Schools repay most of city's $42 million loan

Officials restore on deadline $34 million to rainy day fund

August 03, 2004|By Doug Donovan | Doug Donovan,SUN STAFF

The Baltimore public school system has repaid most of the $42 million loan city government provided in March and has significantly improved its fiscal outlook for the coming year, city and school officials announced yesterday.

Baltimore schools chief Bonnie S. Copeland said her administration had wired $34 million to City Hall yesterday morning and that the loan's remaining $8 million would be repaid, as promised, in two years.

"That was an extraordinary gesture of generosity and an extraordinary gesture of hope in our system, and we cannot thank you enough for that," Copeland told Mayor Martin O'Malley and City Council leaders at a North Avenue news conference.

Copeland said the loan "saved us from bankruptcy." The money was needed after the school system realized it faced a cash-flow shortage on top of a budget deficit.

The cash assistance helped the school system get its finances in order and control spending through layoffs and other cost-saving measures. Copeland said those measures will help the school system reduce its deficit this year.

"Not only are we able to repay our debt to the city, but ... we will close our books within our budget this year," Copeland said.

O'Malley said he was relieved that the school system had honored its commitment to repay the money by yesterday. The city approved the loan in March to avoid a state bailout of city schools that would have effectively ended local control of the system.

"The state said they wouldn't help us unless, in essence, we gave up all rights to control the destiny of our own school system," O'Malley said. "We went out on a limb."

In March, Councilman Keiffer J. Mitchell Jr. led the City Council to devise its own loan package just as state legislators were about to consider a bailout after weeks of difficult negotiations in Annapolis.

"I've had this date marked in my calendar," Mitchell said. "The greater the risk, the greater the reward. It was worth the sleepless nights" worrying if the school could pay it back.

The $42 million loan drained most of the city's rainy day fund and jeopardized the typically secure grades given to the city's bonds by rating agencies that inform investors of risks associated with buying municipal debt. Lower grades make borrowing more expensive for the city.

"The bond writers were more interested in this milestone than any other piece of the recovery effort," O'Malley said of the $34 million repayment.

In March, Fitch Ratings put the city on a "negative watch," meaning the agency would probably soon lower the city's A-plus rating, its fifth-highest and an average for most municipalities. In June, Fitch took the city off that list but also changed Baltimore's long-term outlook from stable to negative.

The change reflected a belief that the loan would be repaid but that the city could suffer financially over the next one to two years by assuming more responsibility for schools, said Joseph Mason, a Fitch analyst.

Mason said yesterday that the repayment would not change the negative outlook.

"It's certainly a positive that they repaid what they were supposed to repay," Mason said. "By virtue of their paying it back doesn't change our rating. They're still a long way from climbing out of the accumulated deficit. There's still the possibility that the city would have to make another loan."

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