The debt and the wolf
I've been putting together a literature review on school facilities finance and came across something curious. In a great working paper on state credit enhancement programs by Lang Wang at George Washington University, something about Pennsylvania caught my eye.
Some context: Wang is measuring the impact that state credit enhancement programs have on school district capital spending. Credit enhancement means that the state will "promise to repay district debt when a district cannot do so." When the state has a program that will cover a school district's expenses if something goes to hell with its debt payments, does that make bonds less expensive for the states' districts? Do the districts take out more bonds? Do the districts spend more on capital expenditure?
The paper is helpful because it uses a kind of natural experiment. There are 24 states with credit enhancement programs. It turns out that these programs lower interest rate costs by 6% and increase capital spending by 7%. Small, yeah, but not nothing.
But that's not what caught my eye. When reading through Wang's literature review, she notes that the only time in recent history that a credit enhancement program was actually triggered--these policies are largely there as safety nets, districts rarely actually fall into them--was in Pennsylvania!
This surprised me because I didn't actually think that my state had any programs for school district capital expenditure. The reimbursement funds have been closed for years. But it turns out that PA has an intercept program called Act 150, which means that if shit hits the fan in a school district's debt service then the state will withhold state resources from that district until things are set right. As one presentation explains: "If a school district fails to pay debt service, state aid payments can be intercepted and used to pay debt service due to bondholders."
(As a comment on Wang's paper, I don't think state intercept programs are all that and a bag of chips. We'd want much more intervention to actually cover school facilities costs. But she's obviously right that it makes a difference to the municipal bond market goons if a state has this in place, so fine.)
Apparently the one time Act 150 was used--which also happens to be the only time any state credit enhancement program has been used in recent history nationwide--was when the state had to step in and cover for the Penn Hill School District in 2015.
Debt Gone Awry?
The ultra-capitalist rag The Bond Buyer covered the story in detail when this all went down. The state auditor Gene Pasquale was doing an audit and found some shenanigans in Penn Hills, which is 15 miles east of Pittsburgh in Allegheny County. (As an interesting sidenote, the city is half an hour north of Braddock, where John Fetterman--our new huge senator--was mayor for many years. This becomes important later.)
The big thing that caught Pasquale's attention and ultimately triggered Act 150 was a huge increased in debt the district had to pay back. It went from $11 million in 2009 to $167 million in 2015, increasing more than ten times in just five years.
According to the Bond Buyer, the audit claimed that "stunning financial mismanagement and illogical business decisions" got the district super heavily indebted. This pro-muni market paper titles its story "Debt Gone Awry" but the story the article tells, and I'm pretty sure the audit itself reveled, doesn't quite add up.
Again, the claim is that the district, specifically its business officer and secretary Richard Liberto, mismanaged the district's finances so badly that they weren't able to make debt payments, causing that debt service number to explode.
Indeed, Pasquale found a lot of corrupt shit happening in Penn Hills. First off, you can't be treasurer and secretary of a school board at the same time. But also Liberto oversaw:
$424,000 in...credit-card spending[that] included doughnuts for meetings, lunches at local restaurants, sports equipment, hotel rooms for district consultants and even a residential water heater for $358.98. The district issued 24 such cards, even though only four people were authorized to use them.
Okay, you can't fault people for getting doughnuts for their meetings and eating at, gasp, restaurants. But the water heater thing is bad. There was also $384,500 of lost fuel money due to lack of attention to its transportation contracts and $22,000 of missing revenue from sporting event tickets, along with tons of missing records. Also it turns out the district hired two bus drivers with felony records (one on a drug charge, the other on an aggravated assault charge).
Okay, so, yeah, this isn't great. You shouldn't buy yourself a water heater for your basement using the district credit card and lose tends of thousands in sports ticket money. And I guess you probably shouldn't hire felons as bus drivers (but given mass incarceration and the unjust mess that poses as a criminal justice system in our country, who knows actually?).
But I looked at the numbers again. The added expenses of the corruption doesn't even get to $1 million. That can't possibly account for the tenfold increase in debt service responsibility between 2009 and 2015. The story there is actually much different than the article lets on. That stuff reflect poorly on the financial judgment of Liberato and others, but it's not the whole story behind the debt balloon that triggered Act 150.
Build America
In 2010, the district needed a new high school and a new elementary school. The buildings were old and they needed better ones. So like any upstanding American school district, they went to the municipal bond market and sold themselves as a commodity investment for ruling class bond investors to borrow $130 million. It was a lot of money.
Apparently, the architect consulting on the building project recommended that to afford his plans the district would have to consolidate three elementary schools into one, increase taxes on its residents, and reduce staff throughout the district. In other words, they had to close buildings, fire people, and ask their residents for more money. Rents would increase. Property taxes would increase. People would lose their jobs. This was going to be bad for the people of Penn Hills.
The district leadership didn't do this. They kept the buildings open and didn't fire people. This prompted Pasquale in the audit to say that the architect gave better business advice than the district's business manager.
But come on everyone, helping people out and keeping schools open isn't bad advice! It's just bad business advice, in capitalism, which makes everything worse. Schools shouldn't be treated like this but I suppose it was very de rigoeur then to be unquestioningly neoliberal about everything.
Besides an austerity narrative tainting this account of what happened in Penn Hills, there's more.
Of course, I wanted a little more info so I went to the bond itself. Yes, Penn Hills sold a big series of bonds in 2009-2010. At first, I was wondering if they, like Philadelphia and districts around the country, had gone in for some yahoo go-go bonds that were all in the rage in the 2000s and crashed big and hard during the 2008 crisis. Penn Hills didn't do that, but there is a crisis story here.
Actually, the lion's share of this $130 million bond--$104 million, in fact--was sold as part of the Build America Bonds program created by the Obama Administration's response to the financial crisis. It was a milquetoast tax credit program whose provisions reimbursed entities like school districts for 35% of interest payments on bonds issued under the program.
It's right there in the bond document:
So the Penn Hills people were thinking, let's take advantage of this federal program to build our schools. Federal support is largely absent when it comes to school buildings, so maybe they thought: let's go big. The recovery program will cover more than a third of our interest payments. Maybe we don't have to fire people and close schools.
The debt or the wolf?
But ultimately the audit concluded that the district didn't "budget properly" to cover the resulting debt payments. Of course it was all their fault. And maybe it was, but they weren't pocketing so much of that money that it wouldn't accounted for all that missed debt! It was less than a million bucks, a drop in the bucket. Was it really all their fault? Should we really blame this district, which was corrupt, yes, but also decided not to close schools and fire people and raise taxes when they were relying on a federal program to help them out of a crisis manufactured by ruling class yahoos in the subprime mortgage secondary market?
For a little more background, we know that the Pittsburgh area heavily deindustrialized in the 1980s. Between 1970 and 2010, Penn Hills lost a third of its population. It was the steel industry that kept the whole area afloat. After that industry collapsed, property values sunk. Indeed, it was a wolf that came for Pittsburgh like John Hoerr's book said. Gabe Winant's recent history of the region also documents this history.
John Fetterman has staked his whole political career on being a champion of downtrodden towns hit by this overwhelming social force of deindustrialization. He comes from a place near Penn Hills which had to deal with the same issues. He's clear evidence that this trend is meaningful politically.
Anyway, I'm just wondering if there's a little more to the story here. Maybe Penn Hills wouldn't have been in this situation if the deindustrialization hadn't been so severe; if the federal response to the 2008 crisis was more generous; if the federal and statement government did more to take care of school districts and their facilities needs. Penn Hills' debt balloon can't just be explained by corrupt mismanagement, there are structural features of the situation that account for the astronomical debt in which it found itself.