Schools deal may hinge on state funding

Huge cash flow problem threatens $8 million loan from Abell Foundation

Tens of millions of dollars short

Lenders want assurances that they would be repaid

February 16, 2004|By Liz Bowie and Tanika White | Liz Bowie and Tanika White,SUN STAFF

Without an advance of state funds to cover the Baltimore public schools' cash flow problem - one so great that it threatens to bankrupt the system - a deal brokered over the weekend to ease the system's $58 million deficit will not happen, sources close to the negotiations said yesterday.

The Abell Foundation, a local nonprofit organization, tentatively agreed Saturday to lend the school system $8 million, matching the $8 million pledged by Mayor Martin O'Malley last week from the city's rainy day fund. The money is aimed at paying down a portion of the deficit and covering salaries without midyear layoffs or pay cuts.

But the Abell Foundation's contribution is contingent, sources said, on the school system being able to pay its bills through June, the end of the fiscal year.

The magnitude of the cash flow problem - the gap between money on hand and projected expenses - apparently was not widely known until recently, and presents a worse financial picture than previously reported. It totals tens of millions of dollars, sources said.

School officials would not comment yesterday on the cash flow issue.

Yesterday, Gov. Robert L. Ehrlich Jr. spoke by telephone to state schools Superintendent Nancy S. Grasmick and former state Sen. Robert R. Neall, a financial adviser to the school system, about the financial problems. In a news release issued afterward, he did not address the cash flow issue.

"As a result of the hour-and-a-half conference call, I have increasingly grave concerns regarding the city's school situation," the governor said.

Ehrlich asked that Neall send financial information to officials in his office by the end of the week, "so that the state may consider its own options."

Providing assurances

The revelation about the cash flow problem makes the loan from the Abell Foundation - which has provided grants and other support to the city schools for many years - even more tentative.

Before lending money to the school system to prevent mass layoffs and employee pay cuts, sources said, private lenders want to ensure that the state is willing to advance the schools a significant sum this school year.

The private lenders also want legal assurances that they can get their money back when the loan comes due, the sources said.

School officials have said that if significant steps are not taken to curb spending this year, the deficit could grow by $24 million.

In a first step, the chief executive of city schools, Bonnie S. Copeland, already has laid off 800 employees. But she still needs to cut spending by $16 million more.

Copeland had hoped school employees would help ease that problem by accepting an across-the-board pay cut through the end of the year, but teachers and other workers resoundingly rejected the idea in two votes over the past two weeks.

Difficult choices

That left Copeland where she began: proposing to lay off up to 1,200 employees, most of them teachers, or forcing workers to take a 6.8 percent pay cut, possibly as early as this week.

Imposing a pay cut probably would trigger a court battle with the system's employee unions. School board members met privately Saturday to discuss options with the system's attorneys.

They said they would meet again this morning and that they would announce a decision on whether to use layoffs or salary cuts to limit spending and decrease the deficit.

But the latest proposal from the Abell Foundation and the city has added fodder for discussion.

School officials now say the board only "expects" to come to a conclusion this morning.

Among the questions Copeland and board members must weigh: Would the cost of repaying city and private loans ultimately be too steep for the struggling school system? And would layoffs or pay cuts still be necessary in years ahead, even with city and private help?

`No other options'

City Councilman Kenneth N. Harris Sr. said the school system must seriously consider any proposal being offered by O'Malley and Abell and any other philanthropies that might join in, even if it means having to repay loans with interest.

"The school board has no other options," Harris said yesterday. "It's quite clear from what I've been hearing in the community, parents and most people support the teachers'" decision to reject pay cuts.

But if the loan deal is going to prevent layoffs, he added, "I don't think the school board has any other choice."

Baltimore Teachers Union President Marietta English said school officials should not take too much time to decide whether the latest proposal will work for the school system.

"It's what we've been saying all along, that they should go and try and find the funds from their partners," English said yesterday. "We've asked them why they didn't try to go and talk to foundations before."

If private foundations are nervous about whether they'll be repaid, she can understand why, English said.

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