City took on plan, aware of bond risk

O'Malley cites need to save the schools without state's help

`Plan B' becomes `Plan A'

Rating agencies threaten to downgrade bond status

March 10, 2004|By Laura Vozzella and Tanika White | Laura Vozzella and Tanika White,SUN STAFF

Even as New York bond raters warned of serious consequences, Mayor Martin O'Malley forged ahead yesterday with a $42 million plan to save Baltimore schools without state help, saying the problem was the city's to fix.

Sounding themes of pride and responsibility, O'Malley told the school board he had decided to reject a state bailout despite the financial risks that lay ahead.

"While this may not be a day of celebration, it is a day of commitment, because the risk of not acting is greater than the risk that we take in acting," O'Malley said last night.

"It is a bigger gamble to do nothing about our school system. It's all about risk management."

On Monday, the City Council stunned Annapolis by approving its own loan plan just as state legislators were about to consider a state bailout proposal achieved after weeks of difficult negotiations.

The shock waves from that last-minute turnabout reverberated throughout the city yesterday, even as new controversies arose:

A New York bond-rating agency said it was likely to downgrade the city's bonds if the loan goes through.

School officials questioned whether the city solution can keep the system afloat. The plan provides $8 million less than the state bailout, to be lent for a shorter period.

Some members of the City Council complained they had been misled into approving the loan, which they said was only supposed to be a back-up if the state aid fell through. They also said they had been assured the bond rating would not be affected.

Cassandra W. Jones, the city school system's second-highest-ranking official, was removed from her position by the nine-member school board, which would have been replaced with a state-controlled board under the state plan. The city's rescue keeps the current board in place.

A state prosecutor disclosed a criminal investigation into the leasing of school property.

More than 600 students staged a student strike, skipping school to demand more state aid for city schools. They marched a half-dozen blocks from City Hall to the state Board of Education headquarters on Baltimore Street.

Among the day's more distressing developments for city leaders, Fitch Ratings issued a statement saying it would probably lower the city's bond rating because of the loan plan, which would drain all but $14.2 million from the city's $56.2 million rainy day fund. Two other ratings agencies, Moody's and Standard & Poor's, planned to review the loan.

"We are fending off bond-rating agencies even as we speak," O'Malley told the board.

Meant as `alternative'

City Council members said the administration had assured them that the plan would not affect the city's bond rating.

They also said the city loan was only supposed to be a contingency in case legislation worked out by Gov. Robert L. Ehrlich Jr. and O'Malley failed in Annapolis.

"This was supposed to be a Plan B," Council President Sheila Dixon said. "This was going to be an alternative if things did not happen at the state level."

But Plan B quickly became Plan A with help from O'Malley, who has been involved in a fierce tug of war with Ehrlich over who would save city schools. Ehrlich appeared to have gained the upper hand under an agreement that would have amounted to a virtual state takeover of city schools.

The risks of state controls, O'Malley said yesterday, had finally outweighed the financial risks to the city.

Within hours of the council vote, O'Malley asked Senate President Thomas V. Mike Miller not to submit legislation for the state plan, which included a $42 million state loan.

Sen. Nathaniel J. McFadden took to the Senate floor and announced the city was no longer seeking state aid - after clearing his remarks with O'Malley.

Dixon and other council members said they returned home from their meeting, flipped on the 11 o'clock news and were shocked to hear that the Annapolis bill had been tossed aside in favor of the city loan they had just approved.

"I had no idea that the legislators were going to pull the bill," said Councilman Keiffer J. Mitchell Jr., lead sponsor of the city legislation, who had described the measure as "Plan B" during the council meeting but also said he favored it over the state plan because it would protect the teachers' contract, which could have been broken under the state plan.

Mitchell was prepared to go ahead with the loan.

"If it's Plan A now, we've got to run with it," Mitchell said.

But Dixon said she might vote against the loan when it comes before the city's Board of Estimates, which could happen as soon as next week. O'Malley controls three of the board's five votes, however, so the plan will pass as long as he supports it.

Short on details

In addressing the school board yesterday, O'Malley offered more inspiration than details, insisting the city would demand strict financial accountability and describing the city schools as full of hard-working teachers and good students.

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