Philadelphia’s Aging School Buildings Pose Crisis; Municipal Bond Funding Undermines Repairs, New Analysis Shows

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Many of Philadelphia’s schools are in terrible shape. The average public school building in the city is over 70 years old, and some are over 120 years old.

The state of disrepair, including a lack of air conditioning and incidents of untreated asbestos, mold, crumbling ceilings and flooded hallways, is well documented. In 2017, an assessment found that these buildings had US$4.5 billion in deferred maintenance needs. More recently, Superintendent Tony Watlington estimated that Philly’s school buildings need $7 billion to $9 billion for repairs and upgrades.

I am a scholar of school finance, with an emphasis on infrastructure. My colleague Camika Royal, who’s an expert on urban education and Philadelphia schools, and I wanted to figure out why the city’s school buildings are like this.

Using U.S. Census Bureau data from the National Center for Education Statistics on primary and secondary education finance – specifically data on total interest payments – we found that one key figure helps explain the dire state of the city’s school buildings:

From 1993 to 2021, when adjusted for year-over-year inflation, the School District of Philadelphia had to pay $3.6 billion in interest and fees to get the money it needed for its buildings and other purposes.

That’s an average of $130.4 million per year during that period. Instead of going to the buildings’ maintenance, for example, that money went to wealthy investors and consultants.

Our analysis was published in the peer-reviewed Journal of Educational Administration and History.

Reliance on Wall Street

Pennsylvania, unlike states such as Massachusetts and Wyoming that have robust policies for financing school infrastructure, does not have a statewide program that provides sufficient revenue for school facilities.

The commonwealth’s PlanCon program, for instance, which had reimbursed districts for building costs, was defunded in the wake of the 2008 financial crisis. It hasn’t been fully restored.

While Gov. Josh Shapiro signed the Public School Facility Improvement Grant Program into law in 2024 to provide grants for school buildings statewide, the program – funded with $100 million – is pitifully small.

To get the money it needs for its buildings and infrastructure, the School District of Philadelphia has to sell itself as an investment product on Wall Street. This is done through municipal bonds.

Municipal bonds are basically big loans for local governments’ capital projects.

Investors purchase these municipal bonds because they can make tax-free income when the school district pays them back with interest.

Financial consultants, credit raters, bond lawyers and private banks all benefit from this system as well, since they charge fees for the services helping investors front their money to school districts.

Two-thirds of school districts in the U.S. issue bonds, exposing them to some degree of interest and fees. Other districts are located in states with programs that assume some amount of this liability. One study estimated that school districts most likely spend about 1% of bond principal on fees associated with bonds sold, but there is great variation depending on district size.

For our study, we calculated a 0.08% ratio of fees to principal based on the fees charged to the district between 2005-2021, which is slightly below average.

Market mayhem

You might think that paying some interest and fees for the service of providing liquidity, or money that can be spent on stuff now, to local governments for their infrastructure projects would be efficient and thus worth the price, even if it’s a little expensive.

Looking at the financial history of the school district’s relationship to the municipal bond market from 1993 to 2021, we found two main reasons why this just isn’t true.

1. Less credit was available

The first is the chaos in credit markets from 1993 to 2001.

The municipal bond market is subject to the erratic, competitive and unstable tendencies of Wall Street finance. In 1986, the Tax Reform Act regulated private banks, making it harder for them to buy and sell private activity bonds, and also taxed interest on certain bonds. This prompted many banks to pull out of that market, reducing their share of municipal debt. Credit supply went down by 15%, and prices went up.

This made it more expensive for municipalities like Philadelphia to borrow.

Then, in 1987, the savings and loan crisis caused state budgets to contract nationally by 5%. In 1992, Pennsylvania’s deficit ran to 19.1% of its general fund. The state ranked seventh nationally in its budget shortfall that year.

This reduced Philadelphia School District revenue, making it more difficult to repay previous bonds while also necessitating further lending.

2. Weak investments

The second key reason relates to new investing strategies that lawmakers and the financial industry use to secure money for the district’s buildings.

After deregulating the kinds of bonds that local governments could sell in 2003, Pennsylvania took control of the Philadelphia School District’s finances. Under the leadership of former Superintendent Paul Vallas, the district used market instruments, such as bonds with variable interest rates, that ultimately led to a $330 million loss in the wake of the 2008 financial crisis.

Green New Deal for schools

We conclude our paper with recommendations for policies we believe would be more efficient and just in supporting public school districts like Philadelphia that serve a diverse, working-class population.

These include setting up a National Infrastructure Bank at the federal level that would provide appropriate loan financing for collective goods such as school infrastructure. Also, the Green New Deal for Schools legislation, currently with 82 cosignatories in Congress, was reintroduced last year by its co-sponsor, U.S. Sen. Ed Markey of Massachusetts. The legislation would provide roughly $1.6 trillion in funding for both physical infrastructure and social infrastructure, including resources for district facilities and climate-related needs when educating students, as well as curriculum, staff and materials.

This is an updated version of an article originally published on Aug. 14, 2024. The article has been changed to reflect a revision of the journal article it is based on.