School District of Philadelphia
Financial Impact Analysis:
Funding, Purchasing Power and Stranded Cost Analyses Outcomes
March 2017

 Background and Purpose of this Analysis
•

•

In 2012, an analysis was completed noting that every newly authorized
charter seat costs the district $7,000. This is comprised of two components:
1.

Migrating Students: Every student who leaves the district for a charter school
costs the district $5,600, as funding goes with them to the charters, but some
fixed costs – known as stranded costs – remain at the district.

2.

New-to-System Students: Every new student not transferring from the district
but attending charters costs the district $10,400, as the total funding going to the
district does not increase for these students, but the district must pay charters
for those students.

Combined, the average impact is $7,000 per charter student

Question at hand: What is the financial impact of charter schools on
the district, and what opportunities are there to mitigate costs
associated with enrollment migration from district-run to charter
schools?

 Background and Purpose of this Analysis
In response to the question at hand, the District conducted a three-part analysis
using Fiscal Year 2014 data:
1.
Funding Analysis: how does public funding available to charter schools
compare to district-run schools?
2.
Purchasing Power: what can charter schools afford compared to the
District and how do they allocate their dollars compared to the District?
3.
Stranded Costs: what constraints does the District have on its spending
flexibility and therefore what are the financial implications of enrollment
migration from district to charter schools? What can the District do to
mitigate stranded costs (which are costs that cannot be immediately and
proportionately reduced when enrollment declines)?
These three analyses, together, aim to provide a more detailed
understanding of the implications of future charter authorizations, as well as
provide insight into what the District can do to mitigate the costs of current
and future migration of students from district to charter schools.

 Executive Summary

In FY14, charters received slightly less public funding on a per
pupil basis; however, charters faced different constraints than the
district, allowing them to afford more resources in the classroom.
•

The analysis sample of charter schools in Philadelphia were funded with public
dollars slightly less than SDP on a per pupil basis - 2% less on a weighted basis
and 4% less on an unweighted basis

•

However, Philadelphia charter schools had fewer constraints on uses of their
funding (limited debt, contractual obligations) compared to SDP, and therefore were
able to spend more freely and aligned with strategic priorities, including more
teachers and technology

•

Most notably, because of lower salaries and benefits, charters were able to afford 3
teachers for the cost of every 2 at the District. For a school of 400 students, this is
the difference between 20 and 30 teachers.

•

SDP had more constraints on uses of funding (including contractual obligations,
structural limitations, and resourcing policies). Notably, SDP spent 42% more per
teacher on salary and benefits than the sampling of charter schools analyzed.

 While charter school growth will affect district finances, changes
to the current district cost structure could help SDP to plan
proactively for and manage such growth
•

Due to contractual, structural, and policy constraints, it’s difficult for SDP to react
and reduce its spending when students leave district-run schools.

•

These constraints at SDP cause costs to remain at the District when students
leave – defined here as “stranded costs.” These costs are estimated to be $4,824
per student migrating to a traditional charter school (or $461 per student
remaining in SDP). If debt service were considered a stranded cost, SDP would
experience stranded cost of $6,898 per migrating student.

•

However, these stranded costs would be reduced by an estimated 65% when a
Renaissance charter school is authorized instead of a traditional charter
school. A Renaissance charter school is a turnaround school – where the students
remain at the same school, but the operator changes from district to charter. In this
case, the enrollment leaves SDP from only one school, not many, and therefore
district costs, particularly staffing, are reduced more efficiently.

•

Some of the constraints that lead to stranded costs are partially controllable and
can be mitigated with action by SDP, albeit via difficult actions such as layoffs,
school closures, and/or school turnarounds.

 Analysis Outcomes

In FY14, charter schools were publicly funded
just slightly less on a per pupil basis
• Based on the available
sample set, charter
schools received less
public funding that the
District on both a weighted
and unweighted per pupil
basis*
• However, the variance
was small – 2% on an
weighted basis and 4% on
an unweighted basis
• These figures have been
adjusted to remove debt
service, rent, and special
education outplacements

* The analysis was completed two ways: on an unweighted basis, which looks at funding available per average pupil, and on a weighted basis, to
account for the varying needs of the student population served by each sector; The funding equity variance reduces on a weighted basis, because
the District had a Special Education population with higher needs

 However, Charters and Districts spent their
resources in very different ways
Key Findings:
Charters spent
less than the district on*:
• Facilities & Operations (including
maintenance and utilities)
• Teacher Salaries (per teacher)
• SPED staffing
• Staff Benefits
• Student Outplacements

Allowing them to spend
more on:
•
•
•
•
•
•

Decreased class sizes
Instructional Technology
Instructional Materials
Consulting support
Programs and partnerships
Administrative Staffing & support
(see next page)

*Because charter payments are adjusted for debt service, in effect, charters contribute to the payment of debt
service. Therefore, the district’s debt service has been excluded from this analysis.

 The District significantly reduced the size of its central
office over years of enrollment decline, resulting in
significantly lower per pupil administrative costs
•

Since 2005, SDP has
reduced central office
positions at a deeper
rate than enrollment
has declined - cutting
37% of central office
positions while
enrollment declined 27%*

•

Because of this, and from
lower school
administrative staffing,
the District spends $796
less per pupil on
administrative costs** in
its directly managed
schools than the charter
schools spend

* Data from FY14 CAFR
** Administrative expenses have been defined as school level administration and central office costs

$1,350

$554

 Most notably, because of lower salaries and
benefits, charters were able to afford 3 teachers for
the cost of every 2 at the District
The District spent 42% more
per average teacher in FY14.*
Higher average salaries and total
benefits at the District, especially
Health & Welfare contributions
and Pension payments,
contribute to this gap. Therefore,
charters can afford 3 teachers for
the price of 2 at the District.

$116,208

For a school of 400 students,
this is the difference between
20 and 30 teachers.

*Based on six charters reporting average teacher salary
** Average is weighted – schools with a higher number of teachers contribute more to the average

+42%
$82,049

 The District has more constraints on uses of
funding, limiting its flexibility
•

•

Contractual obligations, structural
limitations, and staffing policies
limit the flexibility of the District’s
cost structure*

Primarily
charter
payments

Because of this, the District has a
significant amount of fixed and
semi-variable costs that cannot
proportionately and immediately
reduce with an enrollment
reduction
–

–

4% is fixed and will not reduce at all
with enrollment changes (payments to
other LEA’s and central office
executive leadership)
64% is semi-variable – it can change
but does not reduce proportionately
with changes in enrollment (primarily
school-based positions, shared
services, and supports)

*Because charter payments are adjusted for debt service, in effect, charters contribute to the payment of debt
service. Therefore, the district’s debt service has been excluded from this analysis.

Primarily
teachers, other
school-based
positions, and
shared services

 Therefore, it is difficult for the District to react
and adjust its spending when students leave
•

As students migrate to charter schools, public funding follows the students,
but they leave behind their “share” of fixed and semi-variable costs that do
not automatically reduce when they leave – known as “stranded costs”

•

The District must cover these stranded costs with the funding intended for
remaining students, reducing the amount available for each remaining
student’s instructional spending

•

As more students migrate, the stranded costs per district pupil
continually increase if the District does not take steps to mitigate the
costs

 Enrollment shifts from district to charter schools are
already financially impacting the District
•

Charter authorizations made to date have resulted in an estimated 11,600
students migrating from district to charter schools over the next eight years.
After considering corresponding actions of the District, the District will experience
$56M of costs annually by 2023 that are “stranded”, or 4.6% of FY15 budget
–

This impact excludes debt service. Because charter schools’ payments are adjusted for debt
service, the district effectively withholds revenues to cover debt service out of the general fund. In
effect, then, debt service has a guaranteed source of funding. Including debt service would increase
stranded costs by approximately $25M annually.

•

This estimate assumes that the District has not done everything within its
control to mitigate costs – such as closing under-enrolled schools and changing
school staff allocation policies – but does assume reductions of 530 staff and
other expenses (based on existing staffing and allocation policies) resulting from
projected enrollment losses

•

Each migrating student leaves behind about $4,824 in stranded costs – $56M total
– which the district will incur annually in perpetuity. If debt service were
considered a stranded cost, SDP would experience stranded cost of $6,898 per
migrating student

•

This equates to about $461 per remaining district student (excluding debt
service) of additional cost burden to cover to provide the same level of service

 Some of the $56M of stranded costs are partially
controllable and can be mitigated with action by the
District
Potential Action

Potential Impact

Reduce fixed cost
structures, including
closing underutilized
schools and sale of
buildings

By closing schools that are enrolled at below 50% capacity (based
on anticipated enrollment losses from new charter authorizations),
the district can reduce an estimated $33M of the $56M stranded
costs

Consider policy changes
that can make costs
more variable

Teacher costs are the highest cost in the district. Savings could be
realized through establishing more flexible staffing policies to
respond to the challenge of uneven enrollment migration across
schools and grade levels, allowing for different school schedules or
combined grade level classes. Adjusting teacher allocation policies
to increase the average student / teacher ratio 10%, the district can
reduce cost by $47M, partially offsetting $56M stranded costs.

Provide or increase
shared services to
charters

Doing so will help offset fixed costs in these organizations; impact
not quantified and will depend on services provided

In addition to offsetting anticipated stranded costs, these actions will make
the district’s cost structure more variable / flexible. At the same time,
these actions can be challenging and painful.

 Future charter authorizations will increase stranded
costs, but this impact can be minimized
Potential Action

Potential Impact

For future authorizations,
consider Renaissance
charters as opposed to
traditional charter openings.
Renaissance charters are
charter takeovers of existing
district schools.

Renaissance charters reduce stranded costs
by approximately 65% as compared to
traditional charters (from approximately $5.2M
to $1.8M for every 1,000 students migrating).
While both would add to the total stranded
costs, Renaissance charters add significantly
less.

 Supplemental Slides

17

In FY14, the District spent about $923 more per pupil
on Instruction than the charter school sample
•

Items considered Instructional include:
–
–
–
–
–
–
–
–

•

Regular Education Salaries
Special Education Salaries
Other Student Support Salaries
Proportionately Allocated Benefits
Instructional Materials
Information Technology
Programs & Student Supports
Professional Development

Charters spend a slightly larger portion of
their dollars on Instruction – 60% vs. 57%

$15,164
43%
$12,856
40%

57%
60%

•

When benefits are not allocated to
Instructional Salaries, the District’s
Instructional spend is about $212 less than
charters

•

Eliminating debt service from this analysis,
the District’s Non-Instructional spend
reduces by $2,046 per pupil; Charters
reduce by $90 per pupil. Instructional
spend remains the same.

 With a migration of 11,600 students, if the district were
able to reduce positions proportionately with enrollment
reductions, 1,316 positions would be eliminated.
•

However, only 530 positions are assumed to be reduced based on
current policies and structures, or 40% of proportionate reduction of
1,316 positions.

40%
65%
26%

26%

32%