In 2004, as part of a raft of legislation to rescue Pittsburgh from near bankruptcy, the state Legislature transferred a portion of a tax levied by the Pittsburgh Board of Public Education to the city.
At the time, the school district seemed to be on firm financial footing with a healthy reserve fund of around $90 million. The city, on the other hand, was sinking into financial distress and facing a $77 million hole in its budget.
But now the financial portrait of both bodies has changed -- even reversed, some say. While the city has boasted balanced budgets and bond upgrades for several years running, the school district is facing the possibility of being placed on a financial watch list by the state within the next few years if it continues down its current path.
Within three years, the district has a projected deficit of $46 million, more than the district could cover with its current fund balance.
This month, Superintendent Linda Lane is expected to propose some school closings for next fall.
As the city and school district head down opposite financial paths, city Councilman Bill Peduto, who is expected by most to be elected mayor Tuesday, and city council each have proposals to help the district's finances and give the city a bigger say in district operations.
"I want to find a way that the schools are sustained with the revenue they need to educate children," Mr. Peduto said.
He hopes to raise additional money from the city's large tax-exempt nonprofits, which would allow the city to return some money shifted from the district to the city during its crisis.
His proposal comes as city council embarks on a new effort -- one that has not been well-received in all quarters -- to bridge the chasm between city council and the Pittsburgh Board of Education with a 21-member task force that will bring together city and school officials, education advocates and community members to discuss alternatives to school closings.
Councilwoman Theresa Kail-Smith sponsored the resolution creating the task force.
The resolution, which also urges the board of education to put a moratorium on school closures, passed unanimously Tuesday.
While some school officials say they'll embrace the new partnership with city council, they say the help they need most is the financial kind.
"As the city begins to engage itself in the conversation in ... how they can help," Ms. Lane said, "any change in terms of tax revenue coming in from that source would at this juncture be extremely helpful."
In 2003, the city was closing pools, laying off workers and facing the very real possibility of bankruptcy.
That year, the state stepped in, installing financial oversight through Act 47. It later created another oversight board, the Intergovernmental Cooperation Authority.
And while the district had funds in reserve, it was already beginning to dip into that money to balance its budgets.
The state Legislature passed a series of bills to help the city's financial situation. That included transferring $4 million in Allegheny County Regional Asset District funds from the school district to the city and giving the city a larger share of money generated from the earned income tax beginning in 2007.
The earned income tax then stood at 3 percent, with 2 percent going to the district and 1 percent going to the city.
In 2007, the year the law took effect, 1.9 percent went to the schools and 1.1 to the city.
The following year, the split changed to 1.8 for the district, 1.2 for the city. And the year after, the city's portion went up again to 1.75 for the district, and 1.25 for the city, where it remains now.
That has added up to around $84 million in lost revenue for the district over the years, though its state subsidy was adjusted slightly to make up for the loss.
Board solicitor Ira Weiss called the change in earned income tax distribution "a stealth move," one that was made without the consultation of board members, who protested loudly at a news conference after they learned of the proposal.
Under state law, school districts are limited to the earned income tax and property taxes to raise revenues, which made the situation even more unjust, Mr. Weiss said.
"So here we have a situation where the Legislature takes a significant amount of money from one taxing body which does not have an array of taxing powers to begin with and gives it to the city," he said. "It's a continuing source of strain since then because there's no logical reason for it."
A change in the formula?
Ms. Lane, who was hired by the district after the law was passed, said she appreciates that the welfare of the city and its schools are inextricably linked. But she said the district might not be grappling with this financial situation if it had not lost that revenue.
"If these funds had not been diverted to the city ... we'd have a pretty significantly different situation," she said.
Ronald Joseph, the district's business manager, said, "The financial outlook of the district would have been much improved," were it not for the diversion.
Now, Mr. Peduto would like to return some of that revenue, though he declined to put a number on how much. But the city's not in a position to simply give money to the district without replacing the funds in its own coffers.
His plan calls for pressing nonprofits, which are exempt from payroll and property taxes, for more in the way of voluntary payments. Currently, the city has an agreement with the Pittsburgh Public Service Fund -- a consortium of nonprofits that together gives about $2.6 million annually -- that expires this year.
Mr. Peduto would like to see nonprofits give much more -- though he declined to put a number on that amount. With enough contributions, though, "it would also give us a little bit of room to be able to help the schools."
That funding would come with strings, he said.
He'd want to see the district agree to follow the recommendations of the task force. And he'd like the district to give the city more say in what happens to shuttered schools, allowing it to create "long-term capital plans."
State Rep. Dan Frankel, D-Squirrel Hill, said it may be time for officials to revisit the way the revenues are divided between the city and the district, but that it "can't be at the expense of putting the city back in distress."
In doing so, he also believes the state should increase its support of schools, which have lost state dollars not only to cuts but also because of charter school funding formulas.
"It's more complex than looking at recovering the revenue from the city," he said. "We ought to be having that discussion about what is the state's role."
Ms. Kail-Smith said she, too, would be open to a discussion about returning some revenue to the district. But she believes it needs to occur in a broader context about how the district can better use its half-billion-dollar budget. The district's enrollment dropped slightly this year, and it now services a little under 25,000 K-12 students.
"I think there should be a lot of formulas that should be reviewed," she said.
By and large, though, she believes there needs to be greater partnership between the district and the city if more school closures are forthcoming.
Mr. Peduto's plan, too, calls for giving the city more say in what happens to shuttered school facilities.
"If a school does have to close, we have the ability to create long-term capital plans," he said.
He emphasized the urgency of the situation. The district renegotiates its contract with the teacher's union in 2015 and is slated to run out of money in 2016, which he called "the second tsunami." He sees the city as a "mediator" between stakeholders.
"With the financial crisis looming and being real in 2016, with the teacher contract and both sides digging their heels in in 2015," he said, "it's absolutely imperative that we take action in 2014."
Moriah Balingit: email@example.com, 412-263-2533 or on Twitter @MoriahBee.