the use, continuation or expansion of programs designated by the School Rdorm Commission as pilot or experimental programs; (v) the approval or designation of a school as a charter or magnet school; or (vi) the use of technology to provide instructional or other s1!rvices. Section 696 further provides that a collective bargaining agreement for professional employees entered into after the expiration of the agreement in effect on the date of the declaration of dii,tress shall provide for the following: (i) a school day for professional employees that is at least equal to the state average as determined by the Department of Education ("Department"); any extension resulting from this requirement will be used exclusively for student instructional time; (ii) the number of instructional days will be at least equal to the state average number of A-3 instructional days; and (iii) the School Reform Commission shall not increase compensation for employees solely to fulfill the preceding requirements concerning length and number of instructional days. Any provision in a contract in effect on the date of the declaration of distress that is in conflict with the provisions of Section 696 of the School Code shall be discontinued in any new or renewed contract. Except as specifically provided in Section 696, nothing shall eliminate, supersede or preempt any provision of an existing collective bargaining agreement until the expiration of the collective bargaining agreement unless otherwise authorized by law. Should a collective bargaining agreement in effect on the date of the declaration of distress expire and a subsequent collective bargaining agreement fail to be ratified, the School Reform Commission will establish a personnel salary schedule to be used until a new collective bargaining agreement is ratified. The current members of the School Reform Commission are: Name James E. Nevels Martin G. Bednarek* James P. Gallagher Sandra Dungee Glenn • Daniel J. Whelan Title Chairman Member Member Member Member A1mointed December 2001 October 2003 January 2002 January 2002 January 2002 Term Exl}ires January January January January January 2009 2005 2009 2005 2007 • Ms. Glenn was appointed by the Mayor. Mr. Bednarek was appointed by the Governor at the request of the Mayor. The following are brief resumes of the members of the School Reform Commission: James E. Nevels, Chairman. Mr. Nevels was appointed Interim Chairman of the School Reform Commission by the Governor on December 22, 2001 and as Chairman on January 14, 2002. James E. Nevels is the chairman of the board and chief executive officer of The Swarthmore Group, Inc., an independent investment advisory and financial advisory firm which he founded in November 1991. As of December 31, 2003, The Swarthmore Group, Inc. is one of the largest minority-owned firms in the United States and among the 500 largest asset managers in the United States. The firm currently manages approximately $2 billion in assets for institutional and individual clients. Mr. Nevels has more than 20 years experience in the securities and investment industry. Prior to starting The Swarthmore Group, Mr. Nevels was an investment banker for Smith Barney, Harris Upham & Co., Inc. and Prudential Bache Securities, Inc. Mr. Nevels also practiced law as counsel in bond transactions with the law firm of Ballard Spahr Andrews & Ingersoll, LLP. Mr. Nevels previously served as a member of the three-person Board of Control for the Chester-Upland School District in Delaware County, Pennsylvania. Mr. Nevels received a Bachelor's degree from Bucknell University in political science and philosophy, a Juris Doctor from the University of Pennsylvania, and a Masters of Business Administration from the Wharton School at the University of Pennsylvania. Martin G. Bednarek, Member. Mr. Bednarek was appointed on October 15, 2003 to fill a vacant seat on the Commission. He is the Chief Executive Officer, Executive Vice President and member of the Board of Directors of the Washington Savings Association and is a licensed real estate broker and appraiser. Mr. Bednarek was formerly a member of The School District of Philadelphia Board of Education, where he served as the chairperson of the Legal Committee. Mr. Bednarek is the Executive Director and founder of the Northeast Girls' Basketball Club which is a member of the Amateur Athletic Union (AAU), Treasurer of the Mid-Atlantic AAU Regional Board, girls' basketball coordinator for the Keystone Games for the Philadelphia Region and serves on various youth organizations. He has served as a member of numerous boards including the local chapters of The Appraisal Institute, the American Society of Appraisers and the Philadelphia Realty Board. Mr. Bednarek received a B.A. from St. Vincent College in Latrobe, Pennsylvania. James P. Gallagher, Member. Dr. Gallagher, President of Philadelphia University since 1984, has transformed Philadelphia University into a diverse academic community with undergraduate and graduate programs in five schools. He has served the Commonwealth of Pennsylvania as Commissioner for Higher Education, where he developed the Commonwealth of Pennsylvania's Desegregation Plan for Higher Education, and as Chair of the A-4 Pennsylvania State Board of Education. Dr. Gallagher served as President of Mount Aloysius College and in senior positions at The American College in Bryn Mawr, St. Joseph's University, Georgetown University, Towson State University and The College of the Holy Cross. He received his Ph.D. from the Catholic University of America, a M.Ed. from Duquesne University and a B.S. in education from St. Francis College. Sandra Dungee Glenn, Member. Ms. Glenn is the President of American CitieB Foundation, a nonprofit organization involved with community development. education and urban policy, and a former member of the Board. Ms. Glenn has more than fifteen years experience in electoral politics, community organizing and campaign management. She has served as associate director with the Philadelphia Area Project on Occupational Safety and Health and Regional Dire,ctor of Pennsylvania Citizen Action, and as Pennsylvania state director with the NAACP National Voter Fund. From 1991 to 1994 she was Chfof of Staff to then-State Senator Chaka Fattah. She has served in various Ieadership positions including Chairperson of the Board of Commissioners of fhe Philadelphia Housing Authority. Ms. Glenn is an active member of the Coalition for 100 Black Women and 2000 African American Women. Ms. Glenn received he,r B.S. degree, cum laude, from Pennsylvania State UniverBity in 1978. Daniel J. Whelan, Member. Mr. Whelan is currently of counsel at the Philadelphia law firm of Montgomery, McCracken, Walker & Rhoads, LLP. On December 31, 2002, Mr. Whelan retired as the President of Verizon Pc:nnsylvania Inc. (formerly Bell Atlantic-Pennsylvania, Inc.) where he began his career in 1977 as an attorney. Before becoming Pn!sident of Verizon, Pennsylvania, Inc., he served as President, of Bell AtlanticMaryland, Inc., as Vice President of both Regulatory and Governmental Relations, as well as Keystone Operations in Pittsburgh. Mr. Whelan is a board member of the Greater Philadelphia Chamber of Commerce (Board and Executive Committee), the Regional Performing Arts Center (Board Chair and Executive Committees), Temple University Board of Trustees, Temple Law School Board of Advisors, AON Insurance Board of Advisors and LaSalle Academy. Mr. Whelan received his J.D. in 1974 from the Temple University School of Law, where he was editor-in-chief of the Law Revi1!W,and his B.A. in Philosophy from La Salle College in 1968. Administrntion {:h;[efExecutive Offic~. The Chief Executiv,e Officer is responsible for the admmistration and operation of the public school system and the supervision of all matters, subject to the policies and direction of the Governing Body. The Chief Executive Officer is responsible for all of the legal duties of the Sup,!rintendent set forth in the Home Rule Charter and the School Code, including those of Secretary and Treasurer of the Board. Chief Academic Officer. The Chief Academic Officer is responsible for directing the academic achievemt:nt of School District students. The duties of the Chief Academic Officer include the oversight of curriculum, instruction, assessment and professional development. Principals, regional superintendents and all academic areas report directly to the Chief Academic Officer. S:::hiefFinancial Officer. The Chief Financial Officer is responsible for the preparation and implementation of the operating and capital budgets, formulation of financing plans for operating and capital requirements, accounting and financial reporting, auditing, payroll, cash management, treasury operations, categorical finance, workers' compensation,. risk management and employee benefits as well as the administration of the School District's Finance and Human Resource System. The Chief Financial Officer serves as Deputy Treasurer. {kneral Counsiel. The Office of General Counsel is responsible for providing legal services to the Chief Executive Officer and all organizational units of the School District and the IU and provides legal services to the Governing Body on certain issues. As Secretary, tne Chief Executive Officer is responsible for the general supervision of all business affairs of the School District, the furnishing of all reports to the Department of Education of the Commonwealth and other matters prescribed by the School Code. As Treasurer, the Chief Executive Officer receives all Commonwealth appropriations, School District taxes and other moneys of the School District, makes payments on orders approved by the Governing Body and is responsible for the investment of School District funds. A-5 Key Operating and Financial Officers of the School District The following sets forth information concerning the current management structure of the School District: Paul G. Vallas, Chief Executive Officer. Paul G. Vallas was appointed Chief Executive Officer by the School Reform Commission on July 17, 2002. Mr. Vallas was born and raised in Chicago and received his undergraduate degree in history and political science and a masters degree in political science from Western Illinois University in Macomb, Illinois. Prior to his appointment in Philadelphia, Mr. Vallas served as Chief Executive Officer for the third largest school system in the nation, the Chicago Public Schools, from 1995 to 2001. He was budget director for the City of Chicago from 1993 through 1995 and revenue director from 1990-1993. Mr. Vallas was Executive Director of the Illinois Economic and Fiscal Commission from 1985 to 1990, and served as principal advisor to the Illinois State Senate and the Senate Elementary and Secondary Education and Appropriations Committees. Mr. Vallas was a gubernatorial candidate for the State of Illinois during the election in 2002. Gregory E. Thornton, Chief Academic Officer. Dr. Thornton was appointed Chief Academic Officer on June 16, 2004. From 2002 until he joined the School District, Dr. Thornton served as Deputy Superintendent and Community Superintendent to the Montgomery County, Maryland public schools. From November 1997 through June 2002, Dr. Thornton also held positions of Assistant Superintendent in Winston-Salem, North Carolina and Coordinating Director of Secondary Schools for Charlotte-Mecklenburg. As a 26-year public school educator, teacher and administrator, he has had a wide-range of experiences and has held principalships at the elementary and secondary school levels. Dr. Thornton has served as Chair, board member and member on numerous educational, CIVIC and community organizations. He was awarded the Citizen of the Year Award from the Montgomery County Chapter of Omega Psi Phi Fraternity; the Black Achiever Award from the Winston Salem YMCA, and the Outstanding Service Award from the Winston Salem/ Forsyth County Schools. Dr. Thornton received a Bachelor of Science in Education from Temple University in 1977, a Masters of Arts in Administration from Salisbury State University in 1981, and an Ed. D. in Educational Leadership from Nova Southeastern University, Florida in 2002. Michael E. Harris, Chief Financial Officer. Michael E. Harris was appointed Chief Financial Officer on August 4, 2002. Prior to joining the School District, Mr. Harris was the City of Chicago Budget Director from 1999 to 2002. He held various positions of increasing responsibility for the City of Chicago as Deputy Budget Director from 1993 to 1999; Assistant Commissioner, Department of Housing from 1992 to 1993; Director of Fiscal and Administrative Services, Law Department from 1990 to 1992 and Principal Budget Analyst, Office of Budget and Management from 1988 to 1990. Mr. Harris attended Illinois State University where he received his B.S. and M.S degrees in political science. He has been active in community affairs, serving as Board President of Chicago One-Stop Capital Shop, Board Secretary for the Chicago-based Non-Profit Financial Center and was active in Chicago in several animal welfare agencies. Wendy Beetlestone, Esquire, General Counsel On December 16, 2002, the School Reform Commission appointed Ms. Beetlestone General Counsel of the School District and the School Reform Commission. Prior to joining the School District, Ms. Beetlestone was a litigation partner in the law firm of Schnader Harrison Segal & Lewis LLP where she provided advice and representation to clients in commercial disputes. Ms. Beetlestone received a Bachelor of Arts (Honors) degree in philosophy from the University of Liverpool, U.K., in 1984 and a J.D. in 1993 from the University of Pennsylvania Law School. A-6 Cash Flow Tables TILetables on the following pages show the actual cash flow for Fiscal Year 2003, the flow forecast for Fiscal Year 2:004and the daily cash flow forecasts for July through June of Fiscal Year 2005. [THIS SPACE INTENTIONALLY LEFT BLANK] A-7 THE SCHOOL DISTRICT OF PHILADELPHIA CASH FLOW JULY 1, 2002 TO JUNE 30, 2003 (Amounts In Thousands of Dollars) ACTUAL MAR APR MAY JUN 6,261 (75,873) 146,292 156,458 168,664 264,814 295,383 119,843 18,822 118,283 24,177 123,427 185,392 48,868 923,508 20,974 2,186 14,934 16,402 5,048 119,843 731 15,547 31,881 15,374 18,822 12,458 50,183 27,887 7,421 118,283 444 260,976 19,535 8,539 24,177 573 149,458 24,135 9,078 123,427 444 36,093 21,940 10,410 185,392 9,886 23,114 41,942 8,466 48,868 622 60,074 49,582 10,431 923,508 61,176 685,397 328,028 95,121 176,~_ 59,~ 183,376 116,'7Z_l_ 407,7ZZ____207,421 192,314 268,800 -- 169,577 2,093,230 102,186 91,829 100,921 95,725 8,606 54,511 9,951 71,826 8,841 75,850 110,645 2,882 10,080 73,648 100,257 9,965 72,051 92,341 3,358 9,061 66,357 117,128 9,874 43,629 114,783 2,819 9,034 49,942 10,051 69,800 10,051 66,874 134,130 3,530 9,859 75,595 1,273,636 12,589 114,843 776,268 164,399 168,450 176,578 184,202 154,946 171,117 198,905 185,612 197,255 180,108 172,650 223,114 2,177,336 203,051 207,245 96,846 89,404 (5,998) 6,261 (75,873) 146,292 156,458 168,664 264,8_1_± 211,277 211,277 175,000 175,000 175,000 175,000 175,000 175,000 131,250 87,500 43,750 43,750 43,750 43,750 43,750 175,000 287,708 256, 1_64 __ 308,564 211,21_1 __ NOV DEC 207,245 96,846 89,404 (5,998) 107,989 21,323 112,462 20,974 21,948 718 21,735 20,718 6,948 107,989 21,148 18,191 24,206 1,110 21,323 621 16,316 24,507 3,412 112,462 11,345 18,776 25,293 8,884 72,067 172,644 66,179 98,744 114,947 9,470 56,185 Total Disbursements Balance, End of Month AUG SEP 295,383 203,051 Receipts Gross Commonwealth Subsidies Less: Retirement - employer Deduction 21,948 Net Commonwealth Subsidies Intermediate Unit Local Receipts Categorical Grants Other Total Receipts Balance, Beginning of Month ~ 00 FEB OCT JUL Disbursements Salaries Retirement - employer Debt Service - Set Aside Accounts Payable Notes, outstanding end of month JAN Sinking Fund Deposits/Principal Balance, End of Month, Including Notes 203,051 207,245 271,846 264,404 169,002 181,2_(jl 99,127 321,292 - - TOTAL m.211 THE SCHOOL DISTRICT OF PHILADELPHIA CASH FLOW FORECAST July 1, 2003 to June 30, 2004 (Amounts in Thousands of Dollars) ACTUAL Balance, Beginning of Month Receipts Gross Commonwealth Subsidies Less: Retirement employer Deduction ~ \D Net Commonwealth Subsidies Intermediate Unit Local Receipts Categorical Grants Other Total Receipts JUL AUG SEP ocr 211,277 162,565 74,419 20,364 12,772 53,145 JAN NOV DEC FEB (8,378) (75,675) (181,842) (64,901) (123,261) 5,026 15,941 332,636 19,035 i09,893 APR MAY (3,443) 137,228 31,375 108,903 MAR JUN(*) TOTAL 129,888 30,236 211,277 1,185 250,766 961,041 0 20,364 731 19,068 14,815 7,074 12,772 22,526 15,175 18,715 893 53,145 929 23,248 45,483 3,502 5,026 11,370 18,317 37,864 17,051 15,941 2,112 14,454 26,471 4,882 332,636 1,724 26,080 27,148 15,784 19,035 13,550 47,843 22,698 9,027 109,893 0 165,265 14,354 9,027 31,375 630 234,343 26,488 62,136 108,903 1,643 43,551 32,522 9,994 1,185 10,858 30,191 29,246 9,020 150,166 1,625 58,916 30,159 8,870 96it04i 67,698 696,451 325,963 157,260 62,052 70,081 126,307 89,628 63,860 403,372 112,153 298,539 354,972 196,613 80,500 350,336 2,208,413 65,610 0 10,097 35,057 112,596 0 9,726 35,905 115,454 3,508 9,823 80,319 100,127 0 10,317 46,481 102,623 0 8,478 58,926 140,594 10,384 9,872 125,581 85,866 0 9,877 74,770 105,221 0 9,063 64,437 118,245 11,480 10,971 73,605 99,463 98,947 0 10,538 9,652 10,307 __2!,032___ _79,03]_ 1,243,410 35,910 118,313 840,314 Total Disbursements 110,764 158,227 209,104 156,925 170,027 286,431 170,513 178,721 214,301 203,953 180,152 198,829 2,237,947 Balance, End of Month 162,565 741419 !8.378l !75,675l (181,842) (64,901) (123,261) 137,228 129,888 30,236 181,743 181,743 0 0 40,000 145,000 245,000 325,000 325,000 325,000 120,000 80,000 0 0 0 205,000 40,000 80,000 475,000 462 228 249 888 110 236 181 743 181 743 Disbursements Salaries Retirement - employer Debt Service - Set Aside Accounts Payable Notes, outstanding end of month 325,000 150,000 Sinking Fund Deposits/Principal Balance, End of Month, lncludin1 Notes *Estimated (3,443) 162,565 74 419 31,622 69,325 63,158 260,099 201 739 321 557 98,664 0 10,130 95,159_ THE SCHOOL DISTRICT OF PHILADELPHIA CASH FLOW FORECAST JULY 1, 2004 TO JUNE 30, 2005 (Amounts In Thousands of Dollars) SEP 181,743 (13,557) 289 20,965 0 115,162 0 20,965 744 19,657 16,348 4,179 MAY JUN TOTAL (23,268) (23,048) (83,286) 181,743 37,574 0 118,960 (14,977) 3,214 0 289,248 0 1,009,048 (29,953) 0 110,440 2,025 166,156 26,020 9,711 37,574 1,516 260,424 23,492 9,720 103,983 532 39,157 29,207 11,078 3,214 10,649 23,363 45,890 33,785 289,248 1,719 62,859 21,401 13,105 979,095 69,968 713,870 402,847 121,392 118,816 314,352 332,726 183,957 116,901 388,332 2,287,172 147,785 14,669 6,089 0 66,019 102,794 0 5,443 0 71,065 102,880 0 5,198 0 64,300 106,113 14,322 18,699 0 70,232 102,434 0 21,036 (14,977) 75,244 102,111 0 6,290 0 68,738 102,107 12,375 6,951 0 74,226 1,348,918 52,110 112,477 (29,953) 875,976 173,842 234,562 179,302 172,378 209,366 183,737 177,139 195,659 2,359,528 (89,228l !189,415) (228,1161 (288,602l (146!628l (23,268l (2\048l (83,286l 109,387 109,387 400,000 400,000 400,000 400,000 400,000 300,000 200,000 100,000 0 100,000 100,000 100,000 100,000 400,000 276,732 176,952 16,714 109,387 109,387 OCT DEC JAN FEB MAR (85,676) (89,228) (189,415) (228,116) (288,602) (146,628) 26,444 0 117,868 (14,976) 20,939 0 128,161 0 20,073 0 110,440 0 115,162 24,192 15,801 61,683 1,070 26,444 1,270 23,283 47,885 2,564 102,892 11,733 18,638 40,092 7,970 20,939 2,359 14,622 33,205 2,530 128,161 1,525 26,071 23,269 16,835 20,073 11,704 43,839 34,355 8,845 61,893 217,908 101,446 181,325 73,655 195,861 Disbursements Salaries Retirement - Employer Debt Service - Deposits Debt Service - W/h (inc. above) Accounts Payable 145,780 0 1,519 0 109,894 127,538 0 9,724 0 66,800 102,604 10,744 5,606 0 68,457 106,884 0 20,458 (14,976) 72,511 99,888 0 5,464 0 68,490 Total Disbursements 257,193 204,062 187,411 184,877 Balance, End of Month (1315571 289 (85,676l Notes, outstanding end of month 400,000 400,000 Receipts Gross Commonwealth Subsidies Less: Debt Service Withhelc I AUG NOV Balance, Beginning of Month > .... c:, JUL Net Commonwealth Subsidies Intermediate Unit Local Receipts Categorical Grants Other Total Receipts 400,000 Sinking Fund Deposits/Principal Balance, End of Month, Including Notes 386,443 400,289 314,324 310,772 210,585 171,884 111,398 253,372 APR THE SCHOOL DISTRICT OF PHILADELPIDA UAIL l' LA:Stl l''UKELA:, 1 JULY2004 (Amounts in Thousands ofDollal'll) NET HEGL~:,.,ThG > ,:.. ... LU1"L"'1Ul"IW1i.AL1ll DATE BALANCE SUBSIDIES l-Jul-04 2-Jul-04 3-Jul-04 4-Jul-04 5-Jul-04 6-Jul-04 7-Jul-04 8-Jul-04 9-Jul-04 10-Jul-04 ll-Jul-04 12-Jul-04 13-Jul-04 14-Jul-04 15-Jul-04 16-Jul-04 l 7-Jul-04 18-Jul-04 19-Jul-04 20-Jul-04 21-Jul-04 22-Jul-04 23-Jul-04 24-Jul-04 25-Jul-04 26-Jul-04 27-Jul-04 28-Jul-04 29-Jul-04 30-Jul-04 3 l-Jul-04 181,743 186,134 137505 137,505 137,505 137,505 119,714 122,043 122,689 123,189 123,189 123,189 117,158 117,695 118,464 119,394 44,492 44,492 44,492 (2,179) (8,347) (9,099) (9,099) (12,002) (12,002) (12,002) (lt.~21) (11,821) (6,878) 12,167 (13,557) 3,214 ll'"I .I. J!.A..LTiEVJ.11. UNIT ,J2 .1. .r, LOCAL I"' ,1. 'l'L'T"ODT TOTAL ..... 4 T RECEIPTS GRANTS OTHER RECEIPTS 500 i5 70 4,391 1,133 581 841 646 500 1,488 500 537 769 1,118 500 563 20,965 212 744 18,372 500 537 769 1,618 563 6,531 6,531 1,488 2,334 2.382 2,577 957 500 682 .- "' 6-Nov-04 7-Nov-04 8-Nov-04 9-Nov-04 10-Nov-04 11-Nov-04 12-Nov-04 13-Nov-04 14-Nov-04 15-Nov-04 16-Nov-04 17-Nov-04 18-Nov-04 19-Nov-04 20-Nov-04 21-Nov-04 22-Nov-04 23-Nov-04 24-Nov-04 25-Nov-04 26-Nov-04 27-Nov-04 28-Nov-04 29-Nov-04 30-Nov-04 NET BEGL',NING COMMONWEALTH BALANCE SUBSIDms (89,228) (89.460) (90,391) (107,317) (i04,i57) (136,954) (136,954) (136,954) (149,857) (155,543) (155,136) (161,947) (176,101) (184,537) (184,537) (185,J5 I) (186,165) (168,051) (170,124) (199,130) (199,130) (199,130) (210,064) (214,971) (215,235) (215,435) (200,405) (200,405) (200,405) (199,375) 3,214 INTERMEDIATE LOCAL CATEGORICAL UNIT RECEIPTS GRANTS 532 500 500 500 500 500 500 480 500 729 500 75 OTHER 70 1,493 500 2'-',Q~Q 1,827 2,3~9 500 500 500 4,391 500 I 1,419 28.672 500 480 1,993 12,472 4,035 729 6,740 500 500 JVV 17,725 RETIREMENT DEBT TOTAL DEBT ACCOUNTS TOTAL RECEIPTS SALARIES EMPLOYER SERVICE WITHHELD PAYABLE DISBURSEMENTS 650 500 1,210 21,593 981 777 665 500 795 1,493 1,000 500 22,243 500 1,210 231 231 231 231 231 500 1,200 15,776 1,000 4,394 732 1,431 17,426 1,231 33,297 231 231 231 700 1,900 1,355 800 14,423 8,436 13,403 6,166 1,586 7,540 14,654 8,436 919 408 229 229 229 900 900 3,900 1,000 1,300 1,820 1,308 4,129 2,573 30,216 229 229 229 229 700 1,418 700 700 5,088 13,408 5,684 929 700 5,317 231 1 1,344 28,687 2,474 777 665 500 20,347 12,479 4,037 500 1,835 1,460 500 1,960 10,886 1 8,551 229 226 700 700 930 926 14.622 33,205 2,530 73,655 99,888 5,464 68,490 173,842 ENDING BALANCE (89,460) (90,391) (107,317) (104,157) (136,954) (136,954) (136,954) (149,857) (155,543) (155,136) (161,947) (176,101) (184,537) (184,537) (185,357) (186,165) (168,051) (170,124) (199,130) (199,130) (199,130) (210,064) (214,971) (215,235) (215,435) (200,405) (200,405) (200,405) (199,375) (189,415) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST DECEMBER 2004 (Amounts in Thousands of Dollars) DATE ~ s: 1-Dec-04 2-Dec-04 3-Dec-04 4-Dec-04 5-Dec-04 6-Dec-04 7-Dec-04 8-Dec-04 9-Dec-04 10-Dec-04 11-Dec-04 12-Dec-04 13-Dec-04 14-Dec-04 15-Dec-04 16-Dec-04 17-Dec-04 18-Dec-04 19-Dec-04 20-Dec-04 21-Dec-04 22-Dec-04 23-Dec-04 24-Dec-04 25-Dec-04 26-Dec-04 27-Dec-04 28-Dec-04 29-Dec-04 30-Dec-04 31-Dec-04 BEGINNING BALANCE (189,415) (189,881) (186,919) (233,523) (233,523) (233,523) (246,504) (250,744) (249,316) (252,621) (250,329) (250,329) (250,329) (257,137) (265,791) (274,361) (267,152) (308,592) (308,592) (308,592) (341,833) (342,062) (355,083) (356,288) (357,380) (357,380) (357,380) (355,650) (356,279) (347,507) (228,093) NET COMMONWEALTH SUBSIDIES 3,214 INTERMEDIATE UNIT 532 LOCAL RECEIPTS 463 500 600 500 750 864 934 970 6,614 993 941 1,011 1,877 778 500 3,150 1,000 3,277 2,873 682 500 600 1,851 390 1,060 118,333 128,161 1,525 26,071 CATEGORICAL GRANTS 75 TOTAL RECEIPTS OTHER 70 1,493 84 6,346 184 18,624 500 46 179 TOTAL DISBURSEMENTS 229 229 229 700 1,200 16,777 929 1,429 47,204 229 229 229 229 229 700 700 700 4,094 4,795 13,481 4,990 929 4,323 5,024 941 1,011 2,377 8,615 19,124 6,520 229 229 917 406 229 1,000 9,436 10,030 1,000 1,300 7,749 9,665 10,947 1,406 60,564 229 229 229 209 229 1,000 1,000 1,400 3,869 3,038 36,570 1,229 16,298 4,078 3,267 229 229 229 209 226 1,000 500 500 1,280 230 1,229 729 709 1,583 6,089 66,019 234,562 59,035 1 500 77 16,835 195,861 147,785 7,650 DEBT ACCOUNTS WITHHELD PAYABLE 12,552 4,061 1,960 600 9,501 120,123 1,560 1,400 DEBT SERVICE 500 750 2,357 1,018 7,316 35,341 1,460 RETIREMENT EMPLOYER 30,198 3,329 1,000 3,277 2,873 2,175 1,493 23,269 463 4,391 600 SALARIES 14,669 14,669 ENDING BALANCE (189,881) (186,919) (233,523) (233,523) (233,523) (246,504) (250,744) (249,316) (252,621) (250,329) (250,329) (250,329) (257,137) (265,791) (274,361) (267,152) (308,592) (308,592) (308,592) (341,833) (342,062) (355,083) (356,288) (357,380) (357,380) (357,380) (355,650) (356,279) (347,507) (228,093) (228,116) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST JANUARY 2005 (Amounts in Thousands of Dollars) DATE t " l-Jan-05 2-Jan-05 3-Jan-05 4-Jan-05 5-Jan-05 6-Jan-05 7-Jan-05 8-Jan-05 9-Jan-05 IO-Jan-05 l l-Jan-05 12-Jan-05 13-Jan-05 14-Jan-05 15-Jan-05 16-Jan-05 17-Jan-05 18-Jan-05 19-Jan-05 20-Jan-05 21-Jan-05 22-Jan-05 23-Jan-05 24-Ja__n-O~ 25-Jan-05 26-Jan-05 27-Jan-05 28-Jan-05 29-Jan-05 30-Jan-05 31-Jan-05 NET BEGINNL"JG COMMONWEALTH BALANCE SUBSIDIES (228.116) (228,116) (228,116) (228,375) \Ul,595) (247,418) (243,330) (250,091) (250,091) (250,091) (248,791) (258,280) (258,799) (258,489) (287,818) (287,818) (296,254) (319,178) (305,193) (303,732) (302,566) (305,733) (305,733) (305,733) (304,874) (303,922) (302,587) (273,716) (294,041) (294,041) (293,541) 3,214 Ll'ITERMEDIA TE LOCAL UNIT RECEIPTS 532 1,503 2,020 1,998 1,926 1.216 CATEGORICAL GRANTS 1,493 15 TOTAL RECEIPTS OTHER 70 2,030 1,730 1.210 2,039 1,826 2,814 2,576 2,195 2,483 16,859 11.172 'IAO"'l''J. _.._., ....,- 1~,7f_U 2,030 1,730 1,210 2,039 1,826 16,218 1,493 2,089 2,181 2,564 2,069 3,988 3,382 41Jll9 1,503 2,020 3,491 5,817 1,216 500 19,532 4,069 2,195 2,483 RETIREMENT El\IPI ,OYER SALARIES DEBT SERVICE DEBT \\'TfHHELD ACCOUNTS PAY ABLE TOTAL DISBURSEMENTS 33 11 7,64~ 229 229 229 229 229 1,500 1,000 20,440 1,500 7,748 1,762 1,240 23,314 1,729 7,977 I 229 229 229 229 229 500 !.000 1,500 1,500 1,500 730 11.219 1,729 1,729 31,155 300 688 406 229 229 229 8.436 9,436 1,000 1,000 800 5,121 8,436 22,924 5,547 2,608 1,029 5,650 I 229 1,000 1,000 1.000 1,000 1.084 1.230 1,229 1,229 1,229 30,628 9,990 29,426 12,800 4,141 1,379 6,315 2,089 2,181 2,564 30,100 10,303 29,315 229 229 229 15,076 500 1,460 500 19,918 12,752 227 2,000 14,979 34.355 8,845 118,816 102,794 5,443 71,065 179,302 229 ENDING BALANCE (228,116) (228,116) (228,375) (227,595) (247,418) (243,330) (250,091) (250,091) (250,091) (248,791) (258.280) (258,799) (258,489) (287,818) (287,818) (296,254) (319,178) (305,193) (303,732) (302,566) (305,733) (305,733) (305,733) (304.874) (303,922) (302,587) (273,716) (294,041) (294,041) (293,541) (288,602) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST FEBRUARY 2005 (Amounts in Thousands of Dollars) DATE ~ ... CX> l-Feb-05 2-Feb-05 3-Feb-05 4-Feb-05 5-Feb-05 6-Feb-05 7-Feb-05 8-Feb-05 9-Feb-05 10-Feb-05 ll-Feb-05 12-Feb-05 13-Feb-05 14-Feb-05 15-Feb-05 16-Feb-05 17-Feb-05 18-Feb-05 19-Feb-05 20-Feb-05 21-Feb-05 22-Feb-05 23-Feb-05 24-Feb-05 25-Feb-05 26-Feb-05 27-Feb-05 28-Feb-05 NET BEGINNING COMMON"-~ALTB BALANCE SUBSIDIES (288,602) (288,590) (283,833) (276,197) (292,649) (292,649) (292,649) (293,379) (293,551) (292,780) (287,883) (319,307) (319,307) (319,307) (330,550) (339,623) (342,531) (320,268) (320,284) (320,284) (320,284) (315,285) (309,514) (295,561) (165,564) (169,549) (169,549) (169,549) INTERMEDIATE LOCAL CATEGORICAL RECEIPTS GRANTS UNIT 1,493 3,214 532 3,874 4,493 6,348 3,668 1,493 75 OTHER 70 1,000 1,057 2,000 9,520 6,945 2,000 4,997 5,441 7,363 6,356 107,226 110,440 2,025 5,367 5,986 10,239 3,668 4,126 1,000 1,057 2,000 9,520 6,945 I 1,374 36,640 229 229 229 229 1,000 1,000 1,000 19,891 5,355 1,229 2,603 20,120 229 229 229 229 229 1,500 1,000 1,000 4,394 1,500 1,730 1,229 1,229 4,623 38,369 209 917 406 229 229 9,436 9,436 1,000 6,143 13,243 14,570 9,842 2,633 6,372 1,000 1,000 1,000 1,000 1,000 1,001 1,229 1,229 1,229 30,555 2,000 5,497 6,934 24,896 6,356 13,034 4,217 I 500 6,000 7,000 15,182 131,226 26,570 29,326 229 229 229 229 500 1,493 17,533 6,000 7,000 15,182 24,000 26,070 RETIREMENT DEBT ACCOUNTS TOTAL TOTAL DEBT RECEIPTS SALARIES EMPLOYER SERVICE WITHHELD PAYABLE DISBURSEMENTS 1,404 22,842 5,426 8,641 36,909 12,757 231 1,000 13,988 166,156 26,020 9,711 314,352 102,880 5,198 64,300 172,378 ENDING BALANCE (288,590) (283,833) (276,197) (292,649) (292,649) (292,649) (293,379) (293,551) (292,780) (287,883) (319,307) (319,307) (319,307) (330,550) (339,623) (342,531) (320,268) (320,284) (320,284) (320,284) (315,285) (309,514) (295,561) (165,564) (169,549) (169,549) (169,549) (146,628) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST MARCH200S (Amounts in Thousands of Dollars) NET DATE ~ ... ~ 1-Mar-05 2-Mar-05 3-Mar-05 4-Mar-05 5-Mar-05 6-Mar-05 7-Mar-05 8-Mar-05 9-Mar-05 10-Mar-05 JI-Mar-05 12-Mar-05 13-Mar-05 14-Mar-05 !5-Mar-05 16-Mar-05 17-Mar-05 !8-Mar-05 19-Mar-05 20-Mar-05 21-Mar-05 22-Mar-05 23-Mar-05 24-Mar-05 25-Mar-05 26-Mar-05 27-Mar-05 28-Mar-05 29-Mar-05 30-Mar-05 31-Mar-05 BEGL"ffll.~G COMMONWEALTH BALANCE SUBSIDIES (146,628) (114,381) (80,417) (51,642) (48,063) (48,063) (48,063) (24,650) (3,488) 3,889 15,279 (13,845) (13,845) (13,845) (24,791) (34,647) (32,239) (30,853) (14,089) (14,089) (14,089) (14,163) (25,705) (22,270) (21,881) (43,593) (43,593) (43,593) (54,117) (56,958) (55,302) 3,214 INTER..1\fEDIATE UNIT 532 LOCAL RECEIPTS 54,059 33,700 27,487 23,700 "'" CATEGORICAL GRANTS 1,493 75 RECEIPTS 70 £,I') k"'t,U"'t..1 22,391 12.000 12,619 8,186 6,554 984 3.547 4,627 3,219 2,890 2,994 500 1,493 180 27,806 37,574 1,516 45 ,o,J.J"T 3,510 4,008 4,663 1,617 1,500 7,145 2,315 2,019 2,384 2,346 2,117 260,424 23,492 ~ TOJAL OTHER 1,460 ..................... AJ!, SALARIES rr., .. ,....., • .I.A.l!.J.1'.1.£,J.,. EMPLOYER 54,059 35,193 31,378 23,700 4,127 1,374 24,643 22,391 12,000 12,619 8,186 I nEITT DE!!!' SERVICE WITIIIIBLD 13,027 3,547 5,127 12,250 3,115 21,128 12,764 4.130 3,510 4,008 4,663 1,617 8,645 I 1,375 14,322 12,771 4,132 500 9,720 332,726 106,113 14,322 T()TU. lcNDTNG DISBURSEMENTS 229 229 21,812 1,229 2,603 20,121 229 229 229 229 229 1,000 1,000 4,394 1,000 1,000 1,230 1,229 4,623 1,229 37,310 229 917 406 229 228 1,500 9,936 9,436 1,500 2,761 14,493 14,983 9,842 1,729 4,364 228 228 228 228 3,355 1,000 1,000 1,000 1,000 3,584 15,550 1,228 1,228 30,357 228 228 228 235 1,300 500 500 500 14,299 4,860 728 735 18,699 70,232 209,366 29,357 3,775 2,019 2,384 32,769 PAYABLE 4,658 1,000 1,000 19,892 229 36,081 4 r'r'OTTNT~ BALANCE (114,381) (R0,417) (51,642) (48,063) (48,063) (48,063) (24,650) (3,488) 3,889 15,279 (13,845) (13,845) (13,845) (24,791) (34,647) (32,239) (30,853) (14,089) (14,089) (14,089) (14,163) (25,705) (22,270) (21,881) (43,593) (43,593) (43,593) (54,117) (56,958) (55,302) (23,268) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST APRIL2005 (Amounts in Thousands of Dollars) DATE ::,, ~ 1-Apr-05 2-Apr-05 3-Apr-05 4-Apr-05 5-Apr-05 6-Apr-05 7-Apr-05 8-Apr-05 9-Apr-05 IO-Apr-05 ll-Apr-05 12-Apr-05 13-Apr-05 14-Apr-05 15-Apr-05 16-Apr-05 17-Apr-05 18-Apr-05 19-Apr-05 20-Apr-05 21-Apr-05 22-Apr-05 23-Apr-05 24-Apr-05 25-Apr-05 26-Apr-05 27-Apr-05 28-Apr-05 29-Apr-05 30-Apr-05 NET BEGINNING COMMONWEALTH BALANCE SUBSIDIES (23,268) (49,603) (49,603) (49,603) (49,341) (49,331) (47,774) (42,909) (75,983) (75,983) (75,983) (94,807) (96,979) (103,116) (110,197) (113,659) (113,836) (113,836) (94,564) (94,912) (94,216) (93,110) (122,343) (122,343) (122,343) (132,882) (137,046) (135,492) (31,211) (23,048) 3,214 INTERMEDIATE UNIT 532 LOCAL RECEil'TS CATEGORICAL GRANTS OTHER TOTAL RECEil'TS 2,116 2,116 1,500 2,623 2,593 2,711 1,500 2,623 2,593 6,602 75 70 SALARIES I 1,376 29,443 1,893 2,709 2,043 2,592 2,083 1,846 2,190 2,154 2,371 1,414 96,228 4,541 103,983 532 1,493 500 18,585 2,063 1,230 1,319 763 944 7,561 39,157 29,207 1,460 237 28,214 28,451 237 237 237 237 237 1,000 1,000 799 1,500 3,394 1,238 2,613 1,036 1,737 33,074 1,893 2,709 3,536 2,592 2,583 19,480 4,144 237 237 237 237 925 177 1,000 500 9,436 9,436 5,120 20,717 4,881 9,673 9,673 6,045 177 20,431 2,190 2,154 2,371 1,414 I 1,380 300 258 258 258 258 258 900 900 900 1,007 1,000 1,159 2,538 1,458 1,265 30,647 258 258 258 15,235 265 1,020 1,000 1,000 1,000 5,118 14,062 5,394 1,258 1,258 5,383 75,244 183,737 29,389 12,784 4,136 8,548 500 3,523 1,230 2,812 105,539 13,546 11,078 183,957 102,434 1,493 TOTAL RETIREMENT DEBT DEBT ACCOUNTS EMPLOYER SERVICE WITHHELD PAYABLE DISBURSEMENTS 21,036 (14,977) (14,977) ENDING BALANCE (49,603) (49,603) (49,603) (49,341) (49,331) (47,774) (42,909) (75,983) (75,983) (75,983) (94,807) (96,979) (103,116) (110,197) (113,659) (113,836) (113,836) (94,564) (94,912) (94,216) (93,110) (122,343) (122,343) (122,343) (132,882) (137,046) (135,492) (31,211) (23,048) (23,048) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST MAY200S (Amounts in Thousands of Dollars) BEGINNING BALANCE DATE >/> ~ l-May-05 :! M~y-05 3-May-05 4-May-05 5-May-05 6-May-05 7-May-05 8-May-05 9-May-05 10-May-05 l1-~1ay-05 12-May-05 13-May-05 14-May-05 15-May-05 1~- ~,f,.,.,_(\<, •v ,..,._..;, ~- 17-May-05 18-May-05 19-May-05 20-May-05 21-May-05 22-May-05 23-May-05 24-May-05 25-May-05 26-May-05 27-May-05 28-May-05 29-May-05 30-May-05 31-May-05 (23,048) (23,048) (26,939) (27,729) (19,075) (14,959) (44,358) (44,358) (44,358) (60,774) {65,083) (69,530) (78,256) (91,285) (91,285) (91,285) (92,232) (61,463) (63,415) (63,469) (85,784) (85,784) (85,784) (94,674) (98,758) (97,392) (81,059) (85,254) (85,254) (85,254) (83,810) NET COMMONWEALTH SUBSIDIES 3,214 INTERMEDIATE UNIT 532 LOCAL RECEIPTS 1.026 968 1,001 1,483 1,263 1,027 1,087 2,005 968 784 500 734 684 1,204 1,147 CATEGORICAL GRANTS 75 OTHER 25,064 70 10,117 3,214 10,649 23,363 1,377 29,404 DEBT WITHHELD ACCOUNTS PAYABLE TOTAL DISBURSEMENTS 258 258 258 258 258 4,658 1,500 15,776 1,000 l,OUU 4,917 1,758 17,411 1,258 30,662 258 258 258 258 258 4,394 1,000 1,000 9,436 13,555 17,443 5,396 7,945 9,694 13,813 1,000 32,204 684 1,204 8,347 I 29,404 946 435 258 258 258 1,000 1,000 1,000 1,000 1,000 1,947 1,435 2,636 1,258 30,662 4,159 1,612 2,624 17,591 1,182 12,791 4,138 258 258 258 258 1,300 1,000 1,000 5,119 13,049 5,696 l.258 1,258 5,377 l.460 500 2,445 1,789 I 265 1,000 1,000 1,001 1,265 33,783 116,901 102,111 6,290 68,738 177,139 500 31,470 7,200 1,493 6,191 45,890 I DEBT SERVICE 12,791 4,138 6,687 1.493 985 1,289 1,026 968 26,065 5,374 1,263 RETIREMENT Ei.\IPLOYER SALARIES 1,027 1,087 3,498 968 784 4,159 1,612 1,131 1,283 1.182 TOTAL RECEIPTS 1,378 258 ENDING BALA.."ICE (23,048) (26,939) (27,729) (19,075) (14,959) (44,358) (44,358) (44,358) (60,774) (65,083) (69,530) (78,256) (91,285) (91,285) (91,285) (92,232) (61,463) (63,415) (63,469) (85,784) (85,784) (85,784) (94,674) (98,758) (97,392) (81,059) (85,254) (85,254) (85,254) (83,810) (83,286) THE SCHOOL DISTRICT OF PHILADELPHIA DAILY CASH FORECAST JUNE200S (Amounts in Thousands of Dollars) DATE ~ ~ )-Jw,-05 2-Jwi-05 3-Jw,-05 4-Jw,-05 5-JIUl-05 6-Jw,-05 7-Jw,-05 8-Jw,-05 9-Jw,-05 IO-Jwi-05 ll-Jw,-05 12-Jw,-05 13-JIUl-05 14-Jun-05 15-Jwi-05 16-JIUl-05 17-Jw,-05 18-Jun-05 19-Jw,-05 20-Jwi-05 2)-JIUl-05 22-Jwi-05 23-Jwi-05 24-Jun-05 25-Jun-05 26-JIUl-05 27-Jun-05 28-Jun-05 29-Jwi-05 30-Jw,-05 NET BEGINNING COMMONWEALTH INTERMEDIATE LOCAL CATEGORICAL BALANCE SUBSIDIES UNIT RECEIPTS GRANTS (83,286) 88,541 91,793 46,330 46,330 46,330 67,901 63,631 61,436 60,794 55,756 55,756 47,320 32,169 31,802 59,013 64,803 55,715 55,715 55,715 40,587 35,710 23,094 22,553 18,365 18,365 18,365 22,025 27,596 28,430 176,250 3,214 532 523 649 1,384 35,650 660 498 650 500 25,000 5,663 851 762 925 3,691 800 2,059 75 79,121 336 289,248 1,719 62,859 70 155 19,678 176,773 4,540 1,384 30,782 288 288 288 4,658 1,000 15,777 4,946 1,288 46,847 12,791 4,138 288 292 292 292 292 1,000 500 3,894 1,000 5,246 14,079 4,930 4,186 1,292 5,538 6,685 500 39 84 762 925 29,191 7,508 21,821 292 292 980 469 259 8,436 8,936 1,000 1,000 1,249 1,246 8,436 15,913 1,292 1,980 1,718 30,909 22 500 720 1,254 1,186 1,022 259 259 259 259 259 1,200 1,200 1,236 1,468 4,951 15,628 5,597 13,870 1,727 5,210 259 259 259 267 2,524 2,279 2,168 2,258 2,783 2,538 2,427 2,525 6,951 74,226 195,659 4,760 6,768 21,401 RETIREMENT DEBT TOTAL TOTAL DEBT ACCOUNTS RECEIPTS SALARIES EMPLOYER SERVICE WITHHELD PAYABLE DISBURSEMENTS 35,650 660 1,991 650 500 1,493 500 720 1,254 1,186 1,000 1,683 1,341 3,261 3,163 OTHER 862 6,443 8,109 3,261 83,482 13,105 388,332 29,404 14,169 4,138 12,375 102,107 12,375 ENDING BALANCE 88,541 91,793 46,330 46,330 46,330 67,901 63,631 61,436 60,794 55,756 55,756 47,320 32,169 31,802 59,013 64,803 55,715 55,715 55,715 40,587 35,710 23,094 22,553 18,365 18,365 18,365 22,025 27,596 28,430 109,387 Cash Flow Disc11rnsion The forecast of cash receipts for Fiscal Year 2005 is based on the factors affecting revenues described below. The forecast of disbursements reflects statutory and contractual obligations as well as obligations under collective bargaining agreements and is projected in a pattern consistent with the prior year after giving effect to known or anticipated changes in such pattern. It is the policy of the School District to make required disbursements on a timely basis. The School District's principal sources of revenues from the Commonwealth are the basic education instructional subsidy, special education funding, special education transportation advances, charter school upense reimbursements, the Commonwealth's share of social security tax and retirement payments, the debt service reimbursement, the non-public subsidy, the genc:ral pupil transportation subsidy and certain supplemental line item appropriation grants. The basic education instructional subsidy is ordinarily received in six installments paid by the Commonwealth in August, October, December, February, April, and June. The first five installments are calc 11lated to enable the School District to receive in equal installments an aggregate of75% of the amount the Commonwealth anticipates it will provide to the School District after effecting certain deductions. The June payment by the Commonwealth is adjusted to pay to the School District, in full, its total subsidy entitlement for the fiscal year. Amounts received from the Commonwealth with respect to IU special education are paid in August (50%), November (45%) and the final payment in June (5%). Amounts received from the Commonwealth with respect to School District special i:ducation are paid in July (15%), September (15%), November (15%), January (15%), March (15%) and the final payment in June (25%). Amounts with respect to IU transportation are paid in August (50%), January (25%) and May (25%). Amounts received from the Commonwealth with respect to non-public school services are paid in August (15%), October (75%) and February (10%). The charter school reimbursements for Fiscal Year 2005 will follow a similar payment pattern as that of the basic education subsidy described albove. The supplemental educational appropriation of $25.0 million for Fiscal Year 2005 is anticipated for re1:eipt in June 2005. Receipt of this payment in 2003 and 2004 was contingent upon the satisfaction by the School District of certain statutory ,~onditions as determined by the Secretary of Education of the Commonwealth. The School District met all of thes,e conditions. The Governor's Fiscal Year 2005 budget includes accountability grants which are expected to he received in one lump sum in August. These grants are expected to provide between $35 million to $50 million in additional revenues. See "SOURCESOF SCHOOLDISTRICTREVENUE:-Commonwealth Subsidies." Commonwealth legislation effective July 1, 1995, changed the method by which the Commonwealth reimburses school districts for social security payments and retirement contributions. Previously the Commonwealth paid one-half of the employer's portion of both social: security and retirement. Now school districts are reimbursed by the Commonwealth for members wllio are hired after June 30, 1994, in an amount that is the product of the employer cost multiplied by the market value/income aid ratio with employers bearing no greater cost than would result if their aid ratio was 50%. The School District's aid ratio for Fiscal Year 2005 is 69.97%. For members hired on or before June 30, 1994, the employer and Commonwealth payments will remain at 50% each. Since 1987 the Commonwealth's share of social security payments has been paid to school districts as additional revenue and school districts in tum have paid the Federal government. These amounts are wire-transferred to the School District on the first Thursday of the month in twelve approximately equal installments. The 1995 legislation treats the Commonwealth's retirement contributions as additional revenue and school entities will be required to pay 100% directly to PSERS. For Fiscal Year 2004 the School District received approximately 25% in mid-December, 25% in mid-March amd 25% in mid-June with the balance expected to be received in mid-September. It is anticipated that the same pattern of payments will continue in Fiscal Year 2005. The debt service reimbursement is ordinarily received in the month following the payment by the School District of debt service eligible for reimbursement. The reimbursement for general pupil transportation is received in five installments paid by the Commonw,ealth in August, October, December, March, and June. The first four installments are calculated to enable the School District to receive an aggrngate of 80% of the prior year's amount that the Commonwealth provided to the School District. The June payment by the Commonwealth is adjusted to fully pay the School District its total entitlement for the fiscal year. A-23 Generally, revenues from the Commonwealth are wire-transferred to a School District designated bank on the last Thursday of the month in which the revenue item is received, except for the June payment of the basic education instructional subsidy payment which is received on the first working day in June, and the retirement payment which is received as described above. The Commonwealth's share of social security tax is received on the first Thursday of every month. The School District's principal sources of local revenues are taxes on real estate, business use and occupancy of real estate, retail sales of liquor by the drink and non-business income. See "SOURCESOF SCHOOLDIS1RICTREVENUES Local Tax Revenues." Real estate taxes are subject to a discount of 1% if paid by the last day in February, are due at par if paid in the month of March, and are subject to penalty and interest when paid thereafter. The business use and occupancy tax is due monthly, quarterly or semi-annually derending on the assessed value of the real estate subject to the tax. The liquor sales tax is due monthly on or before the 251 of the month following collection. The non-business income tax is due by April 15 and applies to City residents only. The City provides the School District an annual grant of$35.0 million. It is scheduled for receipt in June. The Home Rule Charter designates the Revenue Commissioner of the City as the responsible agent for the collection of School District tax revenues. School District tax revenues are deposited on the same business day collected, first directly to the School District debt service sinking funds for fixed rate general obligation bonds and then directly to the credit of the School District-designated bank accounts. Categorical Grants from Federal, Commonwealth and private grantors are anticipated to be received in accordance with the projected pattern of grant disbursements so as to result in a minimum balance of unexpended cash grants, as required by the regulations issued by the grantors in respect to such grants. Outstanding Debt At June 30, 2004, the School District had outstanding general obligation bond indebtedness in the principal amount of $2,314,730,000. The School District anticipates issuing general obligation bonds for capital purposes during Fiscal Year 2005. The School District has never defaulted in the payment of debt service on any of its bonds, notes or lease rental obligations. Debt Practices The Local Government Unit Debt Act ("Debt Act") includes requirements that local government units, including the School District, establish serial maturities or sinking fund installments for each bond issue that achieve, as nearly as practicable, level debt service within an issue or overall level debt service within a particular classification of debt. For purposes of this requirement, general obligation and lease-rental debt are treated as a single classification. Tax and Revenue Anticipation Notes The School District routinely issues tax and revenue anticipation notes pursuant to the Local Government Unit Debt Act to relieve temporary cyclical cash flow deficiencies. Such tax and revenue anticipation notes are required under the Debt Act to be paid in the fiscal year in which they are issued and are not considered "debt" for purposes of determining the School District's debt limits and borrowing capacity under the Debt Act. The School District issued tax and revenue anticipation notes in seventeen of the last twenty fiscal years. Due to advances by the Commonwealth of portions of installments of basic education subsidies payable in Fiscal Year 2001 and Fiscal Year 2002, the School District did not issue tax and revenue anticipation notes for those fiscal years. The School District issued two series of Tax and Revenue Anticipation Notes (Series A of 2003-2004 ("Series A Notes") and Series B of 2003-2004 ("Series B Notes")) in Fiscal Year 2004 in private placements, consisting of lines of credit, with a consortium of five banks. The Series A Notes totaled $325 million in principal amount and were issued to address the School District's cyclical cash flow needs. Due to the lengthy state budget impasse, the Series B Notes in the principal amount of $250 million were authorized by the School District and the School District issued $150 million of that Series. When education appropriations were released, the Series B Notes were retired. All of the Series A Notes have been repaid. A-24 Temporary Borrowing The School District does not presently intend to issue additional tax and revenue antkipation notes during Fiscal Year 2005. However, the School District has the right to issue additional tax and revenue anticipation notes during Fiscal Year 2005 up to a statutory limit not to exceed 85% of the sum of taxes levied for Fiscal Year 2005 and current revenues for such fiscal y,!ar to be received by the School District during the period when the Notes shall be outstanding and which are pledged for payment of the Notes, as estimated and certified by the Chief Financial Officer of the School District in accordance wilththe Act. In the Resolution, the School District has covenanted that it will not issue additional tax and revenue anticipation notes in an aggregate principal amount in excess of$25,000,000. THE SCHOOL DISTRICT OF PHILADELPHIA TAX AND REVENUE ANTICIPATION NOTES ISSUED IN ANTICIPATION OF TAXES AND OTHER REVENUES FISCAL YEARS 1999, 2000, 2003-2005 (Dollar Amounts in Millions) Estimated Actual lQQQ (a) Total Authorized to be Borrowed $235.0 Maximum amount outstanding at any time during fiscal year 235.0 Amount outstanding at fiscal year end 0.0 Maximum amount outstanding as a percentage of Total Operating Budget revenU1es 16.1% (a) (b) 2003 $240.0 $175.0 $575.0 $400.0 240.0 175.0 475.0 400.0 0.0 0.0 0.0 0.0 16.2% 10.2% 26.5% 21.8% Due to advances by the Commonwealth of portions of installments of basic education subsidies payable i11Fiscal Year 2001 and Fiscal Year 2002, the School District did no1 issue tax and revenue anticipation notes for those fiscal years. In Fis,;al Year 2004 the School District issued two series of notes due to the Commonwealth budget imp:isse which lasted into December 2003. General Obligation Debt FixecLR.ate. The School District has covenanted to make daily deposits of local tax revenues collected on behalf of the School District by the Department of Revenue of tht: City to each sinking fund established for each of its outstanding fixed rate gen,eral obligation bond issues. See "SECURITYFOR THEBONDS"in the forepart of this Official Statement. Varii!l:lleRate. The School District has determim:d to issue certain of the debt to be incurred for the cost of its Capital Improvement Program (hereinafter defined) as variable rate debt. To that end, the School District issued its $109,000,000 General Obligation Bond, Series A of 2003 ("2003A Bond") on August 12, 2003 and is1med its $100,000,000 General Obligation Bond, Series A of 2004-("2004A Bond") on June 29, 2004 to the Dauphin Count:, General Authority ("Dauphir1 County Authority") to evidence loans from certain pools of the Dauphin County General Authority in the amount of $109,000,000 and $100,000,000 respectively. The 2003A Bond and the 2004A Bond bear interest at variable rates, payabk monthly. In the loan agreements with the Dauphin County Authority, the School District has covenanted to make deposits into a sinking fund 1~stablishedfor the 2003A Bond and 2004A Bond on the fifteenth day prior to each interest payment date (the first business day of each month) in amounts sufficient to pay the interest becoming due on such interest payment date. In the years when p:rincipal is due on the 2003A Bond and 2004A Bond, the School District will deposit in the sinking fund onetwelfth of the principal due iJtlthat year each month on the date it deposits the interest payment. A-25 The School District has issued certain of its debt incurred for the cost of refunding certain of its general obligation bonds as variable rate debt. The School District issued its $652,600,000 General Obligation Refunding Bonds, Series B of 2004 ("Series B Bonds") and its $38,475,000 General Obligation Refunding Bonds, Series C of 2004 ("Series C Bonds") on June 29, 2004. The Series B Bonds and the Series C Bonds are auction rate securities. The School District has covenanted to make monthly sinking fund deposits into sinking funds established for the Series B Bonds and the Series C Bonds in amounts so that funds will be on deposit with the fiscal agent equal to the estimated interest to become due on the Series B Bonds and the Series C Bonds on the next interest payment dates for such Series B Bonds and Series C Bonds through the last day of the next succeeding calendar month. The School District will also make monthly deposits to each sinking fund equal to onetwelfth of the next succeeding principal payment or mandatory sinking fund payment on the Series B Bonds and the Series C Bonds. The sinking funds established for the 2003A Bond, the 2004A Bond, the Series B Bonds and the Series C Bonds do not receive daily deposits of local tax revenues. Qualified Zone Academy Bonds. Qualified Zone Academy funds ("QZABs") are general obligation bonds which bear no interest. The Commonwealth receives an allocation each year of the amount of QZABs permitted to be issued within the Commonwealth which it grants to school districts pursuant to an application process. QZABs may be purchased only by qualified financial institutions and provide the qualified purchaser with a federal tax credit under the Internal Revenue Code of 1986, as amended. The School District issued $22,985,000 ofQZAB general obligation bonds of which $22,975,000 are currently outstanding. The School District received a 2002 allocation from the Commonwealth of $6,066,700 and a 2003 allocation of $13,269,000 to rehabilitate and convert two middle schools to high schools. The School District anticipates issuing $19,335,700 in principal amount of general obligation bonds as QZABs in August 2004. The School District intends to continue to participate in the QZAB program if the program is reenacted by the Federal government. Lease Rental Debt The School District has financed a significant portion of its Capital Improvement Program through the incurrence of lease rental debt under the Debt Act. In August 2003, the School District incurred $588,140,000 of lease rental debt through bonds issued by the Pennsylvania State Public School Building Authority ("SPSBA Bonds"). The Sublease securing payment of these bonds is an instrument evidencing such lease rental debt. The School District entered into an Intercept Agreement with the State Treasurer in order to provide for the payment of Base Rental Payments due under the Sublease on or prior to each Base Rental Payment Date, which is the fifteenth day of the calendar month immediately preceding each debt service payment date for the SPSBA Bonds, directly from State appropriations due to the School District. The School District will determine whether to enter into a similar agreement with respect to future leases. Interest Rate Management Plan General. The School District is authorized, under amendments to the Debt Act enacted in September 2003, to enter into "qualified interest rate management agreements", defined in the Debt Act to be agreements determined in the judgment of the School District to be designed to manage interest rate risk or interest cost of the School District on any debt which the School District is authorized to incur under the Debt Act. Such qualified interest rate management agreements may include swaps, interest rate caps, collars, corridors, ceiling and floor agreements, forward agreements, float agreements and other similar arrangements. The Debt Act requires that, prior to entering into a qualified interest rate management agreement, the School District must adopt a written interest rate management plan ("Plan") prepared or reviewed by an independent financial advisor, which includes: (i) schedules of all outstanding debt of the School District and all outstanding qualified interest rate management agreements, including outstanding debt service and estimated and maximum periodic scheduled payments of all outstanding qualified interest rate management agreements; (ii) a schedule of all consulting, advisory, brokerage or similar fees paid or payable by the School District in connection with the qualified interest rate management agreements and of all such fees and finder's fees, if any, paid or payable by any other party in connection with qualified interest rate management agreements; (iii) analyses of the interest rate risk basis risk, termination risk, credit risk, market-access risk A-26 and other risks of entering into such agreements and of the net payments due for all debt outstanding and for all qualified interest rate management agn:ements; and (iv) the School District's plan to monitor interest rate risk, basis risk, termination risk, credit risk, market-access risk and other risks. Monitoring requires valuation of the market or termination value of all outstanding qualified interest rate management agreements. The P~o. The School District adopted its Plan pursuant to a resolution of the School Reform Commission adopted February 4, 2004, and supple:mented the Plan on March 24, 2004 and on May 26, 2004. Th,: Plan, as supplemented, was prepared by Public Financial Management Inc., the School District's independent financial ~.dvisor within the meaning of the Debt Act ("·Independent Financial Advisor"). The Plan states that derivatives are appropriate interest rate management tools that can assist the School District in managing its interest rate risk or interest cost. Properly used, these instruments can increase the School District's financial flexibility, provide opportunities for interest rate saving;s or enhanced investment yields, and help the School District manage its balance sheet through better matching of assets and liabilities. Swaps may not be used for speculative purposes. The Plan provides that the School District will only utilize derivatives if it is determined that the proposed transaction will be designed to manage interest rate risk or cost to the School District on any debt that the School District is authorized to incur and: 1. 2. Optimize c:apital structure, including schedule of debt service payments md/or fixed vs. variable rate allocations; or Achieve appropriate asset/liability match; or 3,. Reduce risk, including: • Interest :raterisk, or • Tax risk, or • Liiquidi~yrenewal risk. 4. Provide gn!ater financial flexibility; or 5. Generate interest rate savings; or 6. Enhance investment yields; or 7. Manage exposure to changing markets in advance of anticipated bond issuances (through the use of anticipatory hedging instruments). The Plan further provides that the School District will seek to maximize the benefits and minimize the risks of derivative instruments by actively managing its derivative program. This will entail frequent monitoring of market conditions, by both the School District and its Independent Financial Advisor for emergent opportunities and risks related to existing qualified interest rate management agreements,. Active management shall include l. 2. 3. 4. Early termination; Shortening or lengthening the term; Sale or purchase of options; or Use of bas.is swaps. The Plan requires reports of monitoring, including valuation of all outstanding qua1ified interest rate management agreements, at least quarterly, to be delivered by the Chief Financial Officer to the School Rt:form Commission. The reports must including the following: 1. 2. J. A description of all outstanding qualified interest rate management agreements, including bond series, cype of derivative, rates paid and recdved by the School District, total notional amount, forward start dates, average life of each swap agreement, remaining term of each derivative, and option terms. Description of all material changes to qualified interest rate management agreements or new qualified interest rate management agreements entered into by the School District since the last report. Market value, including tennination exposure of each of the School District's qualified interest rat,e management agreements. A-27 4. 5. 6. 7. 8. 9. The credit rating of each counterparty and credit enhancer, if any, insuring qualified interest rate management agreement payments. Information concerning any default by a counterparty, including but not limited to the financing impact, if any, to the School District. If applicable, information concerning any default by the School District to any counterparty. Summary of qualified interest rate management agreements that were terminated or that have expired and the financial impact therefrom. For a qualified interest rate management agreement entered into to generate debt service savings, calculation on an annual basis of the actual debt service requirements compared to the projected debt service on the swap transaction at the original time of execution. The calculation shall include a determination of the cumulative actual savings ( or, if applicable, additional payments made by the School District) compared to the projected or expected savings at the time the swap was executed. The status of any collateral related to any swap transaction including type and amount of collateral, market value of that collateral and the identity of the custodian. Prior Qualified Interest Rate Management Agreements. The School District entered into certain qualified interest rate management agreements ("Prior Agreements") dated as of March 9, 2004, and executed and delivered on March 25, 2004, that consisted of forward starting, fixed payer/floating receiver swaptions (option exercisable by the counterparty) with three counterparties (each having at least one rating of AA or higher from S&P or Aa or higher from Moody's) structured to provide up-front savings in the form of non-refundable payments from certain counterparties in order to achieve a synthetic advance refunding of certain identified bond obligations (the "Identified Bonds") of the School District. Simultaneously with the issuance of its General Obligation Refunding Bonds, Series B of 2004 ("Series B Bonds") on June 29, 2004, the School District cash settled and terminated the Prior Agreements. New Qualified Interest Rate Management Agreements. Simultaneously with the issuance of the School District's Series B Bonds and its General Obligation Refunding Bonds, Series C of 2004 ("Series C Bonds", and together with the Series B Bonds, the "Bonds"), the School District executed certain qualified interest rate management agreements (the "TE Advance Refunding Agreements") with the same Counterparties which were parties to the Prior Agreements, together and in connection with the issuance of the Series B Bonds in connection with the advance refunding, for savings, of the Identified Bonds. The TE Advance Refunding Agreements were executed on a "spot" starting (i.e. not forward starting) basis with variable rate receiver payments based upon a percentage of one-month LIBOR (a tax-exempt proxy). The TE Advance Refunding Agreements are structured so that the savings from the transactions will be received in the Fiscal Years 2004 through 2012 with the remaining years of the transactions expected to produce debt service that is equal to or less than the debt service on the Identified Bonds that are advance refunded. The aggregate notional amounts of the TE Advance Refunding Agreements are equal to the aggregate principal amount of the Series B Bonds. In addition to the TE Advance Refunding Agreements, the School District, on the date of issuance of the Bonds, entered into another qualified interest rate management agreement (the "Taxable Advance Refunding Agreement"), with a counterparty (having at least one rating of AA or higher from S & P or Aa or higher from Moody's), together and in connection with the issuance of the Series C Bonds in order to accelerate the receipt of the savings derived from the TE Advance Refunding Agreements. The Taxable Advance Refunding Agreement was executed on a "spot" starting (i.e. not forwarding starting) basis with variable rate receiver payments based initially upon one-month LIBOR and commencing on December 1, 2005 upon a percentage of one-month LIBOR. The Series C Bonds refunded all or a portion of certain maturities of general obligation bond issues ( other than the Identified Bonds) consisting of the Series A of 1995, the Series A of 1997, the Series B of 1999 and the Series D of 1999 Bonds. The debt service associated with the Taxable Advance Refunding Agreements and the Series C Bonds will occur in the time periods where savings have been generated by the TE Advance Refunding Agreements and the Series B Bonds, which will be in all or some of Fiscal Years 2006 through 2012, and will "bring forward" the savings generated by the TE Advance Refunding Agreements and Series B Bonds into Fiscal Years 2004 through 2006. The notional amount of the Taxable Advance Refunding Agreement is equal to the aggregate principal amount of the Series C Bonds. Security for Qualified Interest Rate Management Agreements. Pursuant to the Debt Act, periodic scheduled payments due from the School District under a qualified interest rate management agreement are payable on a parity with debt service on the bonds related to the applicable qualified interest rate management agreement, and the School District (i) has covenanted to budget, appropriate and pay such periodic scheduled payments from its general revenues, and (ii) has A-28 pledged its foll faith, credit and taxing power (within the limits prescribed by law) to secure such payments. Termination payments are subject and subordinate to periodic scheduled payments and are not secured by the foregoing pledge. The School District has purchased swap insurance insuring periodic scheduled payments, but not termination payments for the, TE Advance Refunding Agreements and the Taxable Advance Refunding Agreements. Under the Debt Act, if a school district fails to provide for the payment of periodic scheduled payments under a qualified interest rate management agreement, the Secretary of Education shall notify the D~partment of Community and Economic Development and if the Secretary of Education finds that the amount due and payable by the school district has not been paid, the Secretary of Education shall withhold out of any state appropriation due the school district an amount equal to the amount due pursuant to the qualified interest rate management agreement and shall pay over the same so withheld to thf: party to the qualified interest rate management agreement to whom the amount is due. This provision of the Debt Act is applicable with respect to periodic scheduled payments due from the School District under its qualified interest rate managem,mt agreements,. SCHOOL DISTRICT FlNANCIAL PROCEDURES Budgetary Prncess The Home Rule Charter requires that the School District adopt an operating hue.get and a capital budget and capital improvement program in each Fiscal Year. The capital budget is prepared as part of 2 six-year capital improvement program, of which the first year is the budget year. All proposed expenditures included in the Capital Improvement Program requir,~ the School Reform Commission's authorization on a project by project basis. The School District has received the Government Finance Officers Association (" GFOA") Award for Distinguished Budget Presentation for its budget presentations for Fiscal Years 1985 through 1989 and Fiscal Years 1991 through l998, the last year the School! District appli1:d for the award. In order to receive this award, a governmental unit must publish a budget document that meets program criteria as a policy document, as an operations guide, as a financial plan and as a communications medium. This award is the highest form of r,ecognition in governmental budgeting. ~m:ing Budget. The operating budget is comprised of the General Fund, the Intermediate Unit Fund and the, Debt Service Fund. See "CERTAil'I FINANCIALINFORMATION OF TIIB SCHOOLDISTRICT--Operating Budget Revenues, Expenditures and Changes in Fund Balances," below. In accordance with Governing Body policy, the process of developing the operating budget begins in early October with the Superintendent or Chief Executive Officer, as applicable,. providing a status report to the Governing Body on the budget for the current Fiscal Year and multi-year projections before, consideration is given to any changes in the current education program. See "CERTAIN FThANCIALINFORMATION OF TIIE SCHOOLDIS1RICT-0perating Budget Revenues, Expenditures and Changes in Fund Balances" below. In November., program managers receive budget preparation materials and within the framework of the policies and guidelines developed by the Goveming Body and the Superintendent or Chief Executive Officer, as applicable, the program administrators develop goals, objectives and priorities that are translated into budget requests called "program and activity statements." All such statements are further dlefined by items of expenditures called "object classes." Completed budget requests, including a revised estimate of the current year's expenditures, are submitted to the Office of Management and Budget for review by the end of Dece:mber. All approved reques.ts are incorporated into the "proposed Operating Budget." Th,e process and schedule described above are based on a policy adopted by the Board prior to the declaration of distress and is subject to modification by the School Reform Commission. In February, in consultation with the Governing Body, the Superintendent or Chief Executive Officer, as applicable. provides status reports on the current Fiscal Year, the ensuing Fiscal Year and multi-year projections before and after giving consideration to any changes in the current education program. The Goveming Body then must observ,e specific timing requirements outlined in the Home Rule Charter as follows: 1. At least thirty days prior to the end of the current Fiscal Year, the budget must be adopted (no later than May 30). 2. At least thirty days prior to adoption, public hearings must be held (no later than April 30). A-29 3. At least thirty days prior to public hearings, notice must be given of hearing dates, and copies of the proposed operating budget must be made available to all interested parties (no later than March 31). Budgets for Categorical Funds, including Federal, State and private grants, the uses of which are restricted to the pursuit of the specific objectives of the legislative acts under which funding is authorized or conditions set forth by the foundation or charitable grantor, are not required to be submitted for adoption. A statement of estimated receipts and expenditures is submitted to the Mayor and the President of City Council on or before March 31. Since the School District has limited taxing power, City Council must establish the rates and subjects of local taxation for school purposes required to fund the estimated expenditures of the School District after taking into account the estimated revenues from the Commonwealth and the 16.75 mills ofreal estate tax levied by the School District pursuant to direct authorization by the General Assembly. If total estimated funds from all sources are insufficient to balance the budget, the Governing Body must reduce anticipated expenditures to a level consistent with total available funds, as mandated by the Home Rule Charter. The ensuing balanced budget becomes the adopted financial plan for the School District for the forthcoming Fiscal Year. Thereupon, budgetary appropriations for all principal administrative units by object class of expenditure are finalized. Capital Budget and Program. The development of the projects contained in the capital budget and program is the principal responsibility of the Office of Capital Planning and represents its research and analyses as well as the priorities of the Governing Body and the Superintendent or Chief Executive Officer, as applicable, and recommendations of the City Planning Commission. Due consideration is given to the balancing of physical needs and financial resources which may become available to fund capital improvements. A capital program detailing the School District's plan for the ensuing six years, as well as a capital budget detailing the expenditure requirements of the first year of the capital program, must be adopted by the Governing Body not later than the date of the adoption of the annual operating budget and follows the same procedures related to public hearings, as mandated by the Home Rule Charter. Implementation of the capital budget is contingent upon the receipt of proceeds of debt obligations of the School District or other moneys made available for capital improvement purposes. Basis of Accounting The accounting policies of the School District conform to generally accepted accounting principles for local government units as prescribed by the Governmental Accounting Standards Board (" GASB") and the American Institute of Certified Public Accountant's audit and accounting guide, "Audits of State and Local Governments." Basis of Reporting The School District's annual financial report has been prepared following guidelines recommended by GFOA. GFOA has awarded a Certificate of Achievement for Excellence in Financial Reporting ("Certificate") to the School District for its component unit financial reports for each Fiscal Year beginning in 1984 through 2002. The School District has made application for its Fiscal Year 2003 report. In order to be awarded a Certificate, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report, the contents of which conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate is valid for a period of one year only. The School District has also received the Certificate of Excellence in Financial Reporting from the Association of School Business Officials International for its annual financial reports for each Fiscal Year from 1985 to 2002. The School District has made application for its Fiscal Year 2003 report. Although the School District issues its own annual financial report, it is considered a component unit of the City for reporting purposes only and is included in the City's Comprehensive Annual Financial Report. The determination that the School District is a component unit is based on criteria developed by the National Council on Governmental Accounting in its Statement 3, which has been adopted by GASB. A-30 Cash Management The Superintendent or Chief Executive Offfoer serves as the Treasurer of the School District. For practical administration of treasury :functions, these responsibilities are delegated to the Chief Financial Officer, whose principal subordinate for this purpose is the Director of Treasury Operations. All moneys of the School District are held separate and apart from the funds of any other entity, including the City. The Director of Treasury Operations accounts for all moneys received and disburned by the School District and develops twelve-month cash flow forecasts (updated monthly) based on historical and projected receipts and expenditure data. These forecasts form the basis for cash management activities during the year, including the forms and sources of funding temporary cash de,ficiencies and negotiating the best forms of investment of idl,! moneys consistent with legal limitations. To facilitate cash management activities and related borrowing/investment programs, the School District has established a pooled cash account, as described below. Pursuant to the School Code and resolutions of the Governing Body ("Investment Resolution"), all School District funds, except sinking funds, shall be invested in United States Treasury bills, short-term obligations of the United States Government or its agencies or instrumentalities, obligations of the United States GJvernment or its agencies or instrumentalities backed by the full faith and credit of the United States of America, certain approved school and local government investment pools and savings accounts and time deposits of financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC") which are collateralized in amounts in excess of FDIC insurance in accordanc:e with state law. Neither the School Code nor the Investment Resolution permit the School District to use reverse repurchase agreements or other means to le,verage its investment portfolio, nor do they authorize the School District to invest in derivative products. The requir1!ments for investment in United States government securities (including collateralizf:d repurchase ~1greements for the same) contained in the Investment Resolution conform to the Guidelines for Municipal Investment in U.S. Government Securities issued by the! Office of the Auditor General of the Commonwealth. Investment of the School District's siinking funds is governed by the Debt Act and the resolutions pursuant to which the School District's bonds are issued. In 1994, the School District engaged in a comprehensive review of its cash managf:ment and short-term investment procedures to improve the School District's working capital management and its procurement of banking services, and to expand investment options. Since that time, the School District has periodically engagec in supplemental reviews. TI1e Investment Resolution, adopted by the Board in September 1994, amended in December 1995, and most recently amended by the Commission in April 2004 reflects an investment policy based on the recommendations of the initial and supplcmentail reviews and amendments to the investment provisions of the School Code. The School District intends 11:o continue the review process and make formal adjustments to these policies as the Governing Body deems appropriate. Pool,ed Cash Account. The School District maintains a Pooled Cash Account to facilitate cash management, coordinated borrowing, investment and accounting. All funds that can be legally and practically combined are included in the Pooled Cash Account.. Proc:eeds of general obligation bonds issued for capital improvements and interest earnings thereon are ,foposited in the Capital Projects Fund, which is not included in the Pooled Cash Account. The basic criteria to properly effoc:t the pooling of cash are (a) participating member funds' equities are adequately identified and secured and (b) a clear transactional audit trail is provided. Distribution of interest earnings is recorded to the credit of the participating member fund:; on a selective basis. Receipts from member funds increase their equity in the account and disbursements on behalf of m1!rnber funds reduce their equity. Temporary deficit balances of member fund, may exist on occasion, but are permitted only if there is. a reasonable assurance that at least an equal amount will be forthcoming shortly from the member's sources of revenue to liquidate the deficit balance. Financial Control Procedures The Governing Body is required to adopt an annual Operating Budget by prin,;ipal administrative unit and by object class. of expenditure. For financial control, allocations are made from each principal administrative unit, e.g. Business and Financial Servicf:s, to programs which represent a specific function, e.g. Chief Financial Officer or Information Technology, and then to activities which represent subfunctions, e.g. Accounting, Payroll, etc. These allocations are posted to an automated accounting system, which for selected transactions mechanically compares encumbrance or expenditure documents to available funds and rejects those in excess of ~.vailable funding. Status repmts of budgetary transactions are available online to each a,;tivity and program manager. A-31 The Office of Budget and Management must review the allotment of personnel and verify the availability of funding. In addition, the Governing Body must approve all personnel appointments and purchases of materials, supplies, books and equipment in excess of $10,000. The Public School Code requires all individual contracts in excess of $100 to receive Governing Body approval; however, the Governing Body has delegated limited contracting authority up to $25,000 per activity to principals, area academic officers and certain cabinet level positions. The contracts are limited to professional services or the use of facilities and associated costs in support of the instructional program. An Oversight Committee empowered by the Governing Body comprised of central administrators meets weekly to review these limited contracts and reports quarterly to the Governing Body. The Director of Audit Services, the Chief Financial Officer's designee to perform the pre-audit function, reviews payment vouchers for propriety before checks are issued. Tax Collection Pursuant to the School Code and the Home Rule Charter, all School District local taxes are collected by the City's Department of Revenue, subject to the same collection procedures applicable to City taxes. Such collected School District taxes are wire-transferred, on the business day collected by the City, first, to the sinking funds established for each series of fixed rate general obligation bonds issued by the School District to fund deposits then required, then to other School District-designated bank accounts. School District local taxes collected by the Department of Revenue, even when held overnight by the City, are at all times the property of the School District. The School Code requires that the Department of Revenue pay all school taxes when and as collected to or upon the order of the School District and that a duplicate receipt for such taxes be filed with the City Controller, as School Auditor. Section 696 of the School Code expressly provides that during a period of distress all taxes collected on behalf of the School District shall continue to be promptly paid to the Governing Body. The School Code further requires that the Department of Revenue report monthly to the Governing Body and the City Controller the amount of school taxes collected during the month. A Standard Accounting Procedure of the City adopted in 1961 and effective since that date requires that such information be furnished to the School District daily. School Auditor The Home Rule Charter requires that the Governing Body appoint the City Controller as School Auditor to conduct an annual post-audit of the finances of the School District and of all persons handling the funds of the School District. The Home Rule Charter also permits the Governing Body, in its discretion, to appoint a firm of certified public accountants to conduct an independent audit of the finances of the School District and to review the audit reports of the School Auditor. The City Controller has not participated in the preparation of this Official Statement nor in the preparation of the budget estimates and projections of the School District set forth herein, nor has the City Controller reported on any financial statements of the School District included herein, except as noted below. Consequently, the City Controller expresses no opinion on any of the data contained in this Official Statement relating to the School District other than the financial statements for the fiscal year ended June 30, 2003 included as Appendix B. Charter Schools The General Assembly enacted legislation, Act No. 1997-22 ("Charter School Law"), on June 19, 1997 to amend the School Code to provide for the establishment of charter schools. Charter schools are independently operated schools that are funded with public tax dollars. Monthly payments for each student enrolled in an approved charter school are made by the school district of the student's residence based on a formula determined by the Commonwealth. Since July 1997, approximately 160 applications have been submitted to the School District for charter status. Of that total, 48 charters currently were in operation during the 2003-2004 school year. During a period of distress for a first class school district, as determined by the Secretary of Education, the provisions of the Charter School Law relating to the A-32 establishment of charter schools are not applicable. See "fHE SCHOOL DISTRICTOF PHILADELPHIA-School Reform Commission." In the spring of 2003, the School Reform Commission approved four new charter schools to begin accepting students for th1! 2003-2004 s1;hool year, two of which have subsequently deferred accepting students until the 2004-2005 school year. Three charters were provisionally approved for 2004-2005 opening. Another applicant, who had deferred from the previou.s year, also opened in September, 2003. Two charter schools were recommer.ded for non-renewal. One of these charter schools withdrew its renewal application while the other went through the hearing process, and was ultimately renewed bringing the total to 48 currently operating charters. On March 17, 2004, of tht: two deferrals and three provisional applications, two of the provisional charters were denied, one of the deferrals denied. It is expected that the two remaining charters will open in September, 2004, along with three new charte:rs that were also approved in March. Tht:re is also one currently operating cb.arter that was recommended for non-renewal. That case is pending. It is expected that 53 charter schools will be operating in September, 2004. The following table shows the year and number of new charter school openings: School Year 1997-98 1998-99 1999-00 2000-01 * Expected Number of Charters 4 9 12 9 School Year 2001-02 2002-03 2003-04 2004-05 Number of Charters 5 6 3 5* to open The projected student enrollment for the 53 charters for the 2004-2005 school year is approximately 25,075. The School Distric:t estimates that its payments for all charter schools for the 2004-2005 school year will be approximately $177.8 millio111.The additional costs for transportation for the 2004-2005 school year are estimated at approximately $10.0 million. In addition to the City charter schools, an area suburban charter school has enrolled approximately 275 City students and a cyber charter school reports that approximately 475 City resident students are enrolled. Currently, the Commonweallth deducts per pupil payments from the School District's basic education subsidy for the students enrolled in the cyber charter school. These costs are included in the $177.8 million amount referred to above. See "LEGAL PROCEEDINGS - Charter School Litigation," below. Pension Plan School districts in the Commonwealth participate in the Commonwealth of Pennsylvania Public School Employees Rt:tirement Syste:m (" P'SERS"), a State-administered pension program. Under this program, contributions are made by each of three parties - participating employees, local educational entities (school districts, Intermediate Units and Area Vocati01rnl Technical Boards) and the Commonwealth. All of the School District's full-time employees, part-time employees salaried over eighty days and hourly employees working more than five hundred hours per year participate in the program. Each party to the program contributes a fixed percentage of an employee's gross earnings. The employees•· rate is 5.25 p1!rcent for employees, hired prior to July 23, 1983, and 6.25 percent for employees hired subsequent to that date. Act 9 of 2001 established a new employee contribution rate of 7.50 percent effective January l, 2002, for employees. electing to pai1icipate in the new membership class. The Commonwealth pays to the School District 50% of the retirement cost for employees hired prior to July 1., 1994 and a p1!rcentage equal to the greater of 50 percent or the School District's market value/personal income ratio for employees hired after June 30, 1994. For Fiscal Year 2005, the School District's market vabe/personal income aid ratio is 69.97 percent. The total employer rate for Fiscal Year 2005 is 4.23 percent. A-33 The School District has no responsibility or authority for the operation and administration of the fund nor has it any related liability except for the annual contribution requirements, which include payments for current normal costs plus amortization of the PSERS unfunded liability. Consulting and Educational Service Contracts In July, 2002, the School Reform Commission entered into contracts with seven non-profit and for-profit organizations (collectively, the "Educational Management Organizations" or "EMOs") to provide educational management services for 45 of the School District's lowest-performing schools. Two of the EMOs are universities located in the City. The contracts with the five non-university EMOs expire on June 30, 2007; the contracts with the two university EMOs expire on June 30, 2005. Effective June 30, 2003, the School District terminated for convenience the contract with one of the non-university EMOs. The Operating Budget includes the costs for purchase of services attributable to the EMO contracts. As with all of its contracts with outside providers, these contracts contain provisions which will enable the School District to comply with its covenants in its debt instruments, including the Resolution, to maintain the exclusion of interest on its obligations, including the Notes, from the gross income of the holders thereof for federal income tax purposes. Another 25 of the lowest performing schools were provided with other reform interventions. Management models for the 70 schools include private educational management, conversion to charter schools, and reconstitution of schools. Sixteen (16) additional schools will continue to receive supplemental funds. Network of Partnerships. On August 11, 2003, the School District announced special partnerships with six universities, The Franklin Institute, a nationally renowned science museum, and a private educational organization to provide a range of services to approximately 8,400 students. The university partners include Arcadia University, Drexel University, Eastern University, Holy Family College, Lock Haven University, the Pennsylvania State System for Higher Education, St. Joseph's University and the University of the Sciences in Philadelphia. The partners are making in-kind contributions in the form of student teachers, professional development, academic coaches and technology support. The 2005 Operating l3udget includes $2.3 million for costs associated with this program. If additional federal and state grants become available, this program will be expanded accordingly. The School District continues to negotiate with other universities, colleges and other entities to expand this program. Funding for those additional partnerships will be internally financed or funded from additional federal or state grants. SOURCES OF SCHOOL DISTRICT REVENUE School District Operating Budget revenue is derived primarily from two sources: Commonwealth subsidies, which in the Fiscal Year 2005 budget approximate 58.9 percent of School District budgeted revenue; and local sources, which in the Fiscal Year 2005 budget represent approximately 41.1 percent of School District budgeted revenue. Commonwealth Subsidies The General Assembly is required by the Constitution of the Commonwealth to provide for and maintain a system of public education, and for that purpose makes subsidy payments to Pennsylvania school districts. Commonwealth education appropriations have been constitutionally mandated since 1874, but are subject to legislative changes in amounts and funding formulae and to annual appropriation. Commonwealth education subsidies are included in the Commonwealth operating budget each year. Total subsidies to the School District have increased in each fiscal year from 1982 to 2004. The largest component of Commonwealth subsidies is the basic education funding allocation, which the School District can use for any costs attendant to the operation of the public school system. The basic education funding allocation formula for Fiscal Year 2004 includes the prior year's base entitlement, a supplement based on a school district's aid ratio and its average daily membership, a poverty supplement and a growth supplement. School districts must meet certain criteria to qualify for the supplements. Since a Commonwealth budget including the basic education subsidy was not enacted prior the School District's adoption of its budget in May of 2003, the School District based its operating budget in that year on the same level of funding it received in 2003. The A-34 Commonwealth budget impasse lasted for almost six months. For Fiscal Year 2004, the School District estimates that it received $744..3 million from the basic education funding allocation which is a 2.5% increase over Fiscal Year 2003. The appropriations bill amending the Commonwealth's budget, when enacted in late December 2003, overall provided an additional $51 million for the School District. For Fiscal Year 2005, the School District has adopted an operating budget based upon tht: Governor's proposed budget which includes basic education funding of $761.6 million. The Governor's budget also inc:ludes an increase over 2004 funding for special education of $2.7 million; partial charter school reimbursements projected to be $29.9 million; and catego:rical funding for Fiscal Year 2005 in the form of"Accountability Grants." Thes1!grants are estimated to provide between $35 to $50 million in additional revenues for educational initiatives such as reduced class size, full day kindergarten and extended day programs. On July 5, 2004, the Commonwealth's budget for Fiscal Year 2005 was enacted. The Commonwealth budget provides for a net increase which is projected to result in $30. 9 million for the School District over those revenues described in the above paragraph. Pursuant to federal law, school districts are required to pay the full employer's share of social security taxes directly to the Federal government. The Commonwealth reimburses school districts, on a monthly basis, for a portion of such employer's share. With respect to contributions to the Public School Employee Retirement System ("PSERS"), effective July 1, 1995, school entities are required to pay 100% of the employer's share of such contributions to PSERS. The Commonw1!alth makes quarterly payments to school districts to reimburse school districts for their respective share of retirement contributions. Prior to July 1, 1995, the Commonwealth paid 50% of the employer's share of retirement contributions directly to PSERS. S,ee "SCHOOLDISTRICTCl>ERATIONS----Pension Plan" below. The School District also receives from the Commonwealth a subsidy for a portion of the debt service on the School District's lease rental and general obligation debt related to eligible capital projects. The Commonwealth also subsidizes the l[U for programs for special education, special education transportation, non-public school services and related management servic,es. Advance funding for special education transportation i!: partially reimbursed to the Commonwealth in the subsequent fiscal year. The School District annually reports total subsidy revenues net of this reimbursement in order to reflect the net resources actual!ly provided by the Commonwealth to finance operations. While interest and principal payments on fixed irate general obligation bonds of the School District are made from local tax revenues deposited in tht: sinking funds under the daily deposit requirement established for the School District's fixed rate general obligation bonds., Commonwealth education subsidies due to the School District are required, pursuant to Section 633 of the School Code, to be paid directly to the sinking fund depository for general obligation bonds or the bond trustee for lea1s1!rental debt to meet principal and interes.t payments on general obligation bonds or lease rental debt if the School Distrkt fails to pay or provide for the payment of such principal and interest. [THIS SPACE INTENTIONALLY LEFT BLANK] A-35 THE SCHOOL DISTRICT OF PHILADELPHIA COVERAGE RATIOS OF NET CASH RECEIVED FROM COMMONWEALTH SUBSIDIES TO DEBT SERVICE PAYMENTS Fiscal Years 2001-2005 (Dollar Amounts in Thousands) ACTUAL ESTIMATED (a) FY02 FYOl FY03 FY04 FY05 $ 1,051,752 $ 1,054,015 $ $ Net Commonwealth $ 882,401 (b) Subsidies $ 896,198 (b) $ 984,684 (b} (c} Long Tenn Debt Service (including State Public Building Authority) $ 75,570 $ 87,150 $ 105,146 10.28 9.36 75,570 $ 87,150 $ 283,825 11.68 10.28 3.47 11.68 Ratios 176,928 5.94 157,130 6.71 Long Tenn and Short Tenn Debt Service (d) $ Ratios Temporary notes (a) (b) ( c) (d) ( e) $ (e) $ (e) $ 178,679 $ 655,428 $ 1.60 $ 478,500 515,520 2.04 $ 358,390 Derived from amended FY2004 Budget and Adopted FY2005 Budget as approved by the School Reform Commission on May 26, 2004. Net Commonwealth subsidies are the result of gross revenues available to the School District less certain payments to other educational entities. In Fiscal Year 2005 this figures represents net Commonwealth subsidies which are the result of gross revenues available to the School District less certain payments to other educational entities plus Base Rental Payments equal to the debt service on the $588.1 million Lease Rental Debt associated with the SPSBA Bonds deducted from the Commonwealth subsidies. Short-term debt service represents interest and principal payments on the School District's annual borrowing in anticipation of the receipt of taxes and other revenues. The School District did not issue short term notes in these two fiscal years. Local Tax Revenues Under the Home Rule Charter, the Governing Body is required to levy taxes, upon subjects and within limits prescribed by either the General Assembly or the City Council, sufficient to provide funds to pay operating expenses, debt service and the costs of any other service incidental to the operation of the schools. The General Assembly has authorized the School District to levy up to 16.75 mills on taxable real estate in the City without City Council approval. The Governing Body is required to submit annually to the Mayor and City Council a request for authority to levy taxes to balance the School District operating budget for the ensuing Fiscal Year. After reviewing such request, City Council has the power to alter the rates or subjects of taxation for school purposes (except for the rate of real estate tax of 16.75 mills authorized by the General Assembly); provided, however, during a period the School District is determined to be distressed, the School Code requires taxes authorized to be levied by the School District on the date of the declaration of distress to continue to be authorized and levied and transmitted to the School District. City Council authorized the School District to levy its taxes for Fiscal Year 2005 by an ordinance enacted May 31, 2004 and signed by the Mayor on June 10, 2004. City Council has never failed to authorize taxes for school purposes. The ordinances authorizing the levy of the real estate tax and the liquor sales tax do not require annual re-enactment and remain in effect. See "Liquor Sales Tax" below. The School District authorized the levy of these taxes by Governing Body resolution on June 16, 2004. The following is a description of taxes levied for school purposes. A-36 Real Estate Tax. The tax on real estate in Philadelphia for public school purposes for Fiscal Year 2005 is 47.90 mills. Of this total, 16.75 mills are levied directly by the School District pursuant to legislative authorization by the General Assembly without further approval of the City Council, and the remaining 31.15 mills are levied pursuant to legislative authorization and approval by ordinance of the City Council. The Board of Revision of Taxes of the City ("Board of Revision") appoints real estate assessors who annually assess all real estate located within the City. The assessors return assessments for each parcel of real estate to the Board of Revision. The Board of Revision may increase or decrease ithe property valuations contained in the returns of the assessors in order that such valuations confom1 to law. After the Board of Revision gives proper notic1! of all changes in property assessments and after it has heard all assessment appeals, it then makes assessments and certifies the results to the Department of Revenue. Assessments are certified on the first Monday in October, subject to certified revisions, and taxes are levied as of January 1. If paid by the last day of February, real estate taxes are discounted by 1%. If the ta> *THE ACCOMPANYING (d) ___ so ~ 1,222 ____ o ~ NOTES ARE AN INTEGRAL PART OF TIDS TABLE. A-42 0 ____ o ~ (20,000) ____ o ~ NOTES: (a) Based on the Fiscal Year 2004 amended Operating Budget and the Fiscal Year 2005 operating budget adopted by the School Reform Commissio,n on May 26, 2004. See "SOURCES OF ScHOOLDISTRICTREVENUE- Commonwealth Subsi,dies"and "CERTAIN FINANCIAL INFORMATION OFTHEScHOOLDISTRICT - Operating Budget Revenues, Expenditures and Changes in Fund Balanc:e-FiscalYear 2004-Amended Budget and Fiscal Year 2005 -Acopted Budget." (b) The amount of Total Taxes reflects an increase due to a transfer of 2.71 mills in real esta,e taxes from the City to the School District estimated to yield $25 million in Fiscal Year 2003; while Non-Tax Revenues reflect a decrease in the ammmt of the City grant in a corresponding amount for that year. For Fiscal Year 2005 the increase in Non-Tax Revenues of $25 million reflects the proceeds from the sale of School District properties. (c) TI1eCommonwealth agreed to postpone the recovery of lU transportation advances in these fiscal years. (d) Includes the proceeds of the School District's, Series B Bonds of 2002, of$317.0 million. (e) These expenditures include costs for transportation of charter students and administrative expenses, among other things. Dire,ctpayments to charter schools for Fiscal Year 2005 are estimated to be $177.8 million. The Commonwealth budget includes a partial reimbursement of prior year's payments. (t) Increase reflects payments for alternative education schools operated and managed by a private contractors beginning in Fiscal Year 2002. (g) "Other" expenditure,s inclULdeallocated costs, scholarships and stipends, interest on temporary borrowing and other components ofmiscc:llaneous expenses such as losses and judgments. (h) Repiresentsthe portion of the proceeds of a 1997 Tax Lien Sale that the School District allocated over six years to ensure that the budgetary effects of the tax lien sale would be neutral in subsequent fiscal years. The School District has tran:;forred and distributed the $23.4 million reserve to each fiscal year as revenue. The final allocation was in Fiscal Year 2003. In Fiscal Year 2005, this amount represents the proceeds from the sale of School District properties to be disttibuted over the next four fiscal years. (i) Includes Umeserved Undesignated Fund Balance (Deficit) in the General Fund and Resef\'ed Fund Balance in the Debt SerYic:eFund. Operatin1: Hudget Revenues, Expenditures and Changes in Fund Balances The School District reported a positive Operating Budget fund balance for the five fiscal years 1994 through 1'999. In Fiscal Years. 2000 through 2004, the School District reported Operating Budget fund balance deficits for •!ach fiscal ye,ar. On May 26, 2004, a balanced Fiscal Year 2005 Operating Budget was adopted by the School Reform Commission. Fiscal Year 2001 Budget Formulation. In April and May of 2000, after Mayor Street had appointed the members of the Board pursuant to the amendment to the Home Rule Charter, representatives of the School District and the City, including the President and Vice President of the Board and the City's Secretary of Education, initiated a series of meetings with repn:sentatives of the executive branch of the Commonwealth, including the Secretary of Education of the Commonwealth, and representatives of the General Assembly. The purpose of the meetings was to establish a cooperative relationship among the Commonwealth, the City and the School District to address the School D:isllrict's short-term and long-term financial condition and its programmatic challenges. The discussions focused in particular on finding a way to address the School District's estimated deficit for Fiscal Year 2000 as well as its future, budgetary needs. As a result of these discussions, on May 31, 2000, the Commonwealth agreed tc, the following measures: (i) the accele,rated payment by the Commonwealth of certain basic education subsidies payable in Fiscal Year 2001 for receipt in July and August, thereby eliminating both the School Distric:t's need to issue tax and revenue anticipation notes in Fiscal Year 2001 and the costs to the School District of interest payments on such notes; (ii) the postponem~nt to a future date,. of the reimbursement to the Commonwealth of IU transportation advances in Fiscal A-43 Year 2000 and Fiscal Year 2001; and (iii) the postponement of any potential collection actions by the Commonwealth with respect to an audit for alleged over-reporting of prior years' enrollment until a future date. At the same time, the City Administration indicated its intention to request City Council to provide a one-time payment of $20.0 million ("Additional Payment") in Fiscal Year 2001, and another $25.0 million in funding in addition to a $15.0 million grant for Fiscal Year 2001 which had already been approved. Furthermore, the School District identified $30.0 million in expenditure reductions to be made to its proposed Fiscal Year 2001 budget. The actions agreed to be taken by the Commonwealth, the City and the School District were designed to provide the School District sufficient cash resources to operate the public school system for a full instructional year in Fiscal Year 2001, and to meet its contractual obligations for Fiscal Year 2001, including its debt service and estimated payroll obligations. The parties also agreed that the School District would develop a multi-year financial plan to address the School District's structural financial needs. Accordingly, the School District prepared a plan which addressed expenditure and revenue trends, regulatory and labor contract requirements. The School District continues to prepare five-year financial forecasts to monitor financial progress and stability. Fiscal Year 2001. On May 31, 2000, the Board adopted an Operating Budget with total obligations and other financing uses of $1,590.2 million that was based upon the following: (1) an estimated opening fund balance deficit of $22.8 million; (2) an increase in investment earnings from the prior year of $6. 7 million, primarily attributable to the accelerated receipt of payments from the State; (3) the deferral of a $24.5 million repayment to the State ofIU transportation advances; (4) new and additional funding of $16.6 million as a result of the Empowerment Act; (5) an increase of $14.0 million in basic education State subsidies; (6) projected growth in real estate tax revenue of less than one percent; (7) grants and payments of $35.0 million from the City of Philadelphia, consisting of a $15 million grant and the one-time Additional Payment of $20.0 million referred to in the preceding paragraph; (8) the completion of the five-year Annenberg Challenge Grant, which had contributed $11.0 million in Fiscal Year 2000; (9) an increase of$13.4 million in State revenue; (10) an increase in debt service costs of$7.0 million; (11) direct payments of $78.6 million for 32 charter schools; (12) a savings of $5.8 million in interest expense since the School District did not need its annual tax and revenue anticipation note borrowing, due to accelerated receipt of State payments; (13) $18.0 million of obligations in the Grants Revenue Fund with any actual expenditures to be made contingent upon obtaining additional governmental funding or reallocating other resources; and (14) $80.2 million in unidentified revenue enhancements and expenditure reductions. Subsequent to adoption of the Fiscal Year 200 l Operating Budget, the School District entered into a collective bargaining agreement with the Philadelphia Federation of Teachers that provided for approximately $24.0 million in bonus payments to be paid to all active PFT-represented employees on or before December 3, 2000. To fund the bonus payments to the PFT-represented employees, Mayor Street committed to request City Council to approve arrangements which would have provided total additional funding of $45.0 million in Fiscal Year 2001 which would have included the $20.0 million Additional Payment, and additional funding of $25.0 million subject to a State waiver of the maintenance of local effort clause in Section 696 of the School Code. Since the State did not grant the waiver, the $45.0 million in additional funding was not received. Despite the additional costs of the PFT contract that were not offset by an increased City contribution, Fiscal Year 2001 closed with an ending fund balance deficit of $64.5 million, a net reduction of $15.7 million in the funding gap in the Adopted Budget. This improvement was primarily the result of a $22.5 million positive adjustment to the Fiscal Year 2000 ending fund balance that resulted from (1) lower than projected expenditures in employee benefit costs, primarily due to a reduction in termination and severance costs due to the end of the Commonwealth's early retirement incentives, and (2) lower than anticipated contracted services and materials and supplies expenditures and encumbrances. Fiscal Year 2002. On May 29, 2002, the School Reform Commission amended the School District's Fiscal Year 2002 budget with obligations and financing uses totaling $1,662.1 million based upon: ( 1) an opening fund balance deficit of $64.5 million; (2) increased revenues of $366.4 million attributable to (a) the proceeds of a deficit financing of $317.0 million; (b) the receipt of $45.0 million in additional grant funds from the City; (c) a net increase in local taxes of $10.6 million; (d) other miscellaneous revenue netting a $0. 7 million increase; offset by ( e) $6.9 million in reduced interest earnings since short-term notes were not required due to State subsidy advances. Expenditure changes totaling $81.3 million included: (1) reductions of $11.0 million for regional and central academic office reorganization; (2) expenditure reductions of $9.1 million in facilities, transportation, space rentals and maintenance overtime; (3) $3.4 million in reduced administrative support personnel; (4) $13.2 million in A-44 reduced charter school payments due to lower than anticipated enrollment; (5) saving~. in temporary borrowing expenses of $12.3 million offset by (2)(e) above; (6) $11.5 million in personnel savings due to increased employee turnover; (7) $9.3 million savings in utility expenses due to a warmer winter; (8) $5.3 million savings due to a reduction in the PSERS rate; (9) $10.4 million redm;tion due to lower enrollment in n:gular classes, alternative education programs and summc:r school; (10) increased Medicaid reimbursement of $4.3 million; (11) increased grant funding of $8.5 miillion for special education teachers and literacy interns; (12) $9.0 million in increased termination and medical benefits due to certain reductions in workforce announced by the School Reform Commission in March, 2002; (13) $2.8 million in increased transportation costs due to a SEPTA fare increase; (14) an increase of $4.1 million due to debt issuance costs for deficit financing; (15) $3.1 million in increased costs for settlements; and (16) all other met changes of $2.0 million. Fisc:al Year 2002 ended with a fund balance of $202.3 million, which included the $317.0 million in deficit financing proceeds, after discharging an estimated $64.5 million Fiscal Year 2001 ending negative fund balance and a $5 l.4 million Fiscal Y1:ar 2002 operating deficit. This $15.2 million improvement over the amended Operating Budget was primarily attributable to cancellation of prior year's encumbrances. Fiscal Year 2003. On May 29, 2002, the School Reform Commission adopted the School District's Fiscal Year 2003 Operating Budget with obligations and financing uses totaling $1,722.6 million based upon (1) an estimated $187.1 million fund balance; (2) increast:d revenues of $93.3 million including: (a) the Governor's proposed budget, which included new State funding of $75 million; (b) $8.7 million in increased State revenue, including a lo/oincrease in the basic education subsidy and a 1.5% increase in special education revenue; (c) $12.8 million increase in all local tax,es; (e) all other net revenue changes that equal a negative $3.2 million and a shift in local tax re:cdpts from a City grant to a 2.71 millage increase in the School District's real estate tax producing $25.0 million. Expenditures in,creased by $55.0 million induding: (1) contracted salary and benefit increases of $47.8 million; (2) $33.3 million in increased charter school payments; (3) a $14.2 millior. increase in debt service attributabl1eto the issuance of general obligation bonds; (4) $4.9 million in increased utility costs; (5) $6.0 million in increased contracted services; (6) $2.7 million in increased payments to other educational entities; and (7) $2.6 million of expenses budgeted for tax and revenue anticipation notes. These increases were offset by expenditure reductions of $23.9 million through the elimination of certain headquarter positions and other administrative positions; $15.6 million operational efficiencies; $4 ..8 million reduction in overtime costs; and $12.2 million in various misi:ellaneous reductions. The operating defidt in the adopted budget was $28.3 million, which would have produced an ending fund balanc;e of $175.3 million. Subsequent Events. The School Reform Commission, after a national search for a new Chief Executive Officer, on July 17, 2002, appointed Paul G. Vallas. In September of 2002, Mr. Vallas announced a comprehensive five-year financial plan that reprioritized School District spending, capitalizing on untapped local, state and federal resources to maximize current revenue streams. The goal of the plan is to increase academic opportunities and to lay the found21tion for an expanded school construction and renovation program. On May 30, 2003, tht: School Reform Commission amended the Fiscal Year 2003 Operating Budget with obligations and financing uses totaling $1,732.5 million. Revenues increased by $17.S million over the adopted Operating Budget based upon (1) $10.4 million in local revenue sources primarily due to increased real estate tax collections; (2) $5.0 miHion in increased alternative education funds; (3) $2.0 million in increased transportation subsidies; ( 4) $1. 7 million in all other state revenues; and ( 5) offset by a negative $1 6 million primarily due to interfund transfers caus,ed by the delay in issuing bonds. Expenditures increased by $9. 9 million primarily attributable to: ( 1) $40.2 million for the partnership schools initiative; (2) $11.2 million for new programs including the extended school day program; (3) $8.8 million for expanded alternative disciplinary schools and truancy programs a:; a part of th1: safety and security program initiatives; ( 4) $5.6 million in increased utility usage and rate increases in water, electric and oil; (5) $4.9 million net change in payments to other educational entities; and (6) $4.4 million of all othcir exp,enditure increases, offset by (1) $44.1 million in reorg.mization and restructuring savings; (2) $10.4 million in n:duced employee benefit costs due to efficiencies in workers compensation and other benefit costs; (3) a $9.3 million increase in salary savings from turnover and delayed hiring; and (4) $1.4 million in reduced debt service costs due to the delay in issuanc:e of bonds. At that time the amended budget projected a $20. 7 million operating deficit. A-45 Fiscal Year 2003 ended with a fund balance of $175.8 million after discharging a $27.7 million operating deficit. Although the Fiscal Year 2003 actual operating deficit was virtually the same when compared to the initial adopted budget, the variance of actual results from the estimates included in the amended budget were the primarily the result of the costs of medical insurance premiums. Fiscal Year 2004 -Adopted Budget. On May 30, 2003, the School Reform Commission adopted a Fiscal Year 2004 Operating Budget with obligations and financing sources of $1,829.7 million based upon: (I) a $175.8 million beginning fund balance; (2) increased revenues of $59.4 million comprised of (a) $12.2 million in revenues from local sources primarily attributable to real estate tax collections; (b) $41.8 million of state revenues based upon: (i) a net reduction of $23.4 million for IU transportation payback produced by postponement of a portion of this payment; (ii) $15.9 million in increased retirement revenues; (iii) $2.1 million in increased debt service reimbursements; (iv) miscellaneous changes of $0.4 million; and (v) $5.4 million of interfund transfers. The School District adopted its budget based upon a level of funding in basic education, equal to the amount expected to be received in Fiscal Year 2003, due to the absence of basic education subsidies in the Commonwealth's enacted budget by virtue of the Governor's line item veto. Expenditures in the School District's adopted budget were based on net increased spending of $97.2 million including: (I) $53.1 million in personnel costs, pension benefits and books and equipment to cover high school restructuring and system wide curriculum reforms; (2) increased charter school costs of $19.5 million; (3) increased debt service of $22.3 million; (4) a net change in salaries, benefits and PSERS contributions totaling $3.4 million; and (5) a reduction of $I.I million from miscellaneous changes. The operating deficit for Fiscal Year 2004 was projected at that time to be $58.4 million, which would have produced an ending fund balance of $117.4 million. The Commonwealth budget impasse was resolved late in December 2003. Due to the absence of basic education subsidy payments for the first six months of fiscal year 2004, the School District's cash flow borrowing needs increased in Fiscal Year 2004. Instead of issuing tax and revenue anticipation notes in a public offering, the School District issued its tax and revenue anticipation notes pursuant to line of credit agreements in the maximum aggregate principal amount of $575 million with a consortium of five local banks. As described below, the December 2003 amendments to the enacted Commonwealth budget provided additional educational funding that has been included in the amended Fiscal Year 2004 budget. Fiscal Year 2004 Amended Budget. On May 26, 2004, the School Reform Commission amended the Fiscal Year 2004 Operating Budget with obligations and financing sources of $1,923.4 million. The amended budget includes a $76.9 million increase in total revenues due to: (I) an increase of $9.0 million in local tax collections, offset by a $1.4 million decline in local non-taxes; (2) an increase of $18.3 million in Commonwealth revenues due primarily to increases of $17.6 million in the basic education subsidy and $3.6 million from all other Commonwealth sources, offset by a reduction of $3.0 million of debt service reimbursements due to a change in the estimated timing of receipts; and (3) net receipts from the sale of swaptions of $51.0 million. Net expenditures increased by $62.6 million due to: (I) a $19.9 million increase in salaries and benefits, primarily due to a 16.5% increase in medical insurance premiums; (2) a $21.0 million increase in expenditures related to the purchase of new District-wide literacy and math curriculum, books and materials for grades K-9, including professional development expenditures; (3) a net increase in debt service of $64.1 million comprised of (a) a $20.7 million increase in principal and interest payments, (b) the creation of a $28.3 million reserve for the swaption unwind, and ( c) $ I 5. I million in capitalized interest and issuance costs (d) offset by proceeds of $31.0 accounted for in reimbursements from other funds; (4) a $7.9 million increase in charter school payments and transportation costs due to increased regular and special education enrollment; ( 5) an increase in utility costs of $1.9 million; and ( 6) various expenditure changes totaling $7.0 million relating to safety initiatives, truancy prevention, the expansion of music, art and theater programs, a reduction of eighth grade class size, increased specialized services and vision screening offset by (7) $28.2 million in undistributed expenditure reductions. Based on the amended budget, the School District's Fiscal Year 2004 operating deficit is projected to decrease from $58.4 million as originally adopted to $44.1 million, a decrease of$13.3 million. The ending fund balance for Fiscal Year 2004 is projected to be $131.7 million. Fiscal Year 2005 Adopted Budget. On May 26, 2004, the School Reform Commission adopted a balanced Fiscal Year 2005 Operating Budget with revenues and financing sources of $1,867.7 million. This budget is based upon the Governor's proposed budget and estimated local tax revenues equal to prior year local tax revenues. The overall increase in revenues of$20.0 million is due to: (I) an increase of$12.5 million in collections of current real estate taxes and $4.9 million in delinquent real estate taxes; (2) $25.0 million from the sale of School District A-46 administrative buildings fully recorded for accounting purposes in Fiscal Year 2005; (3) a $3.4 million increase from all non-tax r,!venues; (4) an increase of $17.3 million in basic education subsidies; ( 5) a $3 .4 million increase in special education subsidies; ( 6) an increase in debt service reimbursements of $5. 7 millicn; (7) an increase of $2.6 million in retirement payments; and (8) an increase of $1.4 million in charter reimbursements, offset by (9) the end of deferrals of the IU transportation payback of $31.0 million, and (10) a $24.5 million deforral of swaption revenue. Expenditur,es decreased by $75.7 million to a total of $1,867.7 million due to: (1) a $34.0 million increase in personnel costs due to the full-·year impact of contractual salary increases and tenure-based step increases; (2) a $10.5 million increase in employee benefits due to increased medical insurance premiums and an increase in employer share of retirement contributions, offset by (3) a $53.5 million decrease in opemting expenditures due to a shift of expenditures to the new state education reform "Accountability Grant" including initiatives to reduce class sizes in middle grades and expand art, music and theater programs initiatives; (4) a $25.5 million increase in payments to charter schools due to newly-approved schools and additional enrollment at existing schools; (5) a $14.8 million increase in contracted services for alternative disciplinary schools, increasing capacity from 2,800 to over 3,500 students along with increases in payments to other educational institutions; (6) a $3.7 million increase in temporary borrowing costs due to anticipated increasc:s in short-term interest rates; (7) a $33. 7 million decrease in debt servic:e costs due to debt restructuring; (8) a decrease of $30.4 million in school area expenditures due to a projected enrollment decline of 5,800; (9) a decrease of $23.8 million in central purchases of new curriculum materials after initial starlt-up costs in Fiscal Year 2004; (10) a $13.8 million decrease in administrative budgets; (11) a $5.0 million decrease in start-up costs for high school reforms; (12) a reduction of ,:xpenditures totaling $4.7 million for utilities, building e:ngineers, custodians and school police for City-sponsored programs operating in school buildings after school hours; and (13) a decrease of $3.6 million achieved by returning certified administrators to the schools. TIile adopted Escal Year 2005 Operating Budget is in balance and projects a fund balance of the $131. 7 million, representing the: remaining proceeds of the 2002 deficit bonds which are to be utilized over the life of the five·-year financial plan. The School Reform Commission has determined that it will reserve $20.0 million to be received from the salt: of School District administrative properties in Fiscal Year 2005 to be distributed over the next four fiscal years of the School District's financial plan. Subsequent Event. The School District's Fiscal Year 2004 budget was based upon a postponement of the IU transportation payba,ck of approximately $25.0 million. After adoption of the Fiscal Year 2005 Operating Budget by the Commission on May 26, 2004, the School District received notification that the Commonwealth was deducting the payback from its June subsidy payment. The School District is negotiatbg with Commonwealth to reverse or mitigate the d1!duction. On July 5, 2004, the Commonwealth enacted its Fiscal Year 2005 budget which is projected to provide the School District with a net increase of $30. 9 million. The School District estimates that the effects of the enactment of the Commonwealth Fiscal Year 2005 budget will allow the School District to maintain the balanced budget as adopted on May 26, 2004, even if it is unsuccessful in its negotiations with the Commonwealth over the deduction. SCHOOL DISTRICT LABOR RELATIONS The School District engages in collective bargaining with the Philadelphia Federation of Teachers (PFT), which represents more than 18,500 employees; the International Brotherhood of Firer:ien and Oilers, AFL-CIO, Local 1201 (Local 1201), which represents approximately 3,800 employees; the School Cafeteria Employees Union, Local 634 (Local 634), which represents approximatdy 2,100 employees; the Commonwealth Association of School Administrators (CASA)., which represents approximately 600 employees; and the School Police Association of Philadelphia (SPAP), which rtipresents approximately 450 employees. Some represented employees are included in more than one bargaining unit and some represented employees are not regularly employed by the School District. Consequently, the total number of represented employees exceeds the approximately 24,250 persons regularly employed by the School Distrkt. The School District is. currently in negotiations with the PFT as the current four-year collective bargaining agreement ,!xpires on August 31, 2004. 1he current agreement with the PFT established a longer school year (181 days) for students, a longer work year for all ten-month employees (188 days) and a longer work day for teachers and other instructional support personnel. The economic package provided for a $1,000 bonus payable to all active A-47 PFT-represented members in December, 2000. In addition, the agreement included across-the-board increases as follows: 4% effective September 1, 2001; 2% effective April 1, 2002; 4% effective December 15, 2002 and 4% effective December 15, 2003. The School District has negotiated and settled five-year collective bargaining agreements with CASA, Local 634, SPAP and Local 1201 (their previous contracts expired on August 31, 2003). The current agreement with SPAP is a five year contract effective from September l, 2003 to June 30, 2008. This agreement establishes a longer workday for all School Police Officers (extended from 7.75 to 8 hours). The economic package provided for a $1,000 location incentive to begin in the third year of the contract and a $300 perfect attendance incentive. The agreement includes the creation of an additional step (Step 7) on the pay scale. A full step equals a 6% increase from step 6. Effective September 1, 2004, SPAP members will be compensated at their current rates for the additional .25 hours of the workday. In addition, the agreement includes across-the-board wage increases as follows: 3% effective September 1, 2005; 3% effective September 1, 2006; and 3% effective September 1, 2007. The SPAP healthcare package includes a migration from Keystone 5 to Keystone 10, from Personal Choice 5 to Personal Choice 10-20-70 modified to waive hospitalization payments, and from a $0/$3 prescription plan to a $5/$10/$15 formulary effective March 1, 2004. Effective September 1, 2004, the Personal Choice 10-20-70 modifications will be eliminated and the members will migrate from the current prescription plan to a $10/$15/$25 formulary. Beginning September 1, 2004, members are eligible to contribute a percentage of their annual income to the cost of their healthcare and experience further plan design modification in accordance with the "me too" clause which links their benefits to the new PFT contract. The current agreement with Local 634 is a five-year contract effective from September 1, 2003 to June 30, 2008. The current agreement includes across-the-board wage increases as follows: 3% (plus an additional $.10 for Noon-Time Aides) effective May 1, 2004; 3% (plus an additional $.10 for Noon-Time Aides) effective May 1, 2006; 3% effective May 1, 2007; and 3% effective May 1, 2008. The Local 634 healthcare package includes a migration from Keystone 2 to Keystone IO. In addition, the District will cease contributing the annual lump sum to the Local 634 Health and Welfare fund, but will increase per member contributions as follows for each Food Service Worker: $950 effective January 1, 2004; $1,600 effective September 1, 2004; $1,700 effective September 1, 2005; $1,800 effective September 1, 2006; and $1,950 effective September 1, 2007. Health and Welfare contributions for each Noon-Time Aide will increase from $62 to $112 effective January 1, 2004 for the life of the contract. Beginning September 1, 2004, members are eligible to contribute a percentage of their annual income to the cost of their healthcare and to experience further plan design modifications in accordance with the "me too" clause which links their benefits to the new PFT contract. The current agreement with CASA is a five-year contract effective from September 1, 2003 to June 30, 2008. The economic package includes a $3,000 lump sum payment for principals who administer the Extended Day program and a $1,000 professional development stipend for all principals. Across-the-board wage increases were established as follows: 4% effective September 1, 2003; 3% effective September 1, 2005; 3% effective December 15, 2006; 3% effective December 15, 2007. The CASA healthcare package, effective February 1, 2004, includes a migration from Personal Choice 10-20-70 modified to waive hospitalization co-pays to Personal Choice 10-20-70 without the modifications and from Keystone 5 to Keystone l 0. Also, the members migrated from a $0/$3 prescription plan to a $10/$15/$25 formulary. Beginning September 1, 2004, members are eligible to contribute a percentage of their annual income to the cost of their healthcare and to experience further plan design modifications in accordance with the "me too" clause which links their benefits to the new PFT contract. The current agreement with Local 1201 is a five-year contract effective from September 1, 2003 to June 30, 2008. The current agreement includes across-the-board wage increases as follows: 2% effective October 15, 2004; 3% effective September 1, 2005; 3% effective September 1, 2006; and 3% effective September 1, 2007. The Local 1201 health care package includes a migration from Personal Choice 5 to Personal Choice 15/25/70 or equivalent and migration from Keystone 5 to Keystone 15 or equivalent. All full-time employees hired after the ratification of the Collective Bargaining Agreement will receive health care benefits in the form of an HMO Plan equivalent to Keystone 15. Contributions to the Local 1201 Health and Welfare Plan will be increased as follows: 6% effective September l, 2003; 10% effective September 1, 2004; 10% effective September 1, 2005; 11% effective September 1, 2006; and 12% effective September 1, 2007. Beginning September l, 2004, members are eligible to experience a A-48 delay in the: receipt of their wage increases in accordance with the "me too" clause which links their benefits to the new PFT contract. INSURANCE The School District is self-insured for most of its risks; however, the School Dis1rict does purchase certain insurance. The types of insurance purchased by the School District include: (i) property and liability insurance or surety bonds when required by Jaw, leases or other contracts; (ii) property and liability insurance when categorical funds arc available to pay the premiums; (iii) excess property insurance in the amount of $100 million per loss; (iv) property insurance for special property, such as computer equipment, boilers and machinery, and fine arts; (v) excess workers' compensation insurance; and (vi) employee dishonesty bonds, Commission and board members and chief office:rs' travel accident insurance and various accident insurance. The School District is self-insured for work1!rs' compensation, unemployment ,;ompensation and weekly indemnity (salary continuation during employee illness) coverage, all of which are provided through the General Fund which, in tum, charges each fund with its proportionate share of the costs. The School District annually budgets an ~1mountmanagement believes is adequate, based on past experience, to provide for these claims when they become, fixed and determinable in amount. Actual payments in Fiscal Year 2003 for workers' compensation were $22.ll million and for unemployment compensation were $4.5 million. For Fiscal Year 2004, the School District estimates the amount payable for workers compensation claims and unemployment compensation claims will be similar to those made in Fiscal Year 2003. W,~ekly indemnity coverage is shared by the School District and covered employees and payments in Fiscal Year 2003 were $13.7 million and are estimated to be the same for Fiscal Year 2004. As of June 30, 2003, there existed a cumulative total potential liability of $60.9 million for workers' compensation claims and $6.1 million for unemployment compensation claims. In addition, a portion of the General Fund balanc:e has been ireservcd in the event of extraordinary costs for the School District's weekly indemnity coverage, which is treated as unavailable for other appropriation in the School District's adopted budget. The amount reserved in the General Fund as of June 30, 2003 was $1.9 million, and is estimated to be a similar amount as of June 30, 2004. LEGAL PROCEEDINGS General The! School District receives significant financial assistance from numerous federal, state and local governmental agencies and other entities in the form of grants or subgrants to conduc:t a variety of educational programs. Generally, the expenditure of funds from such grants must comply with regulations or terms and conditions of grants and is subject to audit by grantor agencies. Such audits could lead to requests for reimbursements to grantor agencies for expenditures disallowed under the terms of the grant. It is management's belief that disallowances, if any, will not be material, except as noted below (see "LEGAL PROCEEDINGS Education Audits," below). Th,~ School District is a party to various claims, legal actions, arbitrations and complaints in the ordinary course of business whic:h aggregate to a total potential liability of $16 million. In 1he opinion of the General Counsel of the School District, it is unlikely that final judgments or compromised settlements will approach the total potential liability. For Fiscal Year 2003, the amount paid from the General Fund for judgments was $3.5 million. A similar amount is estimated for Fiscal Year 2004. Under Pennsylvania law, school districts are immune from liability in tort O!l account of any injury to persons oir damage to property, except for negligent acts by a school district or its employees arising out of the operation of motor vehicles, the care, custody or control of personal property, real property or animals, and a dangerous condition of trees, traffic controls or street lighting. This immunity does not extend to civil rights or contract claims. Additionally, the School District is responsible for a dangerous condition, if any, of utility service facilities iit owns. The Schooll District is required to defend and indemnify employees acting within the scope of their offices or duties. Damages are limited by statute to amounts not to exceed $500,000 in the aggregate arising from the same or a series of ca.uses of action or transactions or occurrences, and in order to recover, claimants must give notice within six months from the date any cause of action arose. A-49 Education Audits The School District in the early 1990's received basic education subsidies from the Commonwealth based principally on student enrollment. In July 1995, the Department of Education notified the School District that an audit conducted by the Auditor General for the years ended June 30, 1991, 1992, and 1993 indicated over-reporting of student enrollment in Fiscal Year 1991, the year established by the Commonwealth as the base for all subsidies through Fiscal Year 1999. A claim for reimbursement due was initially estimated as approximately $40.0 million through Fiscal Year 1999, and subsequently reduced by half, to approximately $20.0 million as a result of additional reviews of School District documentation. In May, 1999, the School District appealed the adverse determination to the Secretary of Education, as provided by law. The Secretary was to appoint a hearing officer to consider the matter further. During the pendency of the dispute over the adequacy of documentation to support 1991 student enrollment figures, an audit of reported enrollment in school years 1994-95 through 1996-97 was undertaken. The Department of Education asserted a claim for an additional $20.0 million for the alleged overreporting of enrollment during the period. As part of its cooperative agreement with the School District, the Commonwealth postponed all potential collection actions in this category. The matter remains pending. See "CERTAIN FINANCIAL INFORMATION OF THE SCHOOL DISTRICT-Operating Budget Revenues, Expenditures and Changes in Fund Balances," above. Desegregation Litigation More than thirty years ago, the Pennsylvania Human Relations Commission ("PHRC") initiated an action against the School District at the administrative agency level and, in 1973, sought to enforce its administrative order by suing the School District in the Commonwealth Court of Pennsylvania. The PHRC then sought to compel remedies including forced busing for historical de facto segregation of students in the School District's schools. During the years between 1973 and 1993, the School District and the PHRC developed a series of desegregation plans, pursued fact-finding and submitted materials to a settlement team. Meanwhile, the School District engaged in an array of voluntary desegregation strategies, including voluntary busing of students and magnet schools with the objective of achieving maximum feasible desegregation. The primary factors affecting the feasibility of physical desegregation have been the persistence of racially segregated residential patterns, the dwindling number of white students residing within the School District and the number of white students who live within the School District but attend any of the many parochial or private schools in the region. In 1993, the PHRC, dissatisfied with the School District's efforts and persistent in its demand for, inter alia, forced busing, requested that the Commonwealth Court impose desegregation remedies. In 1994, the Commonwealth Court made three significant determinations. First, it ruled that neither mandatory busing nor the creation of a metropolitan area district was an appropriate remedy and that joinder of the Commonwealth of Pennsylvania ("Commonwealth") for purposes of providing funding for desegregation remedies was premature. Second, the Court found the School District liable under the Pennsylvania Human Relations Act ("PHRA") for having maintained a racially segregated school system where minority students do not receive equal educational opportunities. Finally, it ordered the School District to develop a reform plan that would address an array of educational components identified by the Court in order "to provide equal educational opportunity and educational quality to all students and to expand the voluntary desegregation of the schools." The School District presented a reform plan to the Court in February 1995, which was approved by the Court in Opinions and Orders issued in April and June 1995. Thereafter, in late 1995, upon the School District's renewed request, the Commonwealth Court joined the Commonwealth (along with the City of Philadelphia whose joinder was sought by another party) as a defendant to determine its liability, if any, to fund implementation of the remedial plan. The Commonwealth Court presided over a multi-week trial during the summer of 1996. During the course of the trial, the Commonwealth filed an Emergency Application for Extraordinary Relief in the Pennsylvania Supreme Court, requesting, inter alia, that the Supreme Court assume plenary jurisdiction and take the case from the Commonwealth Court. The School District opposed that Application. In July 1996, the Supreme Court issued an Order directing, inter alia, that the Commonwealth Court conclude the hearings and issue a "final Opinion," and that the hearings should "focus on the issue of desegregation." The Commonwealth Court completed the hearing and, in August 1996, found that the School District lacked adequate funds to comply with the remedial order and that the Commonwealth was liable for substantial and A-50 ongoing financial contributions to the School District to the extent the School District was unable financially to support the desegregation mandates. The Commonwealth Court's Order, however, was va~ated by the Pennsylvania Supreme Court in September 1996. At the same time, the Supreme Court divested the Commonwealth Court of jurisdiction over the matter and stayed the proceedings in the Commonwealth Court. After nearly three years, in May 1999, the Supreme Court determined that the Commonwealth Court lacked authority to add defendants or claims to tlu, case. Accordingly, the Commonwealth was dismissed from the case and jlll"isdiction was returned to the Commonwealth Court. The School District has continued to operate in accordance with court orders and to report periodically, in writing and verbally during a series of status confe:rences with the Court and counsel, on its progress toward complying with the Commonwealth Court's remedial mandates. In May and September 2001, respectively, at the request of the Court, the School District submitted a Comprehensive School Safety and Security Plan and a Curriculum Renewal Plan. Following a hearing on September 17, 2001, to review the Plar s and the School District's complianc1! with other componi!nts of the Court's remedial mandates, the Court, on September 28, 2001, issued an Opinion arid Order concluding that the School District has made significant and continued efforts to comply with the Remedial O:rder, approving the Plans for implementation and directing the PHRC to monitor the School District's progress. The Court further dir1!cted the PHRC to request the Court to close the case ~hen it is satisfied that the School DistJ"icthas demonstrated that it can and will provide an equal educational opportunity to all its students. ln December 2001, while discussions regarding a possible state "takeover" of the School District were taking pla1;f:, the Commonwealth Court held a conference in the case to reiterate its expectation that the School District would continue to comply with the Court's Orders. Following the declaration of distress with respect to the School District by the Sf:cretary of Education and appointment of members of the School Reform Commission, the Court conducted a status conference during which the Court posed questions concerning, inter alia, the Commission's plans for partnership schools and "privatization," and, by letter, later inquired concerning certain aspects of the School District's plans. In July 2002, the Commission named Paul Vallas as Chief Executive Officer of the School District. At the School District's request, the Court held another conference to discuss various issues in late July 2002. Mr. Vallas responded to questions from the Commonwealth Court and counsel for the other parties and also shared his initial ideas for J"eform in the School District. A follow-up conference was convened in August 2002, during which Mr. Vallas further outlined his plans. Following that conference and before the end of 2002, on several occasions, the School District submitted various materials to the Court and the parties and School District representatives met with counsel for the PHRC regarding the status of issue,s discussed at the conferences. In November 2002, School District representatives, including Mr. Vallas, also accompanied the Commonwealth Court's Monitors and counsel on a tour of two elementary schools to observe after school/extended day remedial reading programs. lt1 March 2003, during a judicial conference, the School District presented additional detail concerning its plans to the Commonwealth Court and counsel; and in early June 2003,. Mr. Vallas accompanied the Court on visits to two elementary schools. Thereafter, in June and July 2003, the Commonwealth Court conducted a hearing concerning the School District's compliance with the Court's Remedial Order, during which Mr. Vallas testified concerning the series of initiatives being undertaken in the School District. At the close of the hearing, the Cornmonw1!alth Court expressed its intention to issue an order by the end of July 2003. The Court has not issued an order. However, by letter dated August 1, 2003, Judge Smith-Rihner indicated the court', intent to "defer issuing an opinion and order until counsel confer among themselves to determine whether they can agree upon a Consent Decree for submission and approval by the Court." Since that time, counsel for the District, the PHRC and the lntcrvenors have met on a regular basis and have developed a proposed memorandum of understanding. In March 2004, the Commonwealth Court issued an order approving the Memorandum of Understanding ("MOU") that stays the action for three years. During those three years, the MOU requir,!s that the parties negotiate, in good faith, the interpJ"etation and implementation of the terms of the MOU and whethf:r compliance therewith has been achieved. The MOU establishes a multi-level dispute resolution process (lasting up to an additional 18-36 months) to resolve rema,ining areas of disagreement, if any, at the end of the three year term. If no resolution can be reached, the MOU anticipates that a Dispute Resolution Team will independently evaluate areas of disagreement, and report and make recommendations to the parties thereto. The MOU also provides that the plaintiffs will end the case afteJ"the three year term or after the dispute resolution process. Furthermore, the MOU limits the circumstances A- 51 nnder which PHRC may return to the Court to reactivate the proceedings to: Q) the selection of the Dispute Resolution Team Chairperson, if the parties cannot agree; and (ii) the completion of the dispute resolution process if areas of disagreement remain and only with respect to those areas. School Funding Litigation In suits brought in 1997 and 1998, the School District participated in litigation in state and federal courts to obtain increased funding from the Commonwealth. The following lawsuit remains pending. In March 1998, the School District, the City of Philadelphia and other plaintiffs brought a federal lawsuit against the Governor, Secretary of Education of the Commonwealth, the State Board of Education and State Treasurer (collectively, "Commonwealth Defendants"). The case, captioned Powell, et al. v. Ridge, et al., alleges that the state's school fnnding formula is racially discriminatory in violation of Title VI of the Civil Rights Act of 1964. On November 20, 1998, the Federal District Court entered an opinion and order dismissing the complaint on the gronnd of failing to state a cause of action nnder Title VI. On appeal, the United States Court of Appeal for the Third Circuit reversed the District Court and remanded the case to the District Court for discovery and trial. The Commonwealth Defendants' request for certiorari to the United States Supreme Court was denied on December 6, 1999. In the District Court, the parties began the process of discovery. However, on Jnne 23, 2000, by agreement of the parties, the District Court stayed all proceedings and placed the case in civil suspense until approximately Jnne 29, 2001. On Jnne 29, 2001, the Commonwealth Defendants filed a motion to continue the stay pending disposition of South Camden Citizens in Action v. New Jersey Dept. of Environmental Protection, 274 F.3d 771 (3d Cir. 2001), which was decided on December 17, 2001. In South Camden the Third Circuit Court of Appeals reversed the District Court holding that the Plaintiffs could not enforce Section 602 of Title VI of the Civil Rights Act of 1964 and its implementary regulation through 42 U.S.C. § 1983, a case the Commonwealth Defendants view as likely to be dispositive of the issues in Powell On December 12, 2001, the District Court entered an order granting the Commonwealth Defendants' motion. In the interim, on August 1, 2001, then Governor Tom Ridge and the Mayor of the City entered into a Memorandum of Understanding in which they agreed to leave the case in suspense pending negotiations to find a long-term solution to the School District's education and financial situation. The case continues in this status as a result of the Memorandum of Understanding entered into on August 1, 2001, pursuant to which the parties agreed to stay all proceedings pending negotiations to find a long-term solution to the School District's educational and financial situations. The negotiations pursuant to the Memorandum of Understanding concluded on December 21, 2001 with an agreement between the then governor of Pennsylvania (Governor Mark Schweiker) and the Mayor of the City that a declaration of distress would be issued and a School Reform Commission would be appointed. The effect of these events on the litigation is nnknown. The December 12, 2001 order of the District Court staying these proceedings remains in effect. Litigation Challenging Declaration of Distress Pennsylvania Commonwealth Court Action, a coalition of community groups, nnions representing School District employees, taxpayers, and parents of School District Students (the "Committee Plaintiffs"), on December 18, 2001, filed a separate action in the Commonwealth Court (the "Commonwealth Court Action"), docketed at No. 625 M.D. 2001, against the then Governor, the Mayor and the Commission, seeking, among other things, to enjoin a contract between the Commonwealth or the School District and Edison Schools, Inc., one of the respondents. Simultaneously, the petitioners filed a "King's Bench Petition" - an application for extraordinary relief in the Supreme Court of Pennsylvania, asking the Court to assume jurisdiction of the Commonwealth Court Action. The application for extraordinary relief in the Supreme Court of Pennsylvania is docketed at No. 164 E.M. 2001. The School District has not opposed this application. By Order dated January 17, 2002, the Pennsylvania Supreme Court denied the King's Bench Petition, without prejudice. By order entered on December 19, 2001, the Commonwealth Court denied the Committee Plaintiffs' request for a temporary restraining order, and after oral argument on December 27, 2001, denied the request for a preliminary injunction. On January 4, 2002, the Committee Plaintiffs filed a notice of appeal of the Commonwealth Court's December 27, 2001 Order denying their preliminary injnnction request. The appeal in the Pennsylvania Supreme Court is docketed at: No. 3 E.A.P. 2002. Edison Schools, Inc. and H. Christopher Whittle, its president and chief executive officer, filed preliminary objections to the Committee Plaintiffs' complaint and on December 28, 2001, the Commonwealth Court notified the parties that oral argument on such preliminary objections would be held A-52 during the week of March 11, 2002. In the Commonwealth Court Action, the State resi::ondents filed preliminary objections on January 11, 2002. On January 15, 2002, the Committee Plaintiffs filed an amended complaint in 1:heCommonwealth Court Action. The amended complaint does not delete any ,existing claim or assert any new claims. The most significant change in the amended complaint is the naming of the following additional respondents to the complaint: the "School R1!form Commission; James Nevels, as Interim Chairman or Chairman of the Commission; James P. Gallagher, as Commission member, Daniel J. Whelan, as Commission member; Michael Masch, as Commission member; [and] Sandra Dungee Glenn, as Commission member." The filing of the amended complaint rendered the preliminary objections p1!nding as of January 15, 2002, moot. On February 14, 2002, foe State respondents filed preliminary objections to the amended complaint. Oral argument on the preliminary objections was held before an en bane parrnl of the Commonwealth Court on June 12, 2002, in Philadelphia. In an Opinion and Order of July 29, 2002, the en bane panel of the Commonwealth Court sustained the respondents·, preliminary objections and dismissed the Committee Plaintiffs' Amended Petition. On August 21, 2002, the Committee Plaintiffa filed a notice of appeal of the July 29, 2002 Order to the Supreme Court. The Supreme Court assigned Docket No. 29 EAP 2002 to this appeal. The Committee Plaintiffs requested the consolidatiion of their two appeals, 3 EAP 2002 and 29 EAP 2002. The Supreme Court granted that request on December 19, 2002. On October 28, 2003, the Supreme Court affirmed the Commonwealth Court's orders. Charter School Litigation On June 24, 1998, Bensalem Township School District (.Bensalem School DiBtrict) granted a charter to Mosaica Academy Charter School (Mosaica), now operating as "School Lane Charter Sc:hool," to operate a charter school in Bucks County, in suburban Philadelphia, which would enroll primarily :?hiladelphia students. On Sept.ember~,, 1998, Mosaica filed suit against the School District and the Commonwealth seeking a declaration that it was validly formed and authorized and, therefore, the School District must pay Mosaica the per-pupil subsidy payments for each Philadelphia resident pupil in attendance. The suit, captioned Mosaic~. Academy Charter School, et al. v. Commonwealth of Pennsylvania, School District of Philadelphia, et al., (803 M.D. 1998), was decided by the Commonwealth Court adversely to the School District on July 20, 2000. Notwithitanding its earlier opinion dismissing preliminary objections to the School District's position, the Commonwealth Court determined that the School District lacked standing to challenge the Bensalem School District's decision to grant the charter. Payments to this chari,er school in Fiscal Year 2004 by the School District were approximately $1.9 million. On January 17, 2001, the School District appealed the Commonwealth Court's decision to the Pennsylvania Supreme Court, docketed at No. 4 E.A.P. 2001. The Supreme Court affirmed the Commonwealth Court'i: decision on December 31, 2002. Mosaica Academy Charter School v. Commonwealth, 572 Pa. 191 (2002). However, an award of counsel fees against th,~ School District in the amount of$265,221.52 was reversed. Miscellaneous !,ocal 1201 Griievanc,eAAA 14 390 01733 01: Rhodes Restoration Project. On October 2, 2001, Local 1201 filed a grievance against the School District alleging the School District violated the parties' collective bargaining agreement when it hired a private vendor to perform fire restoration services at the E.W. Rhodes Middle School ("Rhodes") in th,e amount of$1.545 million dollars. The parties were unable to resolve the dispute and the grievance was submitted to arbitration. Hearings were held on Septembc!r 10, 2002 and March 11, 2003 during which both sides presented oral testimony and documental'.'yevidence. On October 8, 2003 im Arbitrator sustained the grievance and ordered the School District to pay back pay to affected unit employees. The School District has calculated this figure to total $266,807; the union has not yet accepted this figure. In no event, however, will the Local 1201 be entitled to the full contract price of $1.545 million, since the Arbitrator explicitly ruled as such. A-53 J.A. Smith Construction Company. Inc. v. School District of Philadelphia, Harleysville Mutual Insurance Company & Gulf Insurance Company, Court of Common Pleas of Philadelphia. Co., May Term 2004, No. 03226 is a suit by a general construction contractor against the School District as owner of Little School House at Penrose, an 11-classroom, one-story building, for breach of contract, promissory estoppel, unjust enrichment, quantum meruit and violation of the Contractor and Subcontractor Payment Act, caused by having to replace the plumbing contractor, which filed bankruptcy, and the mechanical contractor, which stopped working on the project. Damages for delay are claimed in the total amount of $449,269. Claims are also made against the surety companies for the defaulting contractors. Change orders for delay damages were not approved by the sureties and the School District. The District is defending several civil rights cases including the following: The case of Matthew Gremo v. School District of Philadelphia. et al, Philadelphia Court of Common Pleas, November Term, 2003, No. 1556 is a Civil Rights action against the School District and 14 present and former School District employees. It arises out of a criminal assault upon a student at the George Washington High School on November 13, 2001 that resulted in a serious brain injury. No demand has yet been made in this case. The case of Sherry and McKelvie Cooper. Administrators of the Estate of Robert Scales v. School District of Philadelphia. et al, Philadelphia Court of Common Pleas, March Term, 2004, No. 6336 is a Civil Rights action against the School District and four School District employees. The matter involves the death of student Robert Scales due to heart failure on May 8, 2003 while playing basketball at Germantown High School. No demand has yet been made in this case. A-54 APPENDIX CERTAIN FINANCIAL STATEMENTS OF THE SCHOOL DISTRICT PAGE INTENTIONALLY LEFT SCHOOL DISTRICT OF PIDLADELPIDA CERTAIN FINANCIAL STATEMENTS lFOR THE FISCAL YEAR ENDED JUNE 30, 2003 TABLE OF CONTENTS Letter of Transmittal B-2-5 Certiffoa1teof Achiev,ement for Excellence in Financial Reporting, Government Finance Officers Association B-6 Certificate of Excellence in Financial Reporting, Association of School Business Officials B-7 Independent Auditor''s Report B-8-9 Management's Discussion ;md Analysis B-10-22 Basic financial Statements District Wide Financial Statements Statement of Net Assets Reconciliation of the Balance Sheet for Governmental Funds to the Statement of Net Assets Statement of Activities Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balanc:es of Governmental Funds to the Statement of Activities B-23 B-24 B-25 B-26 Fund Financial Statements Governmental Fund Financial Statements Balance Sh,:::et Statement ofRev,:::nues,Expenditures, and Changes in Fund Balance B-27-28 B-29-30 Proprietary Fund Financial Statements Statement of Net Assets Statement of Revenues, Expenses, and Changes in Fund Net Assets Statement of Cash Flows B-31 B-32 B-33 Fiduciary Fund Financial Statements Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets B-34 B-35 Notes to the Financiial Statements B-36-66 B-1 PAGE INTENTIONALLY LEFT THE SCHOOL DISTRICT OF PHILADELPIDA 2120 WINTER STREET PHILADELPHIA, PENNSYLVANIA 19103-1099 PAUL G. V AUAS CHIEF EXECUTIJIE OFFICER December 31, 2003 To the Members of the School Reform Commission: The Philadelphia Home Rufo Charter requires an annual audit of the books of account, financial records, and transactions of the School Distric:t by the Philadelphia City Controller, an independently elected official who is required to appoint a Certified Public Accmmtant as deputy in charge of auditing. Pursuant to this requirement, we hereby issue, a Comprehensive Annual l<'inancialReport of the School District of Philadelphia for the fiscal year ended June 30, 2003. This Comprehensive Annual Financial Report (CAFR) is presented in three sections: J[ntroductory, Financial, and Statistical. Thi~ Financial s«~ctionincludes Managemtmt's Discussion and Analysis, Basic Financial Statements, Required Suppfomentary Information and the Combining and Individual Fund Statements. The Statistical section includes selected financial and demographic information, generally presented on a multiyear basis. This report consists of managc!ment's representations concerning the finances of The School District of Philadelphia. Consequently, management assumes foll responsibility for the completeness and reliability of all the information presented in this report. The m.anagt."lllent of the School District of Philadelphia has established an internal control framework that is designed to both protect the District's assets from loss, theft or misuse and to compile suffickmt reliable information for the preparation of the School District of Philadelphia's financial statements in conformity with Generally Accepted Accounting Principles (GAAP). The School District of Philadelphia's framework of internal control provides reasonable assurance that the financial statements will not include material misstatem«!nt. The concept of reasonable assurance recognizes that the cost of a control should not ,exceed the benefits likely to be derived from it and that the evaluation of cost and benefits requires estimates and judgments by management. The School District has an offic;e responsible for the audit function, which regularly reviews expenditures of School Distric:t funds and perfonns selective reviews of operations and controls. As management, we assert that to the best of our knowledge and beliefs, this financial report is complete and reliable in material respects. The School District of Philadelphia's financial statements have been audited by the Philadelphia City Controller's Office. The goal of the independent audit is to provide reasonable assurance that th1! financial statements of the Philadelphia S,:::hoolDistrict for the fiscal year ended June 30, 2003 are free of material nisstatement. Thu independent aUlditinvolved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and B- 2 evaluating the 01erall financial statement presentation. The City Controller's Office concluded that there was a reasonable basis for rendering an unqualified opinion that The School District of Philadelphia's financial statements for the fiscal year ended June 30, 2003 are fairly presented in conformity with GAAP. The independent auditor's report is presented as a component of the financial section of this report. The independent audit of the financial statements of the School District of Philadelphia was part of a brooder federally mandated "Single Audit" designed to meet the special needs of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor not only to report on the fair presentation of the financial statements, but also on the audited district's internal controls and compliance with the legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the School District of Philadelphia's separately issued Single Audit Report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The School District's MD&A can be found immediately following the report of the independent auditors. Profile of the District The School District cf Philadelphia is a separate and independent home rule school district of the first class, established by the Philadelphia Home Rule Charter (Charter) under the First Class City Public Education Home Rule Act - P.L.643 (Act). The Act expressly limits the powers of the City of Philadelphia (City) by prohibiting the City from, among other things, assuming the debt of the School District or enacting legislation regulating public education or its administration, except in setting tax rates authorized for school purposes by the General Assembly of the Commonwealth of Pennsylvania. Except following a declaration of distress by the Secretary of Education of the Commonwealth with respect to a school district of the first class, the School District is governed by the Board, which consists of nine members appointed by the Mayor from a list of persons nominated by an Educational Nominating Panel established according to provisions in the Home School Charter. On December 21, 2001, the Secretary of Education declared the School District of Philadelphia distressed, therefore the School District of Philadelphia is currently governed by a five-member School Reform Commission (SRC). The School Reform Commission exercises all powers and has all the duties of the Board of Education. The Board of Education continues in office performing only the duties, if any, that are assigned by the School Reform Commission. The Governor of Pennsylvania appointed the chairman who has full power and authority of the School Reform Commission and two other members, while the Mayor of Philadelphia appointed the two remaining members. The School District of Philadelphia provides a full range of educational services contemplated by statute. These include general, special, and vocational education at the elementary and secondary levels, as well as related supportive services. Pre-school services are also provided in response to the needs of the community. The School District maintains budgetary controls to ensure compliance with legal provisions embodied in the annual appropriated budget by the School Reform Commission. Activities of the General Fund, the Intermediate Unit Fund, the Debt Service Fund, and the Capital Projects Fund are included in the annual appropriated budget. The level of budgetary control is maintained at the object classification level within principal organizational units by fund, except for the Capital Project Fund, which is controlled at the major project and sub-project levels. Purchase commitments are subject to an automated test for verification of available allotments and are encumbered, if not in excess of the available allotments, prior to release to a vendor and do not lapse. At yearend, encumbrances are reported as reservations of fund balance in governmental funds, except for Categorical Funds, since they do not constitute expenditures or liabilities. Unencumbered appropriations lapse at year-end. B- 3 Factors Affec!j.ngFinancial Conditions The information presented in the financial statements is perhaps best understood when it is considered from a broader perspectilve of the specific environment within which The School District operntes. Local Economy:: Philadelphia employment through 2002 remained stable. Employment in the service sector was the strongest. This sector's growth has been key to stabilizing the local economy and will be key to the city's future. Philadelphia's competitive advantages as a business location are based on it's size, location, relative affordability, culltural and re:creational amenifos and its growing strength in key knowledge industries. The City of Philadelphia is the fifth largest city in the U.S. with the third biggest downtown population and is the center of the sixth largest metropolitm region. The Philadelphia metropolitan area is the fourth largest (by population) and this region is a major playc!r in a number of industries which have generated national economic growth. The Greater Philaddphia region sits in the center of the Eastern business corridor. As a major urban center with a rich historical legac:y, Philadelphia is gaining national recognition for its cultural and recreational advantages as well as it's inclustri(;:s. The City's high tax burden for individuals and businesses remain a m~jor obstacle to economic development. The continuing tax c:uts propos<::d,in the Fiscal Year 2004 through 2008 Plan, are a posiitive step to addressing this problem. School District long-term Financial Planning: During fiscal year 2001, the School District engaged in a much more rigorous procedure; it prepared a comprehensive multi-year plan that addresses expenditure and revenue trends, financial forecasts for fiscal years 2002 to 2004, as well as providing performance benchmarks for specific activities. On August 23, 2002, the new CEO, Paul Vallas, announced a comprehensive five-year plan that reprioritized District spending capitalizing on untapped local state and federal resources to maximize current revenue streanrn. The goal of the plan is to increase academic opportunities and to lay the foundation for an expanded school construction and renovation program. The five-year plan was re~ised and extended through fiscal year 2008 in March 2003 upon the District's submission of its fiscal year 2004 budget requests to City Council and agan in May 2003 when the fiscal year 2004 budget was adopted by the SRC. The current five-year plan projects that the District will end fiscal year 2008 with a positive fund balance. The School Di8trict will continue to develop and maintain a fiscally responsible and stable operating budget, at the same time that it improves accountability, expands educational programming and embarks on a comprehensiv1~capital program. Cash Manag,ement Policies and Practices: Cash temporarily idle during the y<:,aris generally invested in certificates of deposit and repurchase agreements in compliance with Commonwealth statutes. These instrument<; have maturitic!Sranging from one day to one year. Under a custody agreement, the underlying collateral for repurchase agrnements is delivered to the trust department of a local bank, which holds the collateral during thc, term of the rc~purchase agreement. The average yield on maturing investments during fiscal year 2003 was 1.774% and total interest income was$ 6.6 million. This was a$ .1 million decrease during fiscal year 2003 primarily due to lower cash balances available for investment and lower interest rates. Risk Manage'ment: The School District is self-insured for fire damage, casualty loss, public liability, worker's compensation, unemployment and weekly indemnity. Additionally the District purchases additional property insurance to cover losses between $ 5 million and $ 100 million. Certain insurance coverages, including employee performance bonds and fire insurance, have also been obtained. Unemployment and worker's compensation «;overage arc! funded by pro-rata charges to each fund. The cost of weekly indemnity coverage is shared by the School District and covered employees. B-4 Awards and Acknowledgements The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the School District of Philadelphia, and the Association of School Business Officials International (ASBO) awarded a Certificate of Excellence to the School District for its Comprehensive Annual Financial Report for the fiscal year ended June 30, 2002. In order to be awarded a Certificate of Achievement and a Certificate of Excellence, a government must publish an easily readable and efficiently organized Comprehensive Annual Financial Report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. The Certificate of Achievement and the Certificate of Excellence are valid for a period of one year only. We believe our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement and Certificate of Excellence requirements, and we are submitting it to GFOA and ASBO to determine its eligibility for additional certificates. The preparation of the Comprehensive Annual Financial Report on a timely basis was made possible by the dedicated service of the entire staff of Business and Financial Services, especially the General Accounting Section of the Office of the Comptroller. We express our sincere appreciation to all the members of the Department who assisted in and contributed to the preparation of this report. We also thank the Office of the City Controller for their cooperation and assistance. Respectfully submitted, w~ Mr. Paul G. Vallas Chief Executive Officer £~. -~ Chief Financial Officer B- 5 Certificateof Achievement for Excellence in Financial Reporting Presentedto School Districtof Phila4elphia,Pennsylvania For its ComprehensiveAnnual Financ:ialReport for the Fiscal Year Ended Iune 30, 2002 A Certificate of Achievementfor Excellencein Financial Reportingis ptcsented by die GovemmentFinanceOfficers Association of theUidted States and Canadato governmentunits andpublic employeeretiiement system, whose comprehensiveannualfinancial reports(CAFR.s)achievethehighest stmdards in goye:mmentaccounting and financialreporting. ~~ President ~/.~ ExecutiveDirector B-6 o~ · . . · \.~1,~ 'fr~c. o· f SCHOOLBllSJ.ll,b•· . .,,~-e:ss · INTERNATIONAL. ,8 . .()~~~ .. ~<.t, lU, ~-~ This Certificateof Excellencein FinancialReportingis presented to SCHOOL DISTRICT OF PHILADELPHIA 1:.:1 --.J For its ComprehensiveAnnualFinancialReport(CAFR) For the Fiscal Year Ended June 30, 2002 · Upon recommendationof the Association'sPanel of Reviewwhich has judged that the Report substantiallyconformsto principlesand standardsof ASBO's Certificateof ExcellenceProgram ~ President ExecutiveDirector () F PHILADELPJHIA OFFICEOF THEC•;;.mTROI..U:R JC.ll',IATI-t,\t\lA. $AIOEL C"'f Conlraliv 1:!It Fl::nr,Ml.I!'~ !~tv1¢U l:Jlljg. HO! John F KenQ!t/ acullrr.J.td Pl'lillllCllllptM.~flll'llli 19102:-1679 FAX,;,11$f~~~ll i~'1l;Jlxl~ ALBER'i f. SCAPEROTIQ DEll!JIYCtyCM~t JNDEfi.NOENTAUDITOR'SREPORT T,) the Chair and Members of tile School Refo:rm Commission of the Si;tioolDistrictuf Philadelphia \Ve.have audited the accompanying financial statements of the governmental activities, the b1iu.iness-tn1e activities. each major fund.and the aggregate remaining fund infonnation of the School District of Philadelphia. Penns}1vamu .•a ®mponent unit oftbe City of Philadelphia, as of and for 1!heyear ende,,i June 30, 2003, whidt collectively comprise the Schoc,I District's basic financ.ial statements as bsted in the table of contents. Tbese financial statements are the re~q:ionsibiliityof the School District of Philadelphia's management. Our re:~nsibility is to express opinions on these financial stmernentsbased on our audit We conducted our audit in ac"".()niancc wilh auditing smndaros generally accepted mthe United States of America and the standards applicable to financial awlits contained in Ga1•ernml!tir Auditing Standards, 1ssucd by the Comptroller General of the United States. Those s:,andaros require that we plan and pcrfo1m the audit to obtain reasonable as$urru:i.ceabout whetherthe financial statementsare free of material misstatement. An audit mcludes examining, on a test b,L'>i~.,:;videncesupporting the amc,untsaoodisclosures in the financial statements. A.n audit also :includes assessing the accounting principles used and significant c;timates made by ntei!lagcment,as ·wellas evaluating the overall financial statement presentation We believe that om audit providt"CS a reasonable basis for ow: opinions. 1n our opinion. the financia.! statements referred to above present fairly, in aH material re5:pects, the respe<::tivefinancial pos1tion of the governmental activities, the business-tYPc ac:ivities, each major fumt and the aggregate remaining fund infonnation of t:le School District rt Phi!adelph.iz., Permsylvani~ as of June 30. 2003, and the respecd\'e ch~mges in finanda.l positton and cJJsh iiow:s, where applicable, thereof for lhe year then ended in conforrmty \vith rc·~ountingrrinciples gc:neraity accepted in the U111tef Services...!ll:.]'1aior Functional Expense Category Table 3 and the following graph illustrate the net costs incurred by each of the major activities presented in the School District's Statement of Net Activities. The functional expe:nse categories are entitled: Instruction, Student Support Services, Administrative Support and Other, Pupil Transportation, Operation & Maintenance, Early Childhood Educationand Food Service. B- 14 .1 ,_ Management's Discussion and Analysis Fiscal Year 2003 Cost of Services by Major Functional Expense Category (Dollars in Millions) Table 3 Functional Expense Instruction Student Support Services Administrative Support & Other Pupil Transportation Operation & Maintenance Early Childhood Education Food Service Total Expenses Gross Cost of Services $ 1,283.2 326.3 197.4 44.7 238.2 25.6 72.5 $ 2,187.9 Net Cost of Service $ 924.4 230.4 168.1 8.3 218.1 12.9 (.8) $ 1,561.4 Governmental Activities Net Costs of Services Year Ended June 30, 2003 (in Millions) C 0 'fl 2 1ii .E - t:: Ill iCO a.a. .22: (I) :::J :::J (I) Cl) Cl) Cl) (I) l; ca Ill t:: O C 0 ... -5la._~ ·.!: g.0 E U"J -u ii 'a. 1s :::J a. a. Ill C Ill ... <( ca (I)0 C 0 C Ill C - i... (I) (I) C a.·- -u >, C gg .:: .c Ill Ill -U 0 w .c -u :::J (.) w = 0~ I- Major Sources of Revenues The School District receives most of its funding from general revenues from real estate taxes and state and federal grant subsidies. The following bar graph illustrates the School District's major sources of revenues for fiscal year 2003. B- 15 Management's Discussionand Analysis Revenue Sources For the Fiscal Year Ending June 30, 2003 1:200 0 -----------------------, 1000 C: ~ 800 ~ .5 I!! ~ J!! 400 8 200 0 State Federal LocalTaxes Non Tax As previously illustrated in Table 2, most of the School District's revenues are considered to be general, as opposed to program. Table 4 provides further detail on how each revenu,e source is recognized. ____ Fiscal Year 2003 Revenue Recognition by Source and Type (Dollars in Millions) _, Table 4 ]llevenue Source General Intermediate Categorical Fund Unit Fund Funds $ Local Taxes 520.6 $ $ Locally Gtmerated 6.4 58.2 Non Tax .3 42.0 62.8 958.2 State Grants & '3ubsidies Federal Grants ,'~ Subsidies 254.9 .3 $ 1,537.3 $ $ 63.1 303.3 Total , V. MAJOR FUND HIGHLIGHTS The :S,:hoolDistrict considers six funds to be major. These funds are the General Fund, Intermediate Unit Fund, Categorical Fund, Debt Service Fund, Capital Projects Fund and Ente1rpriseFund. lli:!!,•~.ralFund The General Fund, which is the School District's operating fund, records all financial activity except for those transactions that must specifically be accounted for in another type of fund. B- 16 Management'sDiscussionand Analysis For fiscal year 2003, the General Fund had excess revenues of $134.3 million and $181.0 million in net transfers to other funds which together resulted in a $46.7 decrease in fund balance. The General Fund balance at June 30, 2003 was $132.2 million. Intermediate Unit Fund The Intermediate Fund is used to account for State appropriations for special education and non public programs as well as certain administrative costs. During fiscal year 2003, the Intermediate Unit Fund had a $.1 million net change in fund balance which increased the fund balance to $2.6 million at June 30, 2003. Categorical Funds Categorical Funds are used to account for specific purpose Federal, State, City or Private Grants. Categorical Funds had a $1.0 million net change in fund balance which decreased the negative fund balance to ($6.1) million at June 30, 2003. Debt Service Fund The Debt Service Fund is used to account for the School District's accumulation of resources for the payment of debt service and bond issuance costs. During fiscal year 2003 the Debt Service Fund had a $10.1 million positive net change in fund balan;e to increase the June 30, 2003 Debt Service Fund balance to $63.2 million. Capital Proiects Fund The Capital Projects Fund is used to account for financial resources used for acquisition of fixed assets, construction, repair, and improvement of the School District's major capital facilities. During fiscal year 2003 the Capital Projects Fund had a net change of ($50.5) million to decrease the June 30, 2003 fund balance to $42.7 million. Enterprise Fund The Enterprise Fund is used to account for the operation of the Food Services Division. During fiscal year 2003 the Enterprise Fund had a net change of $.7 million in net assets and fund balance increased to $11.7 million. The financial performance and position of each of the previously discussed major funds is summarized in Table 5 and Table 6. B- 17 Management'sDiscussionand Alllalysis Excess (Detkiency) of Revenues and Other Financing Sources Over (Under) Expenditmres and Other Financing Uses for General, Intermediate Unit, CategCJ1rical,Debt Service, Capital, Enturprise and Non-Major GovE!rnmental Funds (Dollars in Millions) Table 5 Fund General Intermediate U nit $ Categorkal Debt Service Capital · Enterprise Non-M~jor Go vernrnental Fiscal Year Fiscal Year 2003 2002 ( 46.7) .1 $ 254.9 (.6) 1.0 10.1 (50.5) (.8) 2.3· 33.5 - - T(]lt:alFund B:illances for General, Intermediate Unit, Categoricall, Debt Service, Caipital, Enterprise, and Non-Major Governmental Funds (Dollars in Millions) Table 6 Fund Fiscal Year Fiscal Year 2003 General Intermediate Unit Categorical Debt Service Capital Enteiprise Non-M~9or Governmental $ - 132.2 2.6 (6.1) 63.2 42.7 11. 7 5.4 2002 $ 178.7 2.5 (7. l) 53.1 93.3 11.0 5.4 The School Dis1cricthas one Internal Service Fund (i.e., Print Shop) that utilizes full accnml accounting. The Print Shop Fund is u;ed to account for the centrally produced printing materials for individual schools and offices. The financial performance and positions of the School District's Print Shop Fund is ($.4) million net lossc!s for fiscal year 2003 and the fund equity balance for the Print Shop Fund is ($1.4) million at June 30, 2003. B- 18 Management's Discussion and Analysis VI. GENERAL FUND BUDGETING HIGHLIGHTS The Philadelphia Home Rule Charter (the "Charter") requires the School District to adopt an operating budget and a capital budget for each fiscal year. The Governing Body is required to levy taxes, upon subjects and within limits prescribed by either the General Assembly or the City Council. The Philadelphia City Council holds public hearings to determine the level of funding for the School District. The budget is based upon generally accepted accounting principle presentations, and utilizes the accrual basis of accounting for its governmental funds. The most significant budgeted fund is the General Fund. During the course of the fiscal year, the budget is amended and approved by the School Reform Commission. The final amended budget incorporates all the School District's approved adjustments that have been incurred since the advertised budget was issued. For fiscal year 2003, the final budgeted revenue was $21.5 million higher than the original budget The School District's higher than budgeted revenues reflect slight increases in both tax revenue and additional subsidy from the State in fiscal year 2003. The anticipated expenditures in the final budget represented an increase of $15 .2 million over the original budget. This is the result of additional personal services costs due primarily to lower than anticipated savings from turnover and higher than projected increases in medical insurance premiums. Actual revenues ($1,537.3 million) closely reflect those estimated in the final budget ($1,532.2 million). Although actual expenditures ($1,393.3 million) were slightly higher than estimated in the budget ($1,386.0 million), the difference represents a variance of less than .6%. Table 7 presents a summary comparison of the General Fund's original and final budgets with actual performance. General Fund Budget Comparison (Dollars in Millions) Table 7 Budget Total Revenue Total Obligations Total Other Financing Sources/(Uses) Net Change in Fund Balance Fund Balance Beginning of Year Prior Period Adjustment Fund Balance End of Year Original $1,510.7 1,370.8 (181.6) (41. 7) Final $1,532.2 1,386.0 (177.0) (30.8) (178.3) 150.4 - Actual $1,537.3 1,393.3 (181.8) (37.8) - $ (220.0) B- 19 $ 119.6 $ 178.7 {8.7} 132.2 Variance with Final Budget Positive (Negative) $ 5.1 (7.3) (4.8) (7.0) 28.3 (8.1) $12.6 Management'sDiscussionand Analysis VIL CAPITAL ASSET AND DEBT ADMINJSTRATION As of the end of fiscal year 2003, the School District had $2,046.3 million hvested in capital assets. Over the years these assets have depreciated $919.5 million, leaving a carrying value of $1,126.8 million. This represents a decrease of$ .6 million. Net Capital Assets as of June 30 (Dollars in Millions) Table 8 Capital Asset Category 2002 2003 Land $ 104.7 $ 109.8 Buildings & Improvements 761.7 810.6 Equipment 83.5 129.7 Construction in Progress 131.3 122.9 Total Net Book Value $1,126.8 $ 1,127.4 The Sc:hool District is a component unit of the City of Philadelphia which issues capital debt. The School District issues debt in the form of bonds to be used for construction purposes and notes for short-term cash flow. The School District recognizes bond premiums as rev1;muesin the Statement of Activities, however no bonds were issued for the year ending June 30, 2003. Table 9 shows a summary of aH long-term debt outstanding. Long-Term Debt Outstanding (Dollars in Millions) Table 9 Governmental Activities Business- Type Activities 2003 General Obligation Bonds Employee R.1~lated Obligations Due To Othe:rGovernments Other $ Total Long-Term Debt $ 2003 2002 1,425.1 496.l 45.3 85.7 $ 2,052.2 $ 1,460.6 485.9 45.3 80.5 $ 2,072.3 $ 2002 $ 6.1 6.1 1.8 $ 1.8 Total long-term debt outstanding for governmental activities decreased. by $ 20.1 million, primairily due to a $ 35.5 decrease in ~neral obligation bonds outstanding, partially offset by a $ 10.2 million increase in employee related obligations. Addiitioml information about the District's capital assets and long-term debt can be found in the notes to the financial statements. B- 20 Management'sDiscussionand Analysis VIIL CHALLENGES OF THE SCHOOL DISTRICT FOR THE FUTURE Challenges of the School District for the future include: • • Developing and maintaining a fiscally responsible and stable operating budget. Providing funding for education reform measures and comprehensive school supports in alignment with the federal No Child Left Behind legislation including the implementation of: 1. School choice options for students to transfer from underperforming schools. 2. Supplementary education services for students who remain m under-performing schools. 3. Programs to place qualified staff in classrooms and schools. 4. Research-based programs to narrow the achievement gap in support of the implementation of a uniform standards-based core curriculum including: • • • • • • • 5. • additional time on task (daily instructional blocks of 120 minutes in reading and 90 minutes in math), uniform instructional materials aligned to the core curriculum, district-wide benchmark testing to measure student mastery of the core curriculum throughout the school year, half.day mandatory school-day professional development twice monthly to support best instructional practices, dedicated coaching positions to support classroom teachers, extended day and summer school programs for students performing below grade-level, and reduced class size in K-3 classrooms (in elementary schools) to promote more individualized instruction. Safe school environments where staff have the opportunity to teach and students have the opportunity to learn. Implementing the school construction program that construction and deferred maintenance. Initiatives include: addresses new 1. Improve high school options for students by increasing the number of smaller schools. 2. Phasing out middle schools by converting them to small high schools and elementary schools. B- 21 Management'sDiscussionand Analysis • IX. 3. Alleviate elementary school overcrowding by ,constructing new s,chools,additions and annexes. 4. Stabilize the real property portfolio through phased rehabilitation and repairs. Improving public safety in the schools. Initiatives include: 1. Increase and improve pro-active prevention/intervention strategies 2. Implement Crisis Response Teams and Regional Climate Advisors 3. Improve Code of Student Conduct 4. Expand SMART program to serve K-4 students 5. Reduce truancy CON1'ACTING THE SCHOOL DISTRICT'S MANAGEMENT This financial report is designed to provide a general overview of the financial conditions of tht: School District. If you have questions about the report or need additional financial infonnation contact Michael E. Harris, Chief Financial Officer, or Marcy F. Blender, CPA. Comptroller, at 2120 Winter Street, Philadelphia, PA 19103. B- 22 School District of Philadelphia Statement of Net Assets June 30, 2003 Business-type Activities Governmental Activities ASSETS Cash & Cash Equivalents Cash and lnveS1ments with Fiscal Agent Equity In Pooled Cash and Investments Investments Taxes Receivable ( Net ) Due from Other Governments Accmmts Receivable (net of allowance) Accrued Interest Receivable Third Party Receivables Inventory Deferred Debt Issuance Cost Restricted Assets: Cash and Cash Equivalents Capital Assets: Land Buildings and Improvements Furniture, Fixtures, Equipment, & Machinery Construction in Progress Accumulated Depreciation $ $ 83,342 $ 10,254,682 5,098,160 1,438,898 52,006,757 Total assets LIABILITIES Accounts Payable Overpayment of Taxes Accrued Salaries and Benefits Payable Deferred Revenue Due to Other Governments Bonds Interest Payable Non-current Liabilities Due within one year Due in more than one year Total liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Debt Service Capital Projects Educational Projects Inventory Transportation Maintenance Museum Tickets Fund Principal Designated Unreserved Funds Special Revenue Funds Permanent Funds Self Insurance Unrestricted (deficit) Total Net Assets 1,298,809 63,262,673 183,254,723 1,530 136,814,816 41,365,959 2,167,217 437,175 454,754 2,842,037 6,108,216 Total $ 1,382,151 63,262,673 193,509,405 1,530 136,814,816 46,464,119 2,167,217 437,175 454,754 4,280,935 6,108,216 52,006,757 109,835,248 1,592,278,577 208,856,946 122,808,416 (910,593,596) 12,496,155 (8,870,805) 109,835,248 1,592,278,577 221,353,101 122,808,416 (919,464,401) 1,613,200,257 20,500,432 1,633,700,689 33,583,457 13,568,719 22,090,800 31,371,482 121,343 27,013,476 2,556,908 36,140,365 13,568,719 22,237,083 31,371,482 121,343 27,013,476 146,283 109,893,091 1,943,509,988 6,029,327 109,893,091 1,949,539,315 2,181,152,356 8,732,518 2,189,884,874 68,267,213 3,625,350 71,892,563 63,071,682 46,000,288 19,026,362 63,071,682 46,000,288 19,026,362 347,452 962,644 31,950 2,389,576 347,452 962,644 31,950 2,389,576 2,464,657 567,663 1,858,110 (772,939,696) 2,464,657 567,663 1,858,110 (764,797,132) (567,952,099) The notes to the financial statements are an integral part of this statement. B-23 8,142,564 $ 11,767,914 $ (556,184,185) School District of Philadelphia Reconciliation of the Balance Sheet for Governmental Funds To the Statement of Net As.wts June 30, 2003 F1D1dBalance -Total Governmental F1D1ds (page B-28) 240,102,115 $ Amollllts reported for governmental activites in these statement of net assets are diJforent because: Capital assets usedin governmental activities are not financial resource:s and, therefore, are not reported in the ftmds 1,129,061,092 Other long-tenn assets usedin govemm,:mtal activities are not financial resources and therefore are not reported in the governmental fimds 124,2!0,459 L,ong-term liabilities, including bonds payble, are not due and payable in the current period, and therefore ari, not reported as liabilities in the govc:mmental flDlds. (2,059,939,451) htternal S!:rvicefimds are used by management to charge the C0!,1Sof certain activities to individual flDlds. lbe assets and liabilities of the (1,406,314) htternal S!:rvice fimds are included in the statement of net assets. $ Net assets of governmental ac.,'livities(page B-23) (567,952,099) ===== The notes to the fmancial statements are an integral part of this statement. B-24 School District or Philadelphia Statement or Activides For the Year Ended June 30, 2003 FWictions!ProB!_amS 1,283, J 75,233 326,276,439 120,226,123 238,238,398 44,708,438 279,334 25,561,915 76,895,270 Total Governmental Activities 405,403 91,491 1,369,773 1,859,600 Total Business-type Activities $ $ 3,155,052 358,373,453 95,784,342 21,325,259 13,058,024 36,408,617 106,409 9,522,030 6,556,419 Net (Expense) Revenue and Changes in Net Assets Capital Grants and Contributions 5,176,256 Business-type Activities Governmental Activities (924,396,377) (230,400,606) (97,531,091) (218,144,518) (8,299,821) (172,925) (12,884,833) (70,338,851) Total $ $ (924,396,377) (230,400,606) (97,531,091) (218,144,518) (8,299,821) (172,925) (12,884,833) (70,338,851) (1,562,169,022) 6,881,319 541,134,553 72,537,689 8,185,615 65,152,354 800,280 800,280 72,537,689 8,185,615 65,152,354 800,280 800,280 2,!15,J§_l_,150 Business-type Activities: Food Service Total Charges for Services Expenses Governmental Activities Instruction Student Support Services Administrative Support Operation & Maintenance of Plant Services Pupil Transportation All Other Support Services Early ChilcllioodEducation Interest on Long-Term Debt Program Revenues Operating Grants and Contributions 2,187,898,839 $ 15,066,934 $ 606,28~907 5,176,256 5,176,256 (J,562,169,022) (1,562,169,022) $ 800:iso $ (1,561,368,742) l:O N V, General Revenues: Property Taxes Other Taxes Grants and Contributions Not Restricted to Specific Programs State & Federal Subsidies Transfers Total General Revenues and Transfers Change in Net Assets Prior Period Adjustment Net assets - Beginning Net assets - F.nding The notes to the fmancial statements are an integral part of this statement. 503,114,085 142,216,416 68,145,334 768,987,628 75,731 1,482,539) 94 (79,629,828) (4,415,284) fil!J,906,987) (567,952,099) 503,JJ4,085 142,216,416 68,145,334 768,987,628 (75,731) (75,731) 724,549 $ 11,043,365 11,267,914 1,482,463,463 (78,905,279) (4,415,284) (472,863,622) (556,184,185) School District of Philadelphia Reconciliation of the Statement of Revenues,Expenditures and changes in Fund Balances of Governmental Funds To the Statt,ment of Activities For the Year Ended June 30, 2003 Amounts reported for governmental activities in the statement of activities ( pag,e B-25 ) are different because: Net change in fund balances - total governmental funds ( page B-30) $ Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful liws and :reported as depreciation expense. Capital outlays were less thru1 depreciation in tile current period. Non capitalized purchases that exceed capital outlays (86,023,971) (8,748,303) 3,770,095 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 10,338,432 Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilibilties in the statement of net asse:ts.This is the amount by which proceeds exceeded repayments. (Note 2B) 34,953,641 Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental (33,516,544) fimds. The net revenue (loss) of certain activities of internal service fund is reported with governmental activities. Change in net assets of governmental activities ( page B-25 ) 1be notes to the financial statements are an integral part of this statement. B-26 (403,178) $ (79,629,828) School District of Philadelphia Balance Sheet Governmental Funds June 30, 2003 General Fund ASSETS Cash & Cash Equivalents Cash and Investments with Fiscal Agent Equity in Pooled Cash and Investments Investments Taxes Receivable (Net) Due from Other FWlds Due from Other Governments AccoW1tsReceivable (Net) Accrued Interest Receivable Inventory Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accollllts Payable Overpayment of Taxes Accrued Salaries and Benefits Payable Tennination Compensation Payable Severance Payable Deferred Revenue Due to Other FW1ds Due to Other Governments 1,172,861 $ Categorical Funds $ 145,310,040 136,814,816 7,495,660 18,465,012 1,484,365 88,684 2,729,408 $ 125,948 9,605,583 16,851,355 1,668,262 21,218,893 682,852 $ 313,560,846 $ 11,273,845 $ 38,879,048 $ 17,093,225 13,568,719 15,408,029 14,176,275 2,529,370 118,604,149 $ 4,326,481 $ 6,089,875 Total Liabilities FWld Balances: Reserved for: Inventories Encumbrances Retirement of Long Term Debt Self Insurance Debt Service Interest Trust Flllld Principal Unreserved Designated FWld Balance Special Revenue Fllllds Permanent FW1ds Unreserved-reported in: 4,253,686 2,344,392 36,452,261 33,285 88,058 181,379,767 8,613,452 44,974,586 1,342,046 16,343,403 2,660,393 1,858,110 General Flllld Categorical FW1ds Debt Service FWld Capital Projects FWld 112,637,520 Total FWldBalances 132,181,079 Total Liabilities and FWld Balances Intermediate Unit fund (6,095,538) $ 313,560,846 The notes to the financial statements are an integral part of this statement. B-27 2,660,393 $ 11,273,845 {6,095,538) $ 38,879,048 Debt Service Fund $ $ Non-Major Governmental Funds Capital Projects Fund 63,262,673 3,113,926 52,006,757 $ 2,924,710 Total Governmental Funds $ 53,305,566 63,262,673 183,254,723 1,530 136,814,816 7,495,660 41,365,892 2,167,217 437,175 2,729,408 5,449,109 1,530 13,725 325,646 $ 66,702,245 $ 22,845 $ 54,968,037 $ 5,450,639 $ 490,834,660 $ 6,062,269 $ 6,177 $ 33,578,027 13,568,719 22,082,698 14,176,275 2,529,370 159,137,063 5,539,050 121,343 76,591 3,535,122 545,531 5,539,050, 3,535,122 12,223,441 6,177 46,000,288 22,566 250,732,545 2,389,576 1,342,046 65,026,650 34,137,623 1,858,110 28,934,059 2,389,576 2,464,657 567,663 2,464,657 567,663 34,137,623 28,934,059 112,637,520 (6,095,538) 95,441 (3,255,692) 95,441 (3,255,692) $ 66,702,245 5,444,462 42,744,596 63,167,123 $ 54,968,037 $ B-28 5,450,639 240,102,115 $ 490,834,660 School District of Philadelphia Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For The Year Ended June 30, 2003 General Fund REVENUES Local Taxes Locally Generated Non Tax State Grants and Subsidies Federal Grants and Subsidies 520,584,192 58,229,902 958,198,628 277,190 $ Total Revenues $ $ 336,124 62,751,998 6,449,328 41,976,799 254,889,197 1,537,289,912 63,088,122 303,315,324 874,105,726 54,098,224 79,889,021 224,277,359 44,247,248 279,334 162,133,166 53,312,176 10,441,731 180,054,696 81,521,237 23,386,455 8,944,197 EXPENDITURES Current: Instruction Student Support Services Administrative Support Operation & Maintenance of Plant Services Pupil Transportation All Other Support Services Early Childhood Education Payments to Charter Schools Debt Service: Principal Interest Capital Outlay: New Buildings and Additions Environmental Management Alterations and Equipment Major Renovations Equipment Acquistions 25,561,915 126,061,242 1,402,958,154 Total Expenditures Excess (Deficiency) of Revenues over (under) Expenditures OTHER FINANCING SOURCES (USES) Transfers In Transfers Out Total Other Financing Sources and (Uses) Net Change in Fund Balances Fund Balances, July 1, 2002 Prior Period Adjustment (Change in Inventory Reserve) Fund Balances, June 30, 2003 Categorical Funds Intermediate Unit Fund 225,887,073 319,468,500 134,331,758 (162,798,951) (16,153,176) 2,680,550 (183,729,968) 162,920,676 19,869,151 (2,680,550) (181,049,418) 162,920,676 17,188,601 (46,717,660) 121,725 1,035,425 178,706,851 2,538,668 (7,130,963) 191,888 $ 132,181,079 The notes to the financial statements are an integral part of this statement. B-29 $ 2,660,393 $ (6,095,538) D~bt Service Fund $ 113,089,408 1,677,917 Non-Major Governmental Funds Capital Projects Fund $ 114,767,325 Total Governmental Funds $ $ 633,673,600 68,057,963 1,062,959,908 260,342,643 1,232,702 32,483 5,176,256 131,990 6,441,441 131,990 2,025,034,114 697,069 1,216,990,657 188,931,637 113,717,207 233,221,556 44,247,248 279,334 25,561,915 126,061,242 34,953,641 70,192,523 34,953,641 70,192,523 18,175,393 8,293,958 27,002,966 810,714 2,693,825 18,175,393 8,293,958 27,002,966 810,714 2,693,825 105,146,164 2,111,133,816 56,976,856 697,069 (50,535,415) (565,079) (86,099,702) 444,372 571,500 186,486,249 (186,410,518) 444,372 571,500 75,731 6,421 (86,023,971) 9,621,161 10,065,533 (50,535,415) 53,101,590 93,280,011 325,934,198 5,438,041 191,888 $ 63,167,123 $ $ 42,744,596 = B-30 5,444,462 $ 240,102,115 School District of Philadelphia Statement of Net Assets Proprietary Funds June 30, 2003 Enterprise Fund Food Service ASSETS Current assets: Cash and Cash Equivalents Equity in Pooled Cash and Investments Due From Other Governments Inventories Total current assets $ Noncurrent assets: Machinery & Equipment Accumulated Depreciation Total noncurrent assets Total Assets LIABILITIES Current liabilities: Accounts Payable Accrued Salaries and Benefits Payable Termination Compensation Payable Severance Payable Due to Other Funds Total current liabilties 83,342 10,254,682 5,098,160 1,438,898 16,875,082 Internal Service Fund Print Shop $ 67 112,629 112,696 12,496,155 (8,870,805) 3,625,350 1,242,880 (1,010,165) 232,715 $ 20,500,432 $ 345,411 $ 2,556,908 146,283 1,877,959 4,151,368 $ 8,103 5,430 236,336 Noncurrent liabilities: Total noncurrent liabilties Total liabilities 8,732,518 1,501,856 1,751,725 8,732,518 1,751,725 3,625,350 8,142,564 232,715 (1,639,029) 11,767,914 (1,406,314) NET ASSETS Invested in Capital Assets Net of Related Debt Unrestricted Total Net Assets TOTAL LIABILITIES AND NET ASSETS $ 20,500,432 The notes to the financial statements are an integral part of this statement. B-31 $ 345,411 School District of Philadelphia Statement of Revenues, Expenses, and Changes in Fund Net Asset11 Propf'ietary Funds For the Year Ended June 30, 2003 Enterprise Fund Food Service Operating Revenues: Food Service Revenue Sale of Printing Services $ 8,185,615 Internal Service Fund Print Shop $ 2,191,680 Total Operating Revenues 8,185,615 2,191,680 18,698,192 9,616,451 34,257,316 625,680 9,340,050 936,871 345,956 59,404 64,721 1,187,906 Total Operating Expenses 72,537,689 2,594,858 Operating Income (Loss) (64,352,074) (403,178) 65,152,354 39,699 800,280 (363,479) Operating Expenses: Salaries Employee Benefits Other Purcbast:d Service- Food/ Merchandise Used Depreciation Other Operating Expenditures- General Fund Charges Non-operating Rt:venues (Expenses): Federal and State Operating Grants Income (Loss) Before Contributions Transfers In (Out) (75,731) Chimge in Net Assets Total Net Ass.ets July 1, 2002 Total Net Assets June 30, 2003 $ The notes to th,! financial statements are an integral part of this statement. B-32 724,549 (363,479) 11,043,365 (1,042,835) 11,767,914 $ (1,406,314) School District of Philadelphia Statement of Cash Flows Proprietary Funds For The Year Ended June 30, 2003 Enterprise Fund Food Service CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Users Cash Received from Assessments Made to Other Funds Cash Received (Paid) from Other Operating Revenue Cash Payments to Employees for Services Cash Payments to Suppliers for Goods and Services Cash Payments for Other Operating Expenses 8,185,615 $ Net Cash Provided (Used) by Operating Activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Advances from Other Funds State Sources Federal Sources Transfers Inffransfer (Out) Internal Service Fund Print Shop $ (1,328,491) (28,314,643) (30,781,031) (8,139,409) (1,259,950) (79,771) (1,174,046) (60,377,959) (380,230) 398,689 3,848 35,851 4,708,502 57,498,410 (75,731) 438,388 62,131,181 Net Cash Provided (Used) for Non-Capital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Facilities Acquisition, Construction, Improvements Net Cash Provided by (Used for) Capital and Related Financing Activities 2,191,680 (58,143) (770,360) (58,158) (770,360) (58,158) 982,862 8,936,409 Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents July 1, 2002 $ Cash and Cash Equivalents June 30, 2003 Reconciliation of Operating Income to Net Cash Provided (Used) by Operating Activities: Operating Income (Loss) Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation and Net Amortization Donated Food Commodities (Increase) Decrease in Accounts Receivable (Increase) Decrease in Inventories (Increase) Decrease in Due From Other Governments Increase (Decrease) in Accounts Payable Increase (Decrease) in Accrued Salaries and Benefits Payable Increase (Decrease in Payroll Deductions and Withholdings Increase (Decrease) in Termination Compensation Payable Increase (Decrease) in Severance Payable $ 9,919,271 (64,352,074) $ $ 64,721 625,680 2,945,442 (1,946,630) 580,484 (7,392) 1,473 (12,975) (42,053) 419,871 769,285 Total Adjustments $ Net Cash Provided (Used) by Operating Activities The notes to the financial statements are an integral part of this statement. B-33 (403,178) 103,935 476,048 19,174 3,974,115 22,948 (60,377,959) $ (380,230) School Distrid of Philadelphia Statement of Fiduciary Net Assets Fiduciary Funds Types June 30, 2003 Private - Purpose Trust Funds ASSETS Cash and Cash Equivalents Equity in Pooled Cash and Invc!stments Investments Accounts Receivable Inventories $ $ 598,178 200,027 878 Total Ass.ets 55,356 407,856 26,824,331 12,222 450 19,421,604 5,240,016 454,754 1,707,507 12,222 26,824,331 Total Liabilities $ 5,242,105 21,119,014 799,083 LIABILITIES Accounts Payable Payroll Deductions and Withholdings Due to Studcmt Activities Due to Other Funds Other Liabilities NET ASSETS Held in Trust for Various Purposes Agency Funds 786,861 The notes to the financial statements are an integral part of this statement. 8-34 $ School District of Philadelphia Statement of Changes in Fiduciary Net Assets Fiduciary Funds For the Year Ended June 30, 2003 Private Purpose Trust Funds ADDITIONS Gifts and Contributions Interest Received $ 350,594 19,345 369,939 Total Additions DEDUCTIONS Scholarships Awarded 241,847 Total Deductions 241,847 Change in Net Assets 128,092 Net Assets July 1, 2002 658,769 $ Net Assets June 30, 2003 The notes to the financial statements are an integral part of this statement. B-35 786,861 School District of Philadelphia. SCHOOL DISTRICT OF PHil.,ADELPHIA. NOTES TO THE FIN-ANCIALSTATEMENTS JUNE 30, 2003 These notes are an integral part of the financial statements and include a summary of accounting policies and other information considered necessary for a clear understanding of the statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The acc;ountingpolicies of1he School District, as reflected in the accompanying financial statements for the fiscal year ended June 30, 2003, conform to generally accepted accounting principles (GAAP) for local government units as prescribed by the Governmental Accounting Standards Board (GASB). The most significant accmmting policies are smnmarized below: A. Reporting ]Entity The School District of Philadelphia (the "School District") is a separate and independent home rule school district of the first class established by the Philadelphia Home Rule Charter (the "Charter") in December 1965. The Philadelphia Home Rule Charter Act-PL643 (Act) expressly limits the powers of the City by prohibiting the City from, among other things, assuming the debt of the School District or enacting legislation regulating public education or its administration, except in respect to setting tax rates authorized for school purposes by the General Assembly of the Commonwealth. Although the School District is an independent legal entity it is considered to be a component unit of the City of Philadelphia for reporting purposes and is included in the City's Comprehensive Annual Financial Report (CAFR). The School District of Philadelphia (the "School District") is the largest school district in the Commonwc!alth of Pennsylvania (the "Commonwealth"), serving 211,240 students. The School District is the eighth largc!st in the United States in enrollment and employs 25,658 full-time professional and non-professional persons. The bounda1ies of the School District are coterminous with the boundaries of the City of Philadelphia (the "City"). The School District is a political subdivision of the Commonwealth created to assist in the administration of the General Assembly's duties under the Constitution of the Commonwealth to "provide for the maintenanc:e and support of a thorough and efficient system of public education to serve the needs of th1! Commonwealth." The School District also serves as the agent for the Intermediate Unit No. 26 (the "lU"); an entity established by the Commonwealth to provide special education, speeial education transportation, non-public school services and related management services. The School Reform Commission (the "SRC") constitutes the Board of Directors of the lU; the boundaries of the lU are coterminous with those of the City and School District. The School District, pursuant to contracts between the School District and the IU, performs all the IU servic1!s. B- 36 School District of Philadelphia The School District implemented a new management structure under which a Chief Executive Officer (CEO) was appointed as the Superintendent effective November 1, 2000. The CEO performs the duties imposed on the Superintendent of Schools by the Home Rule Charter and the Public School Code of 1949 (School Code) and serves as the Secretary and Treasurer of the Board. The new structure includes a Chief Academic Officer, a Chief Financial Officer, a Chief Operating Officer and a Chief Information Officer, all of whom report to the CEO. The CEO is responsible for the general supervision of all business affairs of the School District, the furnishing of all reports to the Department of Education of the Commonwealth and other matters prescribed by the School Code, as amended. As Treasurer of the Board, the CEO receives all Commonwealth appropriations, School District taxes and other monies of the School District, makes payments on orders approved by the Governing Body and is responsible for the investment of School District funds. Under this structure, the CEO performs the duties of the Superintendent of Schools under the Charter, including the pre-audit duties and functions of the school controller. The School District suffered recurring operating losses, in 2001 & 2002, which have lead to increasing deficits in the School District's Operating Budget. The recurring operating losses resulted from the fact that the annual growth in per student operating revenues since fiscal year 1995 had averaged 2.6 percent while spending per student over the same period had grown by 3.6 percent per annum. Effective December 22, 2001, in a cooperative effort with the City of Philadelphia to address the District's financial needs, the Commonwealth of Pennsylvania assumed governing control of the School District by declaring it distressed in accordance with Sections 691 and 696 of the Public School Code. Shortly thereafter, a five-member School Reform Commission was established. The School Reform Commission assumed responsibility for a school district that was in distress, both financially and academically. The School Reform Commission exercises all powers and has all the duties of the Board of Education. The Board of Education continues in office, performing only the duties assigned, if any, by the School Reform Commission. The Governor of Pennsylvania appointed the chairman and two other members. The Mayor of Philadelphia appointed the remaining two members of the School Reform Commission. The five-member Commission performs its oversight responsibility for the Philadelphia public school system through their "Guiding Principles." These principles are to: ( 1) educate children first, (2) treat teachers as educators, (3) engage families as parents, and (4) great education emerges from sound financial practices. The School Reform Commission on July 17, 2002 appointed Mr. Paul G. Vallas as the CEO. Together, the School Reform Commission and Mr. Vallas have redefined the School District of Philadelphia. The School District developed and plans to maintain a fiscally responsible and stable operating budget. A fiveyear plan was announced in August 2002 by Mr. Vallas, which projected additional budget reductions, revenue enhancements and improved operations management to achieve this goal. The five-year plan was revised and extended through fiscal year 2008 and projects that the District will end the period with a positive fund balance. In fiscal year 2003 the School District received additional funding from the Commonwealth of Pennsylvania of $25.0 million, as well as an additional $20.0 million in Basic Education Funding, $28.0 million in Charter School Reimbursements, and $2.0 million in Nonpublic School Transportation. The City of Philadelphia provided an annual subsidy of $35.0 million while increasing the School District's real estate tax mills share by 2.71 percent. B- 37 School District of Philadelphia B. J[)istrict-Wide and Fund Financial Statements lln June 1999, The Government Accounting Standards Board (GASB) issued Statement No. 34 "Basic Financial Statements - and Management's Discussion and Analysis -for State and Local Governments " (GASB State:mentNo. 34) effective for periods beginning after June 15, 2001. This statement, known as the "Reporting Model" statement, affec:ts the way the School District pre:pares and presents financial information. State and local governments previously have used a financial reporting model substantially different from the one used to prepare private-sector financial reports. GASB Statement No. 34 establishes new requirements and a new reporting model for the annual financial reports of st'lte and local governments. This statement was developed to make annual reports easier to understand and more useful to other people who use governmental financial information to make decisions and includes: Management's Dlscussion & Analysis- The reporting model includes a requirement that the financial statements be accompanied by a narrative introduction and analytical overview of the government's financial activities in the form of "management's discussion and analysis" (MD&A). This analysis is similar to analysis private sector entities provide in their annual reports and is Required Supplementary Information (RSI). District-Wide Financial Statements- The reporting model includes finandal statements prepared using: full accrual accounting for all of the government's activities. This approach includes not just current assets and liabilities (such as cash and accounts payable), but also capital assets and long-term liabilities. Accrual accounting also reports all of the revenues and costs of providing services each year, not just those received or paid in the current year or soon thereafter. Fiduciary funds are not included in district-· wide financial statements. The basic financial statements include both district-wide (based on the School District as a whole) and fund finandal statements. While the previous financial reporting model emphasized fund types (the total of all funds of a particular type), in the new reporting model the focus is on either the School District as a whole or major individual funds (within the fund financial statements). District-wide and fund financial statements (within the basic financial statements) categorize primary activities as either governmental or business-type. In the district-wide statement of net assets, both the activities assets and liabilities: (a) am presented on a consolidated basis and (b) are reflected, on a full accrual, economic resource basis, which incorporates long-term assets and receivables as well as long-term obligations. Statement of Net Assets - The statement of net assets is designed to display the financial position of the primary government. The School District reports all capital assets in the district-wide statement of net assets and reports depreciation expense - the cost of "using up" capit2,l assets - in the statement of activities. The m:t assets of the School District will be broken down into three categories: 1) invested in capital asstits, net of related debt; 2) restricted; and 3) unrestricted. Statement of Activities - The new district-wide statement of activities reports expenses and revenues in a format that focuses on the cost of each function of the School District. The expense of individual functions is compared to the revenue generated by the function (for instance, through user charges or governmental grants). These directly matched revenues are called program revenues. This format enables the district-wide statement of activities to reflect both the groBs and net cost per functional category (instruction, student support services, pupil transportation, etc.,) that are otherwise being supported by general government revenues. B- 38 School District of Philadelphia Program revenues must be directly associated with a function and are restricted to meeting the operational or capital requirements of a particular function or segment. The operating grants include operating-specific and discretionary (either operating or capital) grants while the capital grants column reflects capital-specific grants. Multi-purposed grants and other items not properly included among program revenues are reported as general revenues. Direct expenses are considered those that are clearly identifiable with a specific function or segment. The School District allocates indirect expenses to their applicable functions. Fund Financial Statements - Separate financial statements are provided for government funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the dstrict-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements. In the fund financial statements, financial transactions and accounts of the School District are organized on the basis of funds. The operation of each fund is considered to be an independent fiscal and separate accounting entity, with a self-balancing set of accounts recording cash and/or other financial resources together with all related liabilities and residual equities of balances, and changes therein. Each fund is segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with specific regulations, restrictions, or limitations. The fund statements are presented on a current financial resource measurement focus and modified accrual basis of accounting. This is the manner in which these funds are normally budgeted. A reconciliation is presented which briefly explains adjustments necessary to reconcile the fund financial statements to the governmental activities column of the district-wide financial statements. The School District's fiduciary funds are presented in the fund financial statements. Since by definition these assets are being held for the benefit of a third party and cannot be used to address activities or obligations of the district, these funds are not incorporated into the district-wide statements. There are three major fund types presented in this report. A brief description of each is presented below: ( 1) Governmental Fund Types - These are the funds through which costs of district functions are typically financed. The funds included in this category are: • General Fund - the principal operating fund of the School District; accounts for all financial resources except those required to be in another fund. • Special Revenue Funds - These funds account for the proceeds of certain revenue sources that are legally restricted to expenditures for specified purposes. Special Revenue funds include: (a) Intermediate Unit Fund - used to account for State appropriations for special education and non public programs as well as certain administrative costs. (b) Categorical Funds - used to account for specific purpose Federal, State, City or Private grants. ( c) Trust Funds for which both principal and earnings may be used to support District programs that benefit either the District or its students. B- 39 School District of Philadelphia (2) (3) C. • Debt Service Fund - used to account for the accumulation of resources for the payment of dt:bt service and bond issuance costs. • Capital Projects Fund - used to account for financial resources used for general fixed asset acquisition, construc:tion, and improvement. • Pem1anent Fund Types - used to account for resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support District programs that benefit the District or its students. Proprietary Fund Types - To,;:se are the funds that account for the operations of the School District that are financed and operated in a manner similar to those often found in the private sector. The funds included in this category are: • Ente,rprise Fund - used to account for the operation of the Food Services Division. • Intemal Service Fund - reports on print shop and photocopy operations by accounting for prinlting and copy services provided to various School District divisions on a cost reimbursement basis. Fiduciary Fund Tvpes - These funds account for assets held by the School District as a trustee or agent for individuals, private organizations, and/or other governmental units. The funds included in this category are: • Private Purpose Trust Funds- used to account for all trus't agreements for which both principal and earnings benefit individuals, private organizations or other governments. • Agency Funds- used to account for assets held by the School District as trustee or agent for others. These funds are accounted for in a manner similar to governmental funds. A1l June 30, 2003 there were four Agency Funds administered by the School District. Measurement Focus, Basis of Accounting and Financial Statement Presentation The district-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiducilry fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Non-exchange tnmsactions where the School District either gives or receives value without directly receiving or giving equal value in exchange include grants and donations. Revenues from grants and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied. It is the School District's policy to first use restricted assets for expense:; incurred for which restricted and unrestricted assets are available. Governmental fund financial statements are reported using the current fmancial resources measurement focus and the modified accrual basis of accounting. This focuses on the determination of, and changes in financial position, and generally only current assets and current liabilities are included on the balanc,~ sheet. Revenues are recorded as soon as they are both measurable mid available. Revenues are considered availa.ble when they are collectible within the current fiscal p,!riod or soon thereafter to pay B- 40 School District of Philadelphia liabilities of the current period. For this purpose the School District considers revenues to be available if they are collected within 60 days of the end of the current period for the general fund and within 90 days of the current fiscal period for categorical funds. Revenues from grants and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied and the resources are available. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Taxes, such as liquor, school income, and use and occupancy associated with the current fiscal period are recognized when the underlying exchange transaction has occurred and the resources are available. Imposed non-exchange revenues such as real estate taxes are recognized when the enforceable legal claim arises and the resources are available. Revenues from grants and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied and the resources are available. All other revenue items are considered to be measurable and available only when cash is received by the School District. The School District receives the vast majority of its revenues from governmental entities. These revenues primarily come in the form of state subsidies, city taxes, federal and state grants, and a city grant. The School District reports the General, Intermediate Unit, Categorical, Debt Service and Capital Project Funds as its major governmental funds. GASB Statement No. 34 eliminates the presentation of account groups, but provides for these records to be maintained and incorporates the information into the governmental column in the district-wide statement of net assets. Private-sector standards of accounting and financial reporting issued prior to December l, 1989, generally are followed in both the district-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent prior sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The District has elected not to follow subsequent private sector guidance. The effect of interfund activity has been eliminated from the district-wide fmancial statements. Exceptions to this general rule are other charges between the District's food service function and other functions of the District. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include: 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenue rather than as program revenues. Likewise, general revenues include all taxes. Indirect costs such as depreciation have been allocated to specific program expenses. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the District's Enterprise Fund (Food Service) and Internal Service Fund (Print Shop) are charges for sales and services. Operating expenses for these funds include costs of sales and services, administrative B- 41 School District of Philadelphia expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. D. ~\ssets, Liabilities., and Net Assets or Equity ( 1) Cash and Investments Cash and cash equivalents include currency on hand, deposits, short-term highly liquid investments, and investments with original maturities of three months or less from the date of acquisition. State sta1utes require the School District to invest in obligations of the United States Treasury and Commonwealth of Pennsylvania and collateralized repurchase agreements. Non-participating investment contracts, generally certificates of deposit, and repurchase agreements are reported at cost, which approximates fair valm:. All other investments are reported at fair value. (2) Real Estate Taxes Ad valorem real estate tax revenues are recognized in compliance with GASB Statement 33. Thtis statement provides that tax revenues should be recognized in the period for which they are levied except that they shall not be recognized unless they are collected within the current year or expected to be collected within sixty days after the end of the current year. Tite tax on real estate in Philadelphia for public school purposes for fiscal 2003 was 4 7 .90 millls. Of this total, 16.75 mills are levied directly by the School District pursuant to legislative authorization by the General Assembly without further approval of the City Council, and the remaining 3 1.15 mills are levie:dpursuant to legislative authorizati on and approval by ordinance: of the City Council. Assessments are certified and taxes are levied on January 1st; taxes are due March 31st. Interest and penalty accrue at the rate of 1-1/2 percent per month beginning April 1st, andl unpaid taxes are considered delinquent the following January l!,t and are then subject to lien .. The City has established real estate improvement programs that abate, for limited periods, tax increase:s that result from higher assessments for improved properties. (3) Due from Other Governments Grant revenues are recognized when all the applicable eligibility requirements have been met and the resources are available. Primarily, the line item "Due From Other Governments" represents the excess of grant expenditures over funds collected. ( 4) Receivables and Payables Activity between funds that are representative oflending/borrowing arrangements outstanding at end of the fiscal year are referred to as either "due to/from other funds". Any residual balances outstanding betwem the governmental activities and business-type activities are n:ported in the district-wide :financial statements as "internal balances." B- 42 School District of Philadelphia ( 5) Inventories Inventories in the General Flllld are valued at an average cost of$ 2,729,408. Included are expendable supplies of $ 1,342,046 held for consumption by the Maintenance and Transportation Departments. The cost is recorded as an expenditure at the time inventory is purchased. The expendable supplies inventory is equally offset by a fund balance reserve, which indicates that, although they are a component of net current assets, they do not constitute resources available to be spent. Enterprise (Food Services) Flllld food inventories include $ 740,863 donated by the Federal Government, which is valued at government cost or estimated value. All other food or supply inventories are valued at last unit cost in accordance with the recommendations of the Food and Nutrition Service of the Department of Agriculture and will be expensed when used. Internal Service (Print Shop) Flllld inventories are valued at last unit cost and will be expensed as consumed. Agency (Student Bus Token) Funds inventories are valued at cost. This inventory represents tokens on hand at the close of the fiscal year. (6) Capital Assets Capital assets, which include property, plant, and equipment, are reported in the applicable governmental or business-type activities columns in the district-wide financial statements. Capital assets are defined by the School District as assets with an initial individual cost of more than $500 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated fJXedassets are valued at their estimated fair market value on the date donated. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Property, plant, and equipment of the School District are depreciated using the straight line method over the following estimated useful lives: Buildings Building improvements Equipment Vehicles Office equipment Computer equipment Library books B- 43 50 20 2-20 3-15 IO 5 5 School District of Philadelphia Capital assets acquired or constructed for governmental fund purposes are recorded as expenditures in the fimd incurring the obligation and are capitaliwd at cost in the district-wide Statement of Net Assets. Proprietary Fund equipment acquisitions are capitalized in the appropriate fund and depreciated over 12 and 10 years in the Ent,!rprise and Internal Service Funds respectively using a straightline method. (7) Deferred Revenues Deferred revenues represent ftmds received in advance of being earned or receivables that will be collected and included in revenues of future fiscal years. In the General Fund, deferred revenues relate principally to property tax receivables, which were levied in the current and prior years, but will not be avai'lable to pay liabilities of the current period. In Categorical Funds, deferred revenue represents grant funds received prior to expenditure or grant funds, which have been earned, but the resources are not considered to be available. In Debt Service Fund, deferred revenues represent interest on investments received in advance of being earned. In1he Capital Projects Fund, defened revenue consists of capital grant funds received prior to expenditure of grant funds. (8) In~~ TI1e School District is self-insured for fire damage, casualty losses, public liability, and Workers.' Compensation and Unemployment Compensation. However, certain insurance coveragc!s, including an employee performance bond and fire damage insurance, have been obtained. Weekly indemnity (salary continuation during employee illness), Workers' Compensation, and Unemployment Compensation coverages are accounted for in the General Fund. Workers' Compensation and Unemployment Compensation coverages are funded by a pro rata charge to various funds. The School District and covered employees share the cost of Weekly Indemnity coverage. Payments in fiscal year 2003 were comprised of $13,660,684 for Weekly Indemnity, $22,113,778 net for Workers' Compensation, and $4,:;47,127 for Unemployment Compensation claims. Liabilities expected to be liquidated with available resources are shown as accrued expenditures in the General Fund. Amounts expected to be paid from future years' resources are shown in the district-wide Statement of Net Assets. (9) ~ompensated Absences It is School District policy to permit employees to accumulate earned, but unused vacation and sick pay benefits. A liability for these benefits is accrued in the district-wide statement of net assets. The current year's po1tion of this accrual is reflected as an expense on the district-wide s1tatementof activities and are payable only upon termination. The School District's leav,:! policy is as follows: B- 44 School District of Philadelphia (10) (a) Vacation and Personal Leave - School District employees who are required to work on a twelve-month schedule are credited with vacation at rates which vary with length of service or job classification. Almost all School District employees are entitled to three days of personal leave annually. Vacation and personal leave may be taken or accwnulated within certain limits witil paid upon retirement or termination at the rate of pay at separation. (b) Sick Leave - Most School District employees are credited with 10 days of sick leave annually to an wilimited maximwn. Upon retirement or termination, such employees are paid 25% of the value of their accwnulated sick leave balance at the rate of pay at separation. Long-Term Obligations In the district-wide financial statements, and propriety fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. Bond premiwns and discowits, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight line method. Bonds payable are reported separately from the applicable bond premiwn or discowit. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental funds recognize bond premiwns and discowits, as well as bond issuance costs, during the current period. The face amowit of debt issued is reported as other financing sources. Premiwns received on debt issuances are reported as other financing sources, while discowits on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. (11) Reserve for Self-Insurance This reserve, which has been established by resolution of the SRC, represents an accwnulation of funds collected in excess of benefits provided for the School District's Weekly Indemnity (salary continuation) plan. (12) Fwid Equity In the fund financial statements, governmental funds report reservation of fund balance for amowits that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. A few of these designations are as follows: (a) Restricted Assets: Certain proceeds of the School District's Debt Service Fwid bonds, resources set-aside for their repayment, and funds held in escrow for refunding and defeasement are classified as restricted assets on the balance sheet. They are maintained wider separate accowits and their use is limited by applicable bond covenants. B- 45 School District of Philadelphia (b) ( 13) Reserve for Retirement of Long-term Debt: Funds are accumulated in the Debt Service Fund to pay the next principal and interest payment on bonds outstanding. Funds re,quired to retire all long-term debt are recorded as long-1:ermliabilities on the districtwide statement of net assets. (See Note 4 E.) Comparative Data Comparative data from FY2002 is provided as a key element of the Management Discussion and Analysis (MD&A) to enhance the analysis of financial data of the current period. 2. RECOJVCILIATJON OF DISTRICT-WIDE AND FUND FINANCLU STATEMENTS A. Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the District-Wide St:atement of Net Assds The governmental fund balance she1!t includes a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the district-wide statements of net assets. When capital assets (land, buildings, equipment) that are to be used in governmental activities are purchased or constructed, the cost of those assets are reported as e,c:penditures in governmental funds. However, the statement of net assets includes capital assets among the assets of the School District as a.whol,e. $ Cost of capital assets Accumulated depreciation Net Cost of Capital Assets $ 2,032,536,307 (909,583,431) l, 122,952,876 Also, "deferred charges," including issuance costs for general obligation bonds, are expensed in the governmen1talfunds, but amortized over the life of the related bonds. This is the balance of unamortized bond issuance costs: $ 6,108,216 Total adjustment to fund balance - governmental funds $ 1 129061 092 Because th1!focus of governmental funds is on short-term financing, some assets will not be available t,o pay current-period expenditures. Thosti assets are offset by deferred revenue in the governmental funds., and thus are not included in fund balance. Taxes. Receivable Accounts Receivable Grants & Subsidies Adjustment of Deferred Revenue $ (117,572,678) (562,243) (6,095,538) $ () 24 230 459) Another elc!mentof that reconciliation explains that "long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds." The details of this ($2,059,939,451) difference are as follows: B- 46 School District of Philadelphia B. Bonds Payable Add: Premium on Bonds Payable Bond Interest Payable Funds Due to Other Governments Life Insurance Liability Retirees Workers Compensation Payable Unemployment Compensation Payable Compensated Absences Severance Payable Claims and Judgments Asbestos Loan Payable $ (1,405,890,000) (19,228,197) (27,013,476) (45,278,566) (21,228,000) (60,946,264) (6,166,239) (288,792,460) (168,546,699) (15,086,716) (996,641) Net adjustment to reduce fund balance - total governmental funds- to arrive at net assets governmental activities $ (2.059 939 451) Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances and the District-Wide Statement of Activities The governmental fund statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes infund balances - total governmental fonds and changes in net assets of governmental activities as reported in the district-wide statement of activities. One element of that reconciliation explains that "Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense." The details of this$ (2,885,515) difference are as follows: Capital outlay Depreciation expense Net adjustment to increase net changes in fund balances - total governmental funds to arrive at/ changes in net assets of governmental activities $ $ 58,978,439 (67,726,742) (8 748 303) Another element of that reconciliation states that "Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets." The details of this($ 34,953,641) difference are as follows: Principal repayments $ 34,953,641 Net effect of differences in the treatment of long-term debt And Related premiums and issuance costs $ {34 953 641) Another element of that reconciliation states that, "some expenses reported in the statement of activities do not require the use of current financial resources, and therefore, are not reported as expenditures in governmental funds." The details of this($ 27,408,328) difference are as follows: B- 47 School District of Philadelphia Change in life insurance payable Change in compensated absences payable Change in severance payable Change, in workers' compensation payable Change, in Wlemployment compensation payable Change, in claims and judgments payable Net accrued bond interest Net adjustment to decrease net changes in fund balance- total governmental funds to arrive at changes in net assets of governmental activities 3. $ (1,891,000) (15,646,925) (2,172,562) 4,353,735 (1,343,898) (10,113,147) (6,702,747) $ (33 516 544) STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY A. Budgetary Infor11Dation ( 1) Gimeral Budget Polices -The Home Rule Charter requires that the School District adopt an operating budget and a capital budget for each fiscal year. The operating budget consists of the G1meral FWld, the Intermediate Unit FWld and the Debt Service FWld. In early October, the CEO provides a status rep01t to the SRC on the budget for the current fiscal year and multi-year projections, and they give consideration to any changes in the current education program. The public is invited to make recommendations for changes in the educational program for the ensuing fiscal year at a special meeting held in late October. fu mid-November program managers receive budget preparation materials, and within the framework of policies and initiatives developed by the SRC and CEO, program administrators di:velop goals, objectives, and priorities which are incorporated into budget requests called program and activity statements. All such statements are farther defined by items of expenditures, called "object classes." Completed budget requests, including a revised estimate of current year's expenditures, are submitted to the Office of Financial Planning and Analysis for revi1!wby the end of December. All approved requests are incorporated into the "proposed oJPeratingbudget." In consultation with the SRC, the CEO provides status reports on the budgets for the current fiscal year, the ensuing fiscal year, and multi-year projections before and after giving consideration to any changes in the current education program. The SRC then must observe specific:-timing requirements outlined in the Charter as follows: • At least thirty days prior to the end of the current fiscal year, the budget must be adopted (no later than May 31 ). • At least thirty days prior to adoption, public hearings must be held (no later than April 30). •• At least thirty days prior to public hearings, notice must :,e given of hearing dates, and copies of the proposed operating budget must be made available to all interested parties (no later than March 30). B- 48 School District of Philadelphia A statement of estimated receipts and expenditures is submitted to the Mayor and the President of City Council on or before March 30. Since the School District has limited taxing power, City Council must approve the continuance of, or changes in, the local taxes for school purposes required to fund the estimated expenditures of the School District after taking into account the estimated revenues from the Commonwealth and the 16.75 mills of real estate taxes authorized by the General Assembly. If total estimated funds from all sources are insufficient to balance the budget, the SRC must reduce anticipated expenditures to a level consistent with total available funds, as mandated by the Charter. The ensuing balanced budget becomes the adopted financial plan for the School District for the forthcoming fiscal year. Control of the operating budget is exercised at the expenditure object class level within principal administrative units. Management is authorized to transfer budget amounts between personal services and employee benefits and among materials, supplies, books and equipment, but only within an administrative unit. Transfers between other expenditure classes or between administrative units require the approval of the SRC with appropriate notice and public hearings. No supplementary budgetary appropriations were necessary during the fiscal year. Unencumbered appropriations lapse at year-end. The development of the capital budget and program is the principal responsibility of the Office of Facilities Management and Services and represents that office's research and analyses as well as priorities of the SRC and the CEO, and recommendations of the City Planning Commission. Due consideration is given to balancing physical needs and financial resources which may become available to fund capital improvements. A capital program detailing a division's plan for the ensuing five years, as well as a capital budget detailing the expenditure requirements of the first year of the capital program, must be adopted by the SRC not later than the date of the adoption of the annual operating budget and follows the same adoption procedures related to public hearings mandated by the Charter. Implementation of the capital budget is contingent upon the receipt of proceeds of debt obligations of the School District or other resources made available for capital improvement purposes. Control of the Capital Projects budget is exercised at the major project and sub-project levels. Transfers between major projects must be approved by the SRC. Unencumbered appropriaticns lapse at year-end although they may be included in the ensuing year's appropriations. Administrative control is maintained at the individual project level. The SRC is not required to adopt a budget for Categorical Funds. The SRC does approve all contracts with funding agencies, and budgetary control is exercised at the level prescribed by funding agency regulations and guidelines. Amendments to Categorical Funds budgets must be approved by funding agencies. Enterprise (Food Services) and Internal Service (Print Shop) Funds budgets are not adopted; however, formal budgets are prepared and approved by management and expenses are controlled on the basis of these budgets. Fiduciary Funds are not formally budgeted; however, each individual expenditure request is reviewed for compliance with provisions and for availability of funding. B- 49 School District of Pbiladelphial (2) B. Encumbrance Accounting - Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of fimds are recorded in order to reserve that portion of the applicable appropriations, is employed as an extension of formal budgetary integration in governmental funds except for Categorical Funds. Encumbrances at year-end are reported as reservations of fimd balance since they do not constitute expenditures or liabilities but serve as authorization for expenditures in the subsequent y,!ar. Unreported Categorical Funds encumbrances totaled$ 40,643,519 at June 30, 2003. Since Categorical Funds do not have a formal adopted budget, this amount is not shown as a reservation of fimd balance at June 30, 2003. ;DeficitFund EquJ!!I The Categorical Ftmds experienced an unreserved fimd balance deficit of$ 6,095,538 while the Internal Service Fund had a retained earnings deficit of$ 1,639,030. The deficit in the Categorical Funds is due to GASB Statement No. 33 provisions which states grant revenue can only bi! recognized that is collected during the fiscal ye:aror collected soon enough after the end of the fiscal pe1iod to be available to pay the liabilities of the current period. 4. DETAILED NOTES ON ALL FUNDS AND ACCOUNTS A. Cash and Investments ( 1) Gtmeral Information Ilte School District's cash and investments at June 30, 2003 are summarized as follows: Cash and Cash Equivalents Cash and Investments with Fiscal Agent Equity in Pooled Cash and Investments Investments Total Cash and Investrnents $ 58,631,013 63,262,673 215,226,597 201,557 $ 337 321 840 The School District is authorized under section 440.1 of the Public School Code to invest in United States Treasury bills, short-term obligations of the United States government and its agencies or instrumentalities, obligations of the United States of America or any of its agencies or instrumentalities backed by the full faith and credit of the United States, obligations of the: Commonwealth of Pennsylvania or any political subidivision of the Commonwealth backed by full faith and credit of the Commonwealth or the political subdivision, money market fimds of U.S. Trnasury obligations, and collateralized repurchase agreements. (2) Pooled Cash and Investment~ The School District maintains an internal investment pool to facilitate cash management and ac:counting. This technique is used to limit demand balance5, to 1hose sums necessary to reimburse banks for account related activities. All fimds that can be legally or practically combined are included in the pooled cash and investments account. Receipts from member funds increase their equity in the account and clilsburst!ments made on behalf of member funds reduce their equity. Interest earned on B- 50 School District of Philadelphia investments is distributed to certain member fimds based on their equity in the pooled cash and investments account. At June 30, 2003, pooled cash and investments were $ 15.3 million more than members' equity. This amount represented checks drawn but not yet processed for payment. (3) Deposits At June 30, 2003, the carrying amount of the School District's deposits with financial institutions was$ 118.1 million and the bank balance was$ 133.4 million. The deposits are categorized as follows: (amounts in thousands) Carrying Bank Amount Balance Amount insured by the FDIC or collateralized with securities held by the School District in its name $ Amount collateralized with securities held by the pledging financial institution's trust department in the School District's name Uncollateralized. These items are covered by pledged assets which are pooled to secure deposits of public fimds as authorized by State Statute P.L. 281, No 72. Total Deposits (4) 400 200 117,504 $ 118)04 $ 400 200 132,843 $ ]33 443 Investments The School District's investments are categorized below to give an indication of the level of credit risk assumed by the entity at year-end as follows: Category 1 includes investments that are insured or registered, or for which the securities are held by the School District or its agent in the School District's name. Category 2 includes uninsured unregistered investments for which the securities are held by the counterparty's trust department or agent in the School District's name. Category 3 includes uninsured and unregistered investments for which the securities are held by counterparty or held by the counterparty's trust department or agent but not in the School District's name. B- 51 School District of Philadelphia (amounts in thousands) Repurchase Agreements Other Investments Total Investments $ 3 2 $ - $ 22,817 $ - $ Ul.2.W Other Investments (Fair Value): Forward Purchase Investment Stocks Total Investments (5) Catego!,Y 2 $ $ __ 1_ $ 196,196 __ 22,817 ----1=~ 2 $ - $ $ Carrying ReportedAmouat/ Am01mt Fair Value $196,196 $ 196,196 22,819 22,817 $ 219,015 $ 219.0]3 22,817 $ 22,817 $ 22.817 $ 22.817 Cash and Investment Balanc~ From Fe·bruary 2003 to early June 2003 uncollateralized deposits significantly exceeded the amounts reported in this category at June 30, 2003. This was due to cyclical tax collections {billings for taxes are mailed in January and payable in March). B. Receivable§. (1) Ni~tRec,eivables: Receivables as of the year end for the School District's individual Major and Non-MaJor, Internal Service and Fiduciary Funds in the aggregate, including the applicable allowan,ces for uncollectible accounts, are as follows: (amounts in thousands) General Receivables. Interest Taxes Accounts Gross Receivables Less: allowances for Uncollectibl1~ Taxt:s Accounts Total allowance Net total receivables Categorical $ 88.7 216,980.8 2,723.1 $ 219,792.6 $ $ 682.9 682.9 Debt Service $ 325.6 $ 325.6 Capital Projects $ 22.8 80,165.9 1,238.7 81,404.6 $ )38 388 O 22.8 Total $ 437.l 216,980.8 3,406.Q $ 220,823.9 80,165.9 1,238.'Z 81,404.6 $ ~82.9 $ 32~ 6 $ 22,8 $ 1J9 ~12 l The allowance for mcollectible accounts are for receivables established :forthe collection of employe€:s that were overpaid. B- 52 School District of Philadelphia (2) Taxes Receivable: Estimated collectible taxes at June 30, 2003 amounted to$ 136.3 million as follows: (amounts in millions) Taxes Receivable Real Estate Taxes Current $ Prior Total Real Estate Taxes Self Assessed Taxes Use and Occupancy School Income Tax Liquor Tax Total Self Assessed Taxes Total Taxes Receivable $ 67.4 119.9 187.3 Estimated Uncollectible Estimated Collectible $ $ 13.8 5.4 10.4 29.6 216 2 8.3 56.7 65.0 8.0 0.7 6.4 15.1 $ SQl 59.1 63.2 122.3 5.8 4.7 4.0 14.5 $ l 36 8 During July and August 2003, $ 13.8 million in real estate taxes receivable and $ 5.8 million in selfassessed taxes receivable were collected. Those amounts were accrued and included in fiscal 2003 revenues. Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue reported in the governmental funds were as follows: Taxes receivable earned but not available (General Fund) Accounts receivables earned but not available (General Fund) Grant Funds earned but not available (Categorical Fund) Grant Funds received prior to meeting all eligibility requirements (Categorical Funds) Interest on investments received prior to being earned (Debt Service fund) Grant Funds received prior to meeting all eligibility requirements (Capital Projects Fund) Total deferred revenue for governmental funds B- 53 Unavailable $117,211,948 1,392,201 6,095,538 Unearned $ 30,356,723 3,535,122 545,531 $ l 24 699 687 $34437376 School District of Philadelphia C. :Capital Assets Capital Asse:ts activity for the year endtid June 30, 2003 was as follows: (amounts in millions) Balance _My_l, 2002 Additions Deletions Governmental Activities: Capital Assets, not being depreciated: Land $ 104.7 Constmction in __ 131.3 Progress Total Capital Assets, __ 236.0 not being depreciated Capital Assets, being depreciated: Buildings Improvements Personal Property __ Print Shop Total Capital Assets, being depreciated Less accmnulat,ed depreciation for: Buildings Improvements Personal Property Print Shop Total Acc:umulated Depreciation Total Capital Assets, $ being depreciated, net Governmental activities Capital Assets, net $ Business-type Activities: Capital Assets, being depreciated: Machiinery and $ equipment Less accumulated depreciation for: Mach:inery and equi]Pment Business··type activities Capital Assets, net $ 770.7 772.9 198.3 _.Ll $ 5.1 $ 1,743.0 (32.1) 232.7 (2.4) (5.6) 32.1 (8.0) 32.1 774.4 817.9 207.6 1.,J QJ 892.2 (33.8) 1,801.1 (434.9) (346.8) (127.9) (l.Q) (910.6) 2.4 5.6 8.0 890 ..5 32.1 1 128 2 $ <5ID $ 12.0 $ 0.6 $ B- 54 109.8 28.8 (12.4) (37.1) ( 18.2) {0.1} (67.8) (0.6} $ $ 122.':? (422.5) (312.1) (115.3) (0.9} (850.8) 36 $ (32.1) 34.0 (8.4) Balance June 30, 200:! 23.7 3.7 15.3 14.9 __ Transfers $ 0.1 $ $ J 123 2 $ 12.5 (8.'2} O.l $ - $ $ 3ti School District of Philadelphia Depreciation expense was charged to the following activities as follows: Governmental activities: Instruction $ Student Support Services Administrative Support Pupil Transportation Operation Maintenance of Plant Services $ Total depreciation expense 50.8 7.1 7.1 2.6 0.1 67 7 For Business-type activities, all of the depreciation expense was charged to Food Service. The beginning balances of certain fixed asset accounts were adjusted by a net total of$ 4,415,282. This amount is reflected as a prior period adjustment in the district-wide Statement of Net Assets. These adjustments involved an understatement of asset value of $ 860,469 and a net understatement of accumulated depreciation of$ 3,554,813. D. Leases Operating Leases: The School District is committed under various leases for building, office space and equipment. These leases are considered for accounting purposes to be operating leases. Lease expenditures for the year ended June 30, 2003 amounted to $ 8,771,463. Future minimum lease payments for these leases are as follows: Fiscal Year Ending June 30 2004 2005 2006 2007 2008 2009-2010 Total Lease Payments (amounts in millions) $ 8.4 2.8 1.0 0.2 0.1 0.3 $ 12 8 Total expenditures in the Internal Service Fund for operating leases with terms less than one year amounted to $ 579,446 in 2003. F.. Obligations Short-Term Obligations: Short-term debt activity for the year included the issuance of a Tax and Revenue Anticipation Note during September 2003. The proceeds of the note was used for cash flow purposes; invested until needed and repaid by the District June 30, 2003. Changes in short-term obligations payable during fiscal year 2003 were as follows: (amounts in millions) Balance July 1, 2002 Governmental Activities: Tax and Revenue Anticipation Note (Series 2002-2003) $ - B- 55 Additions Deletions $ $ 175.0 175.0 Balance June 30,2003 $ School District of Philadelphia ;Long-Term Obligations: Changes in long-term obligations payable during :tiscal 2003 were as follows: Balance July 112002 Additions Governmental Activities: Termination Compensation $ Payable 296.0 $ Severance Payable 170.4 1,440.5 General Obligation Bonds Add: Bond Premium 20.1 Total Bonds Payable 1,460.6 Loans Payable 1.4 Federal Asbestos Due to Other Governments Deferre:d Reimbursement 45.3 Other Liabilities 75.1 Life Insurance Benefits 19.4 Deferred Revenue 4.0 Governmental activity Long-term ]liabilities $ 2 072.2 $ Business- Type Activities Termination Compensation $ Payable $ Severan4:e Payable Business-type activity Long-term liabilities $ (ammmts in millions) Balance Deletions June 30i2003 55.6 10.6 $ $ 303.9 171.0 1,405.9 19.2 1,425.1 $ 15.2 2.5 45.0 0.9 45.9 0.4 1.0 0.3 45.3 82.2 21.2 3.6 45.3 6.5 0.2 0.4 $ 100 7 ~ 2 053 3 $ 13.6 2.0 81.8 47.7 10.0 34.6 0.9 35.5 Due Within One Year 0.6 1.8 $ $ 0.1 4.2 $ $ $ $ 1.9 4.2 $ $ ~ $ 43 $ i... 6,1 $ 109 8 (1) T,ermination Compensation Payable - Termination pay consfots of accumulated leave no1t expected to be paid with avaHable resources. In addition, the School District provided an early re:tirement incentive for employees who retired before June 30, 2002. This provision gavti these employees medical coverage for a two-year period. This medical payout termination liability at June 30, 2003 was$ 766,192, which was included in 1hetenninationpayable amount above. (2) Severance Payable - Pursuant to collective bargaining agret:ments with the Philadelphia Federation of Teachers and the Commonwealth Association of School Administrators,, ttm-month salary schedules were extended over twelve months beginning September 1, 1982. This effectively reduced the salary payments to affected employees by approximately 17% for the year ended June 30, 1983 and created a severance liability to each employee that will be paid only upon termination. Estimated severance payable based on current salaries at June 30, 2003 was $ 171.0 million. July and August 2003 salaries for ten-month employees who had not terminated were budgeted in and paid from 2004 fiscal year appropriations. (3) peneral Obligation Bonds - General obligation debt is issued pursuant to the Local Government Unit Debt Act of .July 12, 1972, P.L. 781 as amended and re-enacted by Act 177, approve:d December 1996. The Debt Service Fund is used to account for the accumulation of resources and thti payment of principal, interest and issuance costs on general obligation bonds. The District has issued various general obligation bonds to fund budgeted capital projects and to B- 56 School District of Philadelphia refund higher interest rate bonds with new bonds bearing lower costs, and to provide level debt service payments for the District. General obligation bonds at Jillle 30, 2003 by bond issue are summarized as follows: Issue Interest Rates 1993-A 1993-B 1995-A 1995- B 1997-A 1997-B 1999-A 1999-B 1999-C 1999-D 2000-A 2000-B 2002-A 2002-B 5.000 - 5.375 5.000- 5.400 4.600 - 6.250 4.600 - 5.500 5.000 5.000 - 5.375 3.625- 5.250 3.500 - 5.250 4.250- 5.750 4.250- 5.500 4.500- 5.750 QZABS* 5.000- 5.500 4.000 - 5.625 Maturity Year Ending June 30 2006 2007 2010 2026 2010 2027 2027 2012 2029 2010 2030 2014 2031 2025 Total Original Principal Issued $ 113,505,000 97,620,000 53,725,000 163,730,000 52,220,000 105,665,000 156,575,000 98,405,000 103,990,000 73,765,000 130,000,000 22,985,000 156,000,000 300,000,000 $] 628l 85000 Principal Interest Total $ 22,445,000 $ 1,837,478 $ 24,282,478 19,645,000 1,7%,987 21,441,987 47,830,000 11,207,500 59,037,500 142,890,000 135,647,229 278,537,229 42,500,000 8,913,750 51,413,750 91,825,000 79,166,063 170,991,063 156,555,000 132,781,974 289,336,974 98,385,000 27,797,088 126,182,088 103,975,000 139,970,357 243,945,357 70,875,000 14,785,163 85,660,163 129,990,000 124,463,388 254,453,388 22,980,000 22,980,000 155,995,000 177,993,283 333,988,283 300,000,000 195,970,643 495,970,643 $] 405890000 $1052330903 $2 458220903 * Qualified Zone Academy Bonds are interest free to the issuer. Debt service to maturity on general obligation bonds at Jillle 30, 2003 is summarized as follows: Governmental Activities Year Ending Jillle 30 Interest Total Princi12aJ $ 45,000,000 $ 74,043,953 2004 $ 119,043,953 47,210,000 2005 71,834,135 119,044,135 2006 50,005,000 69,043,440 119,048,440 52,490,000 66,557,072 2007 119,047,072 55,365,000 2008 63,680,509 119,045,509 2009-2013 283,805,000 274,113,875 557,918,875 237,090,000 2014-2018 205,150,579 442,240,579 276,955,000 2019-2023 139,073,616 416,028,616 2024-2028 220,575,000 74,449,837 295,024,837 2029-2031 13723952000 1423832887 15127782887 Total $ 1 405 890 000 $ 1 052 330 903 $ 2 458 220 903 The School District has covenanted that the City will, on each business day, irrevocably deposit with the paying agent for the bonds, from local tax revenues collected that day, for payment into a sinking fund, approximately equal daily installments of amounts which, together with other available resources in the sinking fund will be sufficient to accumulate the sum required to pay the next principal or redemption price and the sum required to pay the next interest payment. Such debt service resources are required to be accumulated in full by this method by the 151h day prior to each specified payment date. These covenants were established to enhance the credit underlying the School District's general obligation bonds and to assure timely payment of debt service. B- 57 School District of Philadelphia The Pennsylvania Local Government Unit Debt Act of 1996 (Act No. 177) establishes borrowing base and debt limits for municipalities and school districts. The Act provides no limitation on debt approved by 1hevoters (electoral) and excludes Tax and Revenue Anticipation Notes from the computation of the non-electoral debt limit. As previously stated, the School District does not have a debt limit on electoral debt. As of June 30, 2003, outstanding electora.l debt totaled $ 6.1 million. The non-electoral and lease rental borrowing capacity (debt limit) for the District was$ 2,101.3 million as of June 30, 2003. Federal Arbitrage regulations are applicable to the School District of Philadelphia. At the School District the most common occurrence of arbitrage involves the: investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. As of June 30, 2003, there was no arbitrage payable. (4) Loans Payable: Federal Asbestos Loans - consist of$ 1.0 million for an interest-free loan expected to be repaid over the next four years. (5) Due to Other Governments: Deferred Reimbursement -The Commonwealth of Pennsylvania has agre:ed to continue to defer to at least fiscal year 2004, amounts due from prior years totaling $ 45.3 million for reimbursement of advanced funds provided for Special Education transpottation costs. (6) Other Liabilities: Other liabilities consist of$ 60.9 million for Workers' Compensation$ 6.1 million for Unemployment Compensation Claims (See Note 1 D 8) and$ 15.1 million for Claims & Judgements. The School District's various funds are charged for their portion of salary related, as well as claims and judgement, liabilides. These liabilities are then liquidated by the General Fund. Repayment of the Federal Asbestos Loan is funded by the General Fund. However, payments are made from the Debt Servicti Fund. In prior years, thii School District defeased certain general obligation bonds by placing the proceeds of new bonds in an irrevocable trust to provide for al future debt service payments on the old bonds. Accordingly, the trust account assets :md the liability for the defeased bonds are not included in the School District's. financial statements.. At June 30, 2003, $ 120,790,000 of bonds outstanding i:s considered defeased. F. Interfund Receivables, Payables and Transfers ( l) 1be composition of Interfund balances as of June 30, 2003 is as follows: Receivable Fund General Fund Payable Fund Capital Projects Fund Internal Service Fund Student Bus Token Fund Total B- 58 Amount $ 5,539,050 1,501,856 4542754 $ 2.425.660 School District of Philadelphia The balance of $ 5,539,050 under the Capital Projects Fund represents a negative equity amount that we reclassified as a due to other funds for reporting purposes. The $1,501,856 under the Internal Service Fund was eliminated within the governmental activity column. The $454,754 due the General Fund from the Student Bus Token Funds was reclassified as ThirdParty Receivables. (2) Interfund transfers at June 30, 2003 were as follows: Interfund Transfers In General Intermediate Unit Categorical Debt Service Non-Major Total Interfund Transfers Out Categorical Grants Fund Enterprise $ 2,680,550 $ General Fund $ 162,920,676 19,869,151 368,641 571:500 75,731 $ 183122 268 $ 2 680 550 $ Total 2,680,550 $ 162,920,676 19,869,151 444,372 571:500 15 Z31 $ 186486 242 Transfers are used to (1) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget require to expend them, and (2) move receipts to Debt Service from Enterprise Fund as a transfer to cover fiscal year 2003 allocations of cafeteria renovations. G. Construction and Equipment Purchase Commitments The School District's outstanding contractual commitments at June 30, 2003 are summarized as follows: New Construction and Land Environmental Management Alterations and Improvements Major Renovations Equipment Acquisition Total H. $ $ 11,307,120 840,662 7,703,247 19,048,347 7:100:912 46 ooo 288 Affiliated Organizations The Philadelphia Education Fund, Philadelphia Academies, Inc. (formerly The Philadelphia High School Academies), Foundations, Community Education Partners, Aspira Inc., and Philadelphia Youth Network are nonprofit corporations, funded by grants, contributions and approximately $ 36.0 million in contract revenue from the School District during fiscal 2003. These organizations, in cooperation with the School District, administer programs to enhance the education of Philadelphia School District students. These corporations are governed by independent boards, which include representatives of the School District. Management of these organizations is not designated by the School District, nor does the School District have the ability to significantly influence 1heir operations. The School District does not subsidize the operations of these corporations, nor guarantee their debt service. These organizations are not considered component units of the School District's reporting entity because there is no accountability for fiscal matters to the School District. B- 59 School District of Philadelphia I. .lntermedia1te Unit The School District is also an ID established by the Commonwealth to provide programs for special education and certain non-public school services. Conceptually, the cost of operating an ID for a fiscal year is partially financed by Commonwealth appropriation. In certain instances (transportation) the School District reimburses the Commonwealth for the funds advanced in the previous year. The amount advanced fo:rtransportation of special education students is reimbursed in foll less the Commonwealth's share of suc:h cos1tas determined by a formula based on the number of students transported, route distances, and effidency of vehicle utilization. J. Litigation Hd Contingencies ( 1) The School District receives significant financial assistance from numerous federal, state and local governmental agencies and other entities in the form of grants or sub-grants to conduct a variety of educational programs. Generally, the expenditure of funds received under such grants must be in compliance with ct:rtain regulations or grant terms and conditions and is subject to audit by grantor agencies. Such audits could lead to requests for reimbursements to grantor agencies for expenditures disallowed under the terms of the grant. It is management's belief that disallowances, if any, will not be material. (2) Mosaica Academy Charter School, et al. v. Commonwealth of Peansylvania, School District of Philadelphia, et al., (803 M. D. 1998), was decided by the Commonwealth Court adversely to th,e School District on July 20, 2000. The Commonwealth Court determined that the, Philaddphia School District lacked standing to challenge the Bensalem School District's de:cision to grant the charter. This charter school cost the School District about $ 1.8 million in fiscal year 2002.. On January 17, 2001, the School District appealed the: Commonwealth Court's decision to the Pennsylvania Supremt, Court. The Supreme Courl affirmed the Commonwealth Court's decision on December 31, 2002. Bensalem School District renewed the school's Charter in 2003 .. (3) A cyber charter school, the Einstein Academy Charter School or T.E.A.C.H., holder of a charter granted by the Morrisville School District, enrolled Philadelphia-resident students in online classes beginning in September 2001. The Board of Education denied a charter to T ..E.A.C.H. in February 2001, and refused the school's demand for payments for its Philadelphia students. The Department of Education has deducted funds from the Schoo!I Districfs education subsidiaries and paid such sums to T.E.A.C.H. since August 30, 2001. As of June 2003, the Department of Education withheld$ 327,413 and the estimated deduction for July 2003 is$ 68,000 for a total of$ 395,413 for f1Scalyear 2003. On November 16, 2001, the School District brought suit against T.E.A.C.H. in Common Pleas Court, seeking a declaration that the charter was improperly formed and is not authorized by law, and seeking an m~unction against future payments and deductions. An Order dated March 7, 2002, was entered \\-hich consolidated all of the Pennsylvania cases challenging Einstein in Downingtown Are,,! S.O., et al. V The National Organization for Children, Inc., a/k/a/ Einstein Academy Charte:r §:chool, a/k/a T.E.A.C.H. Charter School, et al., CCP, Chester County, Civil Action No. 01: Q,5818. In the meantime, itn a separate action, the Commonwealth Court affirmed the revocation of the T.E.A.C.H. Charter. T.E.A.C.H. did not appeal the Commonwealth Court's decision, resulting in the revocation becoming final. The School District will have no furthe,r obligation to contribute funding to this charter school. B- 60 School District of Philadelphia (4) E.W. Rhodes Middle School: On September 19, 2001, a fire devastated the E.W. Rhodes Middle School. The School District contracted with a company, Servpro, to conduct the cleanup of the school for a price of$ 1,545,508. Servpro completed the job on time and on budget. Local 1201 filed a grievance alleging a violation of the Collective Bargaining Agreement. Specifically, Local 1201 alleges that they were not given an opportunity to bid on the clean-up project. The union presented its case in chief on September 10, 2002. A second hearing date was held on March 11, 2003. On October 8, 2003, the arbitrator found in favor of the union and held that the School District violated the collective bargaining agreement. The arbitrator ordered the School District to make whole the affected employees but did not order the payment of a specific amount of money. The parties are in negotiations regarding the amount of back pay. It is a remote possibility that the amount of back pay will exceed $ 1.5 million. (5) Giles J. Cannon, Inc. v. J.A. Smith Construction Co. and The School District of Philadelphia, May Term, 2001, No. 002593 (CC Phila). In May 2001, Giles J. Cannon, Inc. ("Cannon"), a masonry subcontractor on J .A. Smith Construction Co., Inc.' s, general construction contract for a school addition which had been terminated by the School District for default, filed suit against Smith and the School District for unpaid subcontract balances of$ 491,290 based on unjust enrichment and quantum meruit theories, and delay claim costs of about$ 390,000. Smith filed a cross claim against the School District for damages exceeding $ 4.0 million for unpaid contract work and other costs, lost net income, and officer salary, to which the School District responded by filing a crosscounterclaim of almost $ 1.7 million against Smith for liquidated damages for delay, additional project construction management and architect costs caused by Smith's project delays, contract defaults, and contract default termination, attorneys' fees and costs, and filed delay and disruption claims of Ray Angelini, Inc., (the electrical contractor) and Royal Mechanical, Inc. (the plumbing contractor) for $ 142,259 and$ 377,128, respectively, caused by Smith's project delays, omissions and contract breaches. Fidelity and Deposit Company of Maryland, Smith's surety on its performance bond, filed claims exceeding$ 1.7 million for contract balances totaling$ 440,000 and excess of takeover completion costs of$ 1.3 million. The parties completed discovery, and submitted their respective expert reports. On November 19, 2003, the School Reform Commission approved the settlement of these cases. The School District will pay $ 440,000, representing the balance on the general contract, to Fidelity; additional funds of$ 380,000 will be paid to Fidelity in settlement of all claims of Smith, Fidelity and Cannon. The School District will pay$ 337,660 to settle all claims of Royal, Angelini and Blackney Hayes (architects), for a total of$ 1,557,660. ( 6) The School District is a party to various other claims, legal actions, arbitrations and complaints in the ordinary course of business, which aggregate to a total potential liability of$ 3.8 million. In the opinion of the General Counsel of the School District, it is unlikely that final judgements or compromised settlements wll approach the total potential liability. The School District annually budgets an amount that management believes is adequate, based on past experience, to provide for these claims when they become fixed and determinable in amount. In addition, the School District has recorded total cumulative potential liability of $ 60.9 million for Workers' Compensation,$ 6.1 million for Unemployment Compensation Claims and$ 15.1 million for Claims & Judgements in the district-wide statement of net assets. B- 61 School District of Philadelphia (7) Th«! School District receives basic education subsidies from the Commonwealth based principally on student enrollment. In July 1995, the Pennsylvania Department of Education ("PDE") notified the School District that the results of an audit conducted by the Auditor General for the years ending June 30, 1991, 1992, and 1993 indicated School District overreporting of student enrollment in Fiscal Year 1991, the year established by the Commonwealth as the base for all subsidies through Fiscal Year 1999. The potential reimbursement was pre,viously reported as approximately$ 40.0 million through Fisul Year 1999. By letter dated November 3, 1998, PDE notified the School District that as a result of additional reviews of the School District's documentation, PDE reduced its claim for sub5.idy reimbursement for these years by half, to approximately$ 20.0 million. This demand amount remained firm through subsequent requests for reconsideration and negotiations; however, PDE agreed to a repayment schedule that would result in p1!riodicdeductions of fractional shares of the total from the Basic Education Funding ("BEF") paid by the State to the School DistJict, beginning in Fiscal Year 1999. The Fiscal Year 1999 loss ofrevenue would have been$ 2.8 million. On May 13, 1999 th~: School District of Philadelphia appealed the entire finding to the Secretary of Education. The matter remains pending. During the pendency of the District's appeal from that decision, no deductions from BEF have been made. As a result of a subsequent audit of school years 1994-95 through 1996-97, PDE claimed that an additional$ 20.0 million during the audit period was due from the District for alleged overreporting of enrollment. The District denied the claim and produced documentation. The Commonwealth in order to assist the District through a funding shortfall postponed collections in this category through at least Fiscal Year 2001. Both matters remain pending. Though discussions with the state regarding relief from this potential liability have been ongoing, because no final determination of forgiveness has been made to rute, there remains a reasonably possible loss in this category in the total amount of$ 40.0 million. K. Post Retir1~mentBenefits As required by union contracts, the School District provides life insurance benefits for approximately 11,071 retired employees. A retired employee is eligible for this benefit if covered for 10 years as an active employee and retired at age 60 with 30 years of service or age 62 with 10 years of service or any age with 35 years of service. The School District is self-funded, and benefits are recognized as expenditures in the general fund when claims are paid. Coverage at June 30, 2003 amounted to $ 21.2 million. For fiscal year 2003 the cost of life insurance for retirees was$ 403,150 and it was fully paid by the School Distric;t. L Pension Plan ( 1) Pllan Description The School District of Philadelphia contributes to The Public School Employees' Retirement System (PSERS), a governmental cost-sharing multiple-employer defined benefit pension plan administered by PSERS. PSERS provides retirement and disability benefits, legislative mandat1edad hoc cost-of-living adjustments, and healthcare inHurance premium assistance to qualifying annuitants. Act No. 96, amended on October 2, 1975 (24 Pa. C. S. 8101-8535)1, assigns the authority to establish and amend benefit provisions to the Public School Employees' Retirement Code. PSERS issues a comprehensive annual financial report that includes financial B- 62 School District of Philadelphia statements and required supplementary information for the plan. A copy of the report may be obtained by writing to Public School Employees' Retirement System, P.O. Box 125, Harrisburg PA 17108-0125, Attention: Barbara D. Flurie, Office of Financial Management. (2) Funding Policy The contribution policy is established in the Public School Employees' Retirement Code and requires contributions by active members, employers, and the Commonwealth. (3) Contribution Rates Most active members contribute at 5.25 percent (Membership Class TC) or 6.50 percent (Membership Class TD) of the member's qualifying compensation. Members joining the System on or after July 22, 1983 and who were active as of July 1, 2001 contribute at 6.25 percent (Membership Class TC) or 7.50 percent (Membership Class TD) of the member's qualifying compensation. Members who joined PSERS after June 30, 2001 contribute at 7.50 percent (automatic Membership Class TD). For all new hires and for members who elected Class TD membership, the higher contribution rates began with service rendered on or after January 1, 2002. Contributions required of employers are based upon an actuarial valuation. For fiscal year ended June 30, 2003 the rate of employer contribution was 1.15 percent of covered payroll. The 1.15 percent rate is composed of a pension contribution rate of .18 percent for pension benefits and .97 for health insurance premium assistance. The School District's contributions to the System for the years ending June 30, 2001, 2002, and 2003 were $21,104,050, $11,694,823, and $13,059,249 respectively, equal to the required contributions for each year. M Desegregation In 1973 the Pennsylvania Human Relations Commission (Commission) brought suit against the School District in Pennsylvania Commonwealth Court to end historical de facto racial segregation. Over the next 20 years the District implemented various reform plans, which the Court determined, from time to time, were inadequate to cure the problem of racial isolation in the schools. In late 1995, the Commonwealth Court joined the Commonwealth as a defendant, and in summer 1996, following a month-long trial, found that the Commonwealth was liable for substantial and ongoing financial contributions to the School District to the extent that the School District was unable to support the desegregation mandates. However, the Commonwealth Court's Order was vacated by the Pennsylvania Supreme Court when it assumed plenary jurisdiction of the case in fall 1996. After nearly three years, the Supreme Court determined that the Commonwealth Court lacked authority to add defendants or claims to the case after its commencement by the Commission in 1973. The Commonwealth was dismissed from the case and jurisdiction returned to the Commonwealth Court. The School District has continued to operate in accordance with the remedial plan and to report periodically on its progress toward satisfying the Court's mandates. In May and September 2001, respectively, at the request of the Court, the School District submitted a Comprehensive School Safety and Security Plan and a Curriculum Renewal Plan intended to guide the District's work in the areas of curriculum and instruction. Following a hearing on September 17, 2001 to review the Plans and the District's compliance with other components of the Remedial Order, the Court, on September 28, 2001, issued an Opinion and Order concluding that the School District has made significant and continued B- 63 School District of Philadelphia effort to comply with the Remedial Order, accepting the Plans, and directing the Human Relations Commission to monitor their implementation. The Court further directed the Commission to request the Court to close the c:asewhen it is satisfied that the District has demonstrated that it can and will provide an equal educational opportunity to all students. On December 18, 2001, the Court held a conference in the case to reiterate its position that the Plans approved by the Court in September 2001 are to be implemented by the School District notwithstanding any change in management structure unless there is a modification through court order. Between July 2002 and July 2003, the School District responded to Court questions, submitted materials to the court,. attended conferences, accompanied court officials of tours of elementary schools, and testified concerning the series of initiatives being undertaken by the Disttict. At this time, it does not appear that the School District will be compelled to undertake new programs or to incur significant costs in this mattEir going forward than it would not have done absent the litigation. For these reasons, the ultimate financial impact of this litigation remains uncertain. By letter dated August 1, 2003, Judge Smith-Rihner indicated the court's intent to "defer issuing an opinion and order until Cousel confer among themselves to determine whether they can agree upon a Consent Decree for submission and approval by the Court." Since that time, counsel for the District, the PHRC and Intervenors have met on a regular basis. Although we believe the District may be able to enter into a negotiated agreement with the PHRC and Intervenors, we are unable at this time to express an opinion as to whether the parties will ultimately do so and/or whether the Court will approve the terms of any agreemc!nt. N. Risk Management The School District is exposed to various risks of losses related to t01ts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The School District is :self-insured for fire damage, casualty losses, public liability, Workers' Compensation, Unemployment Compensation, and Weekly Indemnity (salary continuation during employee illness). Employee medical benefits are covered by various insurance plans dependent upon the union affiliation of the individual employee. Therefore, there is no risk to the School District. The School District maintains additional property (real property, personal property, valuable papers and records, fme arts, vehicles on premises and property nnder construction) insurance to cover losses between $ 5 million and $ 100 million. Also, certain insurance coverages inc:luding employee performancE: bonds and fire insurance have been obtained. The School District reported the current portion ofits risk management obligation totaling$ 3.2 milliooin the General Fund and the long-term portion of those obligations totaling$ 82.2 million in the district-wide statement of net assets. Workers' Compensation and Unemployment Compensation coverages arefinded by a pro-rata charge to the various funds. The School District and covered employees share the cost of Weekly Indemnity coverage. Claims expenditures and liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. These losses include at1 estimate of claims that have been incurred but not reported, the effects of specific incremental claims adjustment expenditures, salvage and subrogation, and unallocated claims adjustment expenditure!;. B- 64 School District of Philadelphia At June 30, 2003, the amount of these liabilities totaled$ 85.4 million. Changes in the reported liability since June 30, 2002 resulted from the following: (amounts in millions) Current Year Claims and Changes in Prior Year Estimates Beginning-of Fiscal-Year Liability Fiscal 2002 Fiscal 2003 $ $ 74.3 78.9 $ $ 29.7 37.9 Balance at Fiscal Year-End Claim Payments $ $ 25.1 31.4 $ $ 78.9 85.4 Settled claims covered by commercial insurance have not exceeded the amount of insurance coverage in any of the past three years. There has not been a significant reduction in insurance coverage from coverage in the prior year for any risk category. The School District has not entered into any annuity contracts as part of claims settlements. 0. Subsequent Events General Obligation Bond In August 2003, The School District of Philadelphia entered into a loan agreement for $109 million of24 year variable rate debt with the Dauphin County General Authority (DCGA). The loan was funded from DCGA' s 1997 School Revenue Bonds School District Pooled Financing Program II. The proceeds will be used to fund a portion of the School District's$ 1.82 billion Capital Improvement Program. Lease Revenue Bonds In September 2003, The School District of Philadelphia issued $588.1 million in 30 year fixed rate lease revenue bonds through the State Public School Building Authority (SPSBA). As part of this transaction, the District has designated certain properties to be leased to the SPSBA for a lump sum rental payment. The School District has entered into a sublease with the SPSBA for the leased properties by which it is required to make base rental payments to the SPSBA sufficient to pay the principal and interest payments on the outstanding bonds over 30 years. The proceeds of the bonds will be used to fund a portion of the School District's $1.82 billion Capital Improvement Program. Tax and Revenue Anticipation Notes (TRAN) In order to provide sufficient cash for School District operations for fiscal year 2004, in lieu of issuing Tax and Revenue Anticipation Notes through the public financial markets, for fiscal year 2004, the School District privately placed its Tax and Revenue Anticipation Notes through a consortium of local financial institutions. The privately placed notes function as a line of credit with the School District borrowing funds on an as needed basis through the bank consortium. B- 65 School District of Philadelphia The School District has issued two series of Tax and Revenue Anticipation Notes during fiscal year 2004. The Series A Note:s were issued for cash flow purposes and are required to be repaid by June 30, 2004. The entire $325 million in Series A Notes was issued between September and December 3, 2003. The School Reform Commission authorized a Series B of Tax Revenue Anticipation Notes for an additional $250 million. The Series B Notes are being issued through the same consortium of local financial institutions. Series B Notes are required to be repaid in full not later than June 30, 2004, but upon receipt of payments of basic education funding from the Commonw1!alth of Pennsylvania. As of December 22, 2003, $150 million, in total, of the Series B Notes has been issued. B- 66 PAGE INTENTIONALLY LEFT APPENDIX FORM OF CONTINUING DISCLOSURE AGREEMENT PAGE INTENTIONALLY LEFT The School District of Philadelphia Tax and Revenue Anticipation Notes Series of 2004-2005 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement ("Disclosure Agreement") is executed and delivered as of this __ day of July, 2004 by and between The School District of Philadelphia ("School District"), and J.P. Morgan Trust Company, National Association, having a corporate trust office in Philadelphia, Pennsylvania, as sinking fund depository, registrar and transfer, paying and fiscal agent ("Fiscal Agent") under a Fiscal Agent's Agreement, dated July __ , 2004 ("Fiscal Agent's Agreement''), in connection with the issuance and sale by the School District of its $400,000,000, aggregate principal amount, Tax and Revenue Anticipation Notes, Series of 2004-2005 ("Notes"). The Notes are being issued by the School District pursuant to the Local Government Unit Debt Act, Act No. 1996-177 of the General Assembly of the Commonwealth of Pennsylvania ("Commonwealth"), approved December 19, 1996, as amended ("Act"), and a Resolution of the School Reform Commission of the School District adopted pursuant to the Act on July __ , 2004 ("Resolution"). In consideration of the mutual covenants, promises and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: Section 1.. Definitions In this Disclosure Agreement and any agreement supplemental hereto (except as otherwise expressly provided or unless the context clearly otherwise requires) terms used as defined terms in the recitals hereto shall have the same meanings throughout this Disclosure Agreement, and, in addition, the following terms shall have the meanings specified below: "Business Day" shall mean any day other than a Saturday, Sunday or a day on which the School District or the Fiscal Agent is authorized or required by law or contract to remain closed. "Disclosure Representative" shall mean the Chief Financial Officer of the School District or such other official or employee of the School District as the Chief Financial Officer shall designate in writing to the Fiscal Agent. "Material Event" shall mean any of the events listed in Section 3(a) of this Disclosure Agreement, if material within the meaning of the Rule. '"MSRB" shall mean the Municipal Securities Rulemaking Board. 1 "Participating Underwriters" shall mean any of the original underwriters of the Notes required to comply with the Rule in connection with their purchase and reoffering of the Notes. "Registered Owner or Owners" shall mean the person or persons in whose name a Note is registered on the books of the School District kept by the Fiscal Agent for that purpose in accordance with the Resolution and the Notes. For so long as the Notes shall be registered in the name of the Securities Depository or its nominee, the term "Registered Owners" shall also mean and include, for the purposes of this Disclosure Agreement, the owners of book-entry credits evidencing an interest in the Notes; provided, however, that the Fiscal Agent shall have no obligation to provide notice hereunder to owners of bookentry credits in the Notes, except those who have filed their names and addresses with the Fiscal Agent for the purposes of receiving notices or giving direction under this Disclosure Agreement. "Rule" shall mean Rule 15c2-12(b)(5) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time. "Securities Depository" shall mean The Depository Trust Company, New York, New York, or its nominee, Cede & Co., or any successor thereto appointed pursuant to the Resolution. "State Information Depository" shall mean any public or private repository designated by the Commonwealth as a state information depository within the meaning of the Rule. As of the date of this Disclosure Agreement, there is no State Information Depository. All words and terms used in this Disclosure Agreement and not defined above or elsewhere herein shall have the same meanings as set forth in the Fiscal Agent's Agreement, if defined therein, or in the Resolution, if defined therein. Section 2. Authorization and Purpose of Disclosure Agreement This Disclosure Agreement is authorized to be executed and delivered by the School District pursuant to Section 22 of the Resolution in order to enable the Participating Underwriters to comply with the requirements of the Rule. Section 3. Material Events (a) The School District agrees that it shall provide through the Fiscal Agent, in a timely manner, to the MSRB and to the State Information Depository, if any, notice of any of the following events with respect to the Notes if material within the meaning of the Rule (each a "Material Event"): (1) Principal and interest payment delinquencies; 2 (2) Non-payment related defaults; (3) Unscheduled difficulties; draws on debt servtce reserves reflecting financial (4) Unscheduled difficulties; draws financial (5) Substitution of credit or liquidity providers or theii: failure to perform; (6) Adverse tax opinions or events affecting the tax-exempt status of the Notes; (7) Modifications to the rights of the holders of the Notes; (8) Note Calls; (9) Defeasances; (10) Release, substitution or sale of property securing repayment of the Notes; and (11) Rating changes. on credit enhancements reflecting The foregoing eleven (11) events are quoted from the Rule. No debt service reserves have been established for the Notes and no liquidity facility or credit enhancements are being obtained for the N·otes. The Notes are not subject: to redemption prior to maturity. (b) Whenever the School District concludes that a Material Event has occurred, the Disclosure Representative shall promptly notify the Fiscal Agent in writing of such occurrence, specifying the Material Event. Such notice shall instruct the Fiscal Agent to file a notice of such occurrence with the MSRB and the State Information Depository, if any, at the address designated pursuant to Section 10 hereof. Upon receipt, the Fiscal Agent shall promptly file such notice with the MSRB and the State Information Depository, if any. Any filing with the MSRB shall be accompanied by the form annexed hereto as Exhibit "A" and made a part hereof. (c) Notwithstanding the foregoing, the Fiscal Agent shall, promptly after obtaining actual knowledge of an event listed in clauses (a) (1) or (9).,notify the Disclosure Representative of the occurrence of such event and shall, within three (3) Business Days of giving notice to the Disclosure Representative, file notice of such occurrence with the MSRB and the State Information Depository, if :any, unless the Disclosure Representative gives the Fiscal Agent written instructions not to file such notice because the event has not occurred or the eYent is not material within the meaning of the Rule. 3 (d) The Fiscal Agent shall prepare an affidavit of mailing for each notice delivered pursuant to clauses (b) and (c) of this Section 3 and shall deliver such affidavit to the School District no later than three (3) Business Days following the date of delivery of such notice. (e) The Fiscal Agent shall request the return from the MSRB and the State Information Depository, if any, of written acknowledgment of receipt of any notice delivered to the MSRB and the State Information Depository, if any. Upon the return of all completed acknowledgments of a notice, the Fiscal Agent shall prepare an affidavit of receipt specifying the date and hour of receipt of such notice by each recipient, if such information was provided by the recipient. Such affidavit of receipt shall be delivered to the School District no later than three (3) Business Days following the date of receipt by the Fiscal Agent of the last completed acknowledgment. Section 4. Amendment; Waiver (a) Notwithstanding any other provision of this Disclosure Agreement, the School District and the Fiscal Agent may amend the Disclosure Agreement or waive any of the provisions hereof, provided that no such amendment or waiver shall be executed by the parties hereto or become effective unless: (i) the amendment or waiver is made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in identity, nature or status of the School District or the governmental operations conducted by the School District; (ii) the Disclosure Agreement, as amended by the amendment or waiver, would have been the written undertaking contemplated by the Rule at the time of original issuance of the Notes, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (iii) the amendment or waiver does not materially impair the interests of the Registered Owners of the Notes. (b) Evidence of compliance with the conditions set forth in clause (a) of this Section 4 shall be satisfied by the delivery to the Fiscal Agent of an opinion of counsel having recognized experience and skill in the issuance of municipal securities and federal securities law, acceptable to both the School District and the Fiscal Agent, to the effect that the amendment or waiver satisfies the conditions set forth in clauses (a)(i), (ii), and (iii) of this Section 4. (c) Notice of any amendment or waiver containing an explanation of the reasons therefor shall be given by the Disclosure Representative to the Fiscal Agent upon execution of the amendment or waiver and the Fiscal Agent shall promptly file such notice with the MSRB and the State Information Depository, if any. The Fiscal Agent shall also send notice 4 of the arnendment or waiver to each Registered Owner (including owners of book-entry credits who have filed their names and addresses with the Fiscal Agent). Section 5.. Othei: Information; Duties Under the Resolution (a) Nothing in this Disclosure Agreement shall preclude the School District from disseminating any other information with respect to the School District or the Notes, using the means of communication provided in this Disclosure Agreement or otherwise, in addition to the notices of Material Events or amendments pursuant to Section 4(c) hereof, specifically provided for herein, nor shall the School District be relieved of complying with any applicable law relating to the availability and inspection of public records. Any election by the School District to furnish any information not specifically provided for herein in any notice given pursuant to this Disclosure Agreement or by the means of communication provided for herein shall not be deemed to be an additional contractua:l undertaking and the School District shall have no obligation to furnish such information in any subsequent notice or by the same means of communication. 0b) Nothing in this Disclosure Agreement shall relieve the Fiscal Agent of any of its duties and obligations under the Resolution or Fiscal Agent's Agreement. The Fiscal Agent's duties under this Disclosure Agreement shall be only those duties specifically set forth herein. The Fiscal Agent shall have no responsibility for the content of any notice prepared by the School District pursuant to the terms hereof. (c) Except as expressly set forth in this Disclosure Agreement, the Fiscal Agent shall have no responsibility for any continuing disclosure to the Registered Owners, the MSRB or State Information Depository. Section 6. Default (a) In the event that the School District or the Fiscal Agent fails to comply with any provision of this Disclosure Agreement, the Fiscal Agent or any Registered Owner of the Notes shall have the right, by mandamus, suit, action or proceeding at law or in equity, to compel the School District or the Fiscal Agent to perform each and every term, provision and covenant contained in this Disclosure Agreement. The Fiscal Agent shall be under no obligation to take :any action in respect of any default hereunder unless it has received the direction in writing to do so by the Registered Owners of at least 25% of the outstanding principal amount of the Notes and if, in the Fiscal Agent's opinion, such action may tend to involve expense or liability, unless it is also furnished with indemnity and security for expenses satisfactory to it. A default under the Disclosure Agreement shall not be or be deemed to be a (b) default under the Notes, the Resolution or the Act and the sole remedy in the event of a failure by the School District or the Fiscal Agent to comply with the provisions hereof shall be the action to compel performance described in clause (a) above. 5 Section 7. Concerning the Fiscal Agent (a) The Fiscal Agent accepts and agrees to perform the duties of the Fiscal Agent under this Disclosure Agreement but only upon the terms and conditions set forth herein. The Fiscal Agent may execute any powers hereunder and perform any duties required of it through attorneys, agents, and other experts, officers, or employees, selected by it, and the written advice of such counsel or other experts shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. The Fiscal Agent shall not be answerable for the default or misconduct of any attorney, agent, expert or employee selected by it with reasonable care. The Fiscal Agent shall not be answerable for the exercise of any discretion or power under this Disclosure Agreement, or be liable to the School District or any other person for actions taken hereunder, except only its own willful misconduct or negligence. (b) The School District shall pay the Fiscal Agent reasonable compensation for its services hereunder, and also all its reasonable expenses and disbursements, including reasonable fees and expenses of its counsel or other experts, as shall be agreed upon by the Fiscal Agent and the School District. To the extent permitted by law, the School District will reimburse the Fiscal Agent for claims, damages, fines, penalties and expenses, including reasonable and actual out-of-pocket expenses, including reasonable legal fees and expenses, and the allocated costs and expenses of in-house counsel (to the extent not covered by the Fiscal Agent's fees and expenses referred to in the preceding sentence hereof) (collectively "Expenses") that are imposed on or are incurred by the Fiscal Agent for following any instructions or directions upon which the Fiscal Agent is authorized to rely hereunder. In addition, to the extent permitted by law, the School District agrees to reimburse the Fiscal Agent for Expenses imposed on or incurred by the Fiscal Agent in connection with or arising out of the Fiscal Agent's performance under this Disclosure Agreement; provided that the Fiscal Agent has not acted with negligence or engaged in willful misconduct. The provisions of this paragraph shall survive termination of this Disclosure Agreement. (c) The Fiscal Agent may act on any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, or other paper or document which it in good faith believes to be genuine and to have been passed or signed by the proper persons or to have been prepared and furnished pursuant to any of the provisions of this Disclosure Agreement; and the Fiscal Agent shall be under no duty to make any investigation as to any statement contained in any such instrument, but may accept the same as conclusive evidence of the accuracy of such statement in the absence of actual notice to the contrary. (d) The Fiscal Agent may resign and be discharged of its duties as Fiscal Agent hereunder upon the terms and conditions set forth in Section 14 of the Fiscal Agent's Agreement. 6 Section 8.. Term. of Disclosure Agreement This Disclosure Agreement shall terminate: (1) upon payment or provision for payment in full of the Notes, or (2) upon repeal or rescission of Section (b)(5) of the Rule or (3) upon a final determination that Section (b)(5) of the Rule is invalid or unenforceable. Section 9. Beneficiati.es This Disclosure Agreement shall inure solely to the benefit of the School District, the Fiscal Agent and the Registered Owners from time to time of the Notes and nothing herein contained shall confer any right upon any other person. Section 10. Notices Any written notice to or demand may be served, presented or made to the persons named b,dow and shall be sufficiently given or filed for all purposes of this Disclosure Agreement if deposited in the United States mail, first class posrage prepaid or in a recognized form of overnight mail or by telecopy with confirmation of receipt, addressed: (a) To the Fiscal Agent at: J.P. Morgan Trust Company, National Association One Liberty Place, Suite 5210 1650 Market Street Philadelphia, PA 19103 Attention: Marvin S. Kierstead,Jr., Vice President Telecopy No.: (215) 972-8372 (b) To the School District or the Disclosure Representative at: The School District of Philadelphia 21st Street at Benjamin Franklin Parkway, Room 203 Philadelphia, PA 19103 Attention: Chief Financial Officer Telecopy No.: (215) 299-7604 7 (c) To the MSRB at: Municipal Securities Rulemaking Board 1900 Duke Street, Suite 600 Alexandria, VA 22314-2719 Attention: CDINet Telecopy No.: (703) 683-1930 or such other addresses as may be designated in writing to all parties hereto. Section 11. No Personal Recourse No personal recourse shall be had for any claim based on this Disclosure Agreement against any member, officer, or employee, past, present or future, of the School Reform Commission or the School District (including without limitation, the Disclosure Representative), or of any successor body as such, either directly or through the School Reform Commission or the School District or any such successor body, under any constitutional provision, statute or rule of law or by the enforcement of any assessment or penalty or otherwise. Section 12. Controlling Law The laws of the Commonwealth shall govern the construction and interpretation of this Disclosure Agreement. Section 13. Successors and Assigns All of the covenants, promises and agreements contained in this Disclosure Agreement by or on behalf of the School District or by or on behalf of the Fiscal Agent shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not. Section 14. Headings for Convenience Only The descriptive headings in this Disclosure Agreement are inserted for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 15. Counterparts The Disclosure Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original; but such counterparts shall together constitute but one and the same instrument. 8 Section 110. Entire Agreement This Disclosure Agreement sets forth the entire understanding and agreement of the School District and the Fiscal Agent with respect to the matters herein contemplated and no modification or amendment of or supplement to this Disclosure Agreement shall be valid or effective: unless the same is in writing and signed by the parties hereto. IN WITNESS ,~HEREOF, THE SCHOOL DISTRICT OF PHILADELPHIA, PENNS)'L VANIA, has caused this Disdosure Agreement to be executed by its Chief Financial Officer and J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, has carn;ed this Disclosure Agreement to be executed by one of its Authorized Officers, all as of the day and year first above written. THE SCHOOL DISTRICT OF PHILADELPHIA By: Chief Financial Officer J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as Fiscal Agent By: Authorized Officer 9 EXHIBIT "A" MATERIAL EVENT NOTICE COVER SHEET 1bis cover sheet and material event notice should be sent to the Municipal Securities Rulemaking Board or to all Nationally Recognized Municipal Securities Information Repositories, and the State Information Depository, if applicable, pursuant to Securities and Exchange Commission Rule 15c2-12(b)(5)(i)(C) and (D). Issuer's and/ or Other Obligated Person's Name: ______________________ _ Issuer's Six Digit CUSIP Number(s): ________________________ _ or Nine-Digit CUSIP Number(s) to which this material event notice relates:____________ Number of pages attached to material event notice: _____ _ _ Description of l\faterial Events Notice (Check One) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Principal and interest payment delinquencies Non-Payment related defaults Unscheduled draws on debt service reserves reflecting financial difficulties Unscheduled draws on credit enhancements reflecting financial difficulties Substitution of credit or liquidity providers, or their failure to perform Adverse tax opinions or events affecting the tax-exempt status of the security Modifications to rights of securities holders Bond calls Defeasances Release, substitution, or sale of property securing repayment of the securities Rating changes Failure to provide annual financial information as required Other material event notice (specify).______________ _ I hereby represent that I am authorized by the Issuer and/ or other Obligated Person as an agent of either to distribute this information publicly: Signature=----------------------------------~ Name: ________________ Title:___________________ Employer. ___________________________________ _ _ Address=------------------------------------City, State, Zip Code=------------------------------Voice Telephone Number: -----------------------------Please print the material event notice attached to this cover sheet in 10-point type or larger. The cover sheet and notice may be faxed to the MSRB at (703) 683-1930 or send to CDINet, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314. questions regarding this form or the dissemination of this notice. A-1 Contact the MSRB at (703) 797-6600 with