Mayor may tap `rainy day' fund to aid schools

$8 million loan from city could help avoid layoffs

February 11, 2004|By Doug Donovan | Doug Donovan,SUN STAFF

To help the city school system achieve the financial respectability it so badly seeks, Mayor Martin O'Malley is proposing to lend it money from a fund that has helped city government accomplish the same goal.

Taking $8 million from the city's so-called rainy day fund to help the system avoid extensive classroom layoffs indicates how seriously O'Malley views the schools' budget crisis. The fund, painstakingly accumulated over the past several years, is typically used for emergencies such as weather-related costs and is crucial in maintaining the city's creditworthiness.

"We have to hope we don't have a blizzard this year," city finance director Peggy J. Watson said. "You don't run to your rainy day fund at the drop of a hat."

The city loan is contingent on teachers' approval this week of a 3.5 percent pay cut over the next 10 months, saving the system another $8 million.

As part of the deal announced yesterday, the school system would repay the salary cuts in July next year. A year later, the school system would have to pay back the city - with interest.

The city has built its reserve fund from $17.3 million in 1999 to $56.2 million to bolster the city's credit rating with bond agencies. Good bond ratings allow governments to borrow money more cheaply.

The city's reserve fund is slightly more than 5 percent of the city's $1 billion general fund, the goal Watson set in 1999. After the loan, the reserve fund will dip to $48.2 million, which is slightly less than 5 percent of the general fund.

O'Malley cautioned yesterday that the loan "could hurt our bond rating."

"I'd say 5 percent is the minimum" of what bond agencies like to see, said Joseph Mason, director of Fitch Ratings, who studies Baltimore's debt. "A fund balance below 5 percent is indicative of some kind of financial strain."

Agencies like Fitch rate the creditworthiness of government debt on various factors including reserve funds.

Mason said the loan should not negatively affect the city's bond rating, which Fitch rates at A-plus - the agency's third-highest rating, indicating high creditworthiness.

Even if the school system did not repay the loan, he said, the default would probably not affect the city's bond rating.

Watson said the city would be charging approximately 1.5 percent interest on the loan, which she said would be compounded monthly. The school system will be required to repay the entire amount on June 30, 2006.

Watson said the money would be lent in eight installments over the next four months.

Although some critics said the loan would only add to the school system's deficit, schools chief Bonnie S. Copeland and other school officials insisted on a loan, not a handout, in order to change a culture used to being bailed out.

Critics also contend O'Malley should budget more than the $201.1 million the system currently receives, which is about 20 percent of the school system's total budget. But the city is facing a tight financial situation. The current fiscal year's budget remains balanced, but the city's preliminary studies for the next fiscal year, which begins July 1, show revenues falling nearly $30 million short of expenses, O'Malley said.

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