Erie School District removed from financial oversight as state praises turnaround

The Erie School District's long financial crisis is over.

The state, whose approval of a huge funding boost in 2017 pulled the district back from insolvency and fueled its turnaround, removed the district from financial watch on Thursday. The state also removed the district from the oversight of a state-appointed financial administrator.

"This is a really big deal," Gov. Tom Wolf said at a ceremony in the library of Erie's Strong Vincent Middle School shortly after 2 p.m. on Thursday.

The district's precarious finances had put it under financial watch with the state since 2016, raising the possibility that a state takeover would be next if the district's finances failed to improve. The lifting of the designation eliminates the risk of a takeover, which would have placed the Erie School District in financial receivership with state.

The state will still track the district's financial health, but in a more limited manner and without a financial administrator on the job.

The removal of the financial watch status signals the 10,000-student Erie School District has achieved financial viability after years of struggle.

Erie schools Superintendent Brian Polito, a certified public accountant and the superintendent since July 2017, navigated the district's financial crisis along with his predecessor as superintendent, Jay Badams.

"This really marks the end of the financial crisis era that we have gone through," Polito said after Thursday's 40-minute ceremony.

The removal of the Erie School District from financial watch represents a historic moment for the district as well as the state. A total of 11 of the state's 500 school districts — now excluding Erie's — are under some kind of state oversight with the state Department of Education due to unstable finances.

Eight of those district's are in recovery related to a statute, while others are in different degrees of oversight, according to Department of Education officials. The Erie School District stands as the first of any school district in the state to get the financial oversight lifted.

"I believe that Erie can and will serve as a model to school districts all across Pennsylvania for how you come out of the tough situation that your were in," Wolf said on Thursday to an audience packed with state lawmakers, former and current Erie School Board members, district staff, teachers and others.

"Hard times come to every community, every once in a while. It's what you choose to do in hard times that really matters. The way you folks have reacted, responded to this crisis is really a tribute. You chose to build back and chose to do this together, which is really important."

$14 million key to Erie School District's stability

The Erie School District's recovery could not happened without intervention from Harrisburg.

After 2016, the financial watch status continued as the Erie School District was placed under the oversight of state-appointed financial administrator in return for the district receiving $14 million in annual and recurring state aid, starting in 2018. The General Assembly in October 2017 passed the legislation that approved the additional funding and required the appointment of a financial administrator.

Helping lead the push for the additional state funding was state Sen. Dan Laughlin, of Millcreek Township, R-49th Dist. He was elected to his first term in 2016 on a pledge to get aid to rescue the Erie School District. He said on Thursday that the district's austerity measures during the crisis, including the merger of four high schools to two in 2017, "made it easier for me when I was down in Harrisburg to make the pitch that Erie was worth investing in."

"This is a proud moment not only for me politically and for the Erie School District, but also for the community as a whole," Laughlin said. "Because we all know that, if you don't have a functioning school district, everything else falls apart."

Democrats who pushed for the same goal as Laughlin included state Rep. Pat Harkins, of Erie, 1st Dist.

At the ceremony, Harkins alluded to Superintendent Badams' suggestion, during the worst of the financial crisis, that the Erie School District should close its high schools and send students to outlying districts to save money.

"We've been through hell," Harkins said. "Failure wasn't an option. We had the county school districts who were praying that we would stay surviving and stay afloat for their own sakes.

"It was a monumental task," Harkins said of the financial recovery. "This took a lot of teamwork, this took a lot of insight and a lot of people working together."

Two financial administrators worked with the Erie School District

Once the additional $14 million was secured for the Erie School District, that district got its first financial administrator in 2018 with the governor's appointment, Charles Zogby, a former state budget and education secretary, to the job. He started in March 2018 and created a financial improvement plan that the district had to follow to get out of financial watch. The state Department of Education approved the plan in May 2019.

The Erie School District blamed much of its financial crisis on underfunding from the state. But as Zogby's financial improvement plan pointed out, administrative decisions prior to Badams taking office contributed to the budget crunch.

Zogby departed as financial administrator in February 2020, and the post remained vacant until Wolf in August appointed Erie manufacturing executive Jim Ohrn as financial administrator. Ohrn, who kept his full-time job as chief financial officer at Custom Engineering in Erie, started on Aug. 15. On Sept. 15 he recommended that the state Department of Education remove the district from financial watch, which would release it from the financial improvement plan.

Ohrn said the district had met nearly all the requirements of the plan and had met the primary criterion for removal from financial watch: enough financial stability that the district's budgets will be "structurally balanced" over each of the next five years.

For a budget to be structurally balanced, a school district's revenue must equal or exceed its expenses, with the district using no one-time funding or debt refinancing to balance its budget.

Ohrn in his report also said the Erie School District is showing signs of academic improvement, another key requirement in the financial improvement plan.

The $14 million in additional state aid allowed the district — with a current budget of $267 million — to balance its budget while setting aside millions of dollars to update its curriculum, add programs and undertake a massive project to improve its 15 buildings and build a new Edison Elementary School.

The district received another enormous boost in the 2022-23 state budget. The package increased the district's state subsidy by about $17.2 million — $15.8 million more for basic education and $1.4 million more for special education.

Tax increases still possible for Erie School District

Though the Erie School District is no longer on financial watch, it still needs to keep its finances in order to maintain sound budgets. One of the financial improvement plan's main recommendation is that the district raise taxes 2.46% a year to keep up with cost-of-living expenses and other growing costs.

Polito and the Erie School Board have generally followed that tax increase strategy. Ohrn, in his exit report, stated that the district will have to raise taxes by 2.46% a year if it wants to maintain the student-assistance programs and other initiatives it introduced during the pandemic. Ohrn's report said the tax increases could be higher if inflation continues to rise and if state funding flattens.

But, in general, according to Ohrn's report, "The 2.46 percent annual tax increases in the financial improvement plan scenario are sufficient to maintain the District's recent investments in staff and students and also generate some additional resources that could be dedicated to future capital projects and other priorities."

A 2.46% tax increase in the Erie School District translates to an additional $43.59 in taxes on a property assessed at $100,000, according to district figures for 2022-23. An increase of 2.46% would raise an additional $1.3 million in revenue.

On Thursday, Polito said in an interview that he will continue to favor cost-of-living tax increases to keep the Erie School District financially viable. Laughlin echoed the sentiment that the removal from financial watch does not mean Erie residents will be free from increases in school taxes.

The school district must stay proactive in its financial health "or they could easily slip back into the situation they were in," Laughlin said in an interview.

Polito launched process to get out of watch

Polito in November cited the district's financial stability and petitioned the Department of Education to remove the district from financial watch. But the governor first had to appoint a new financial administrator before the Department of Education could consider Polito's request. Under the law, the financial administrator must recommend removal from financial watch before the Department of Education can act.

In his remarks to the audience on Thursday, Polito thanked Jim Ohrn for agreeing to step in as the district's second and final financial administrator "and for conducting a thorough and very expeditious review of our finances."

Acting Education Secretary Eric Hagarty said the department accepted Ohrn's recommendation and had officially removed the Erie School District from financial watch.

Hagarty, named education secretary in April, is third person to head the state Department of Education under Wolf, a two-term Democrat who is leaving office in January due to term limits. Pedro Rivera was the education secretary who approved the Erie School District's financial improvement plan, in May 2019. Rivera's successor, Noe Ortega, received Polito's removal petition, in November.

Hagarty and Ohrn closed out Thursday's ceremony by signing the document that removed the Erie School District from financial watch.

The document concludes: "Based on the District's current financial practices, academic growth, and implementation of initiatives in the District's Financial Improvement Plan, the District has demonstrated the ability to maintain a structurally balanced budget and satisfies the criteria for removal from Financial Watch status."

Contact Ed Palattella at epalattella@timesnews.com. Follow him on Twitter @ETNpalattella.

This article originally appeared on Erie Times-News: Erie School District finances: State removes financial watch label