CHICAGO - Nine months ago, the Minneapolis school system was in a jam: Its $215 million general fund budget had a $6 million hole and its finances were in shambles.

To help balance the fiscal 1993 budget and make sense of the fiscal chaos, the Minneapolis Board of Education turned to the private sector for assistance.

Peter Hutchinson, president of Public Strategies Group Inc., a St. Paul consulting firm, stepped in and balanced the budget with cuts. With Hutchinson's help, the board in June passed a balanced $257 million general fund budget for fiscal 1994, which began July 1.

Now the board is making the relationship with Hutchinson permanent after it fired Robert Ferrera, who was superintendent when the fiscal problems occurred.

Earlier this month, the board chose Hutchinson to take Ferrera's place as head of the 44,500-student school system.

The school board and Hutchinson are working out the details of his contract, which will be performance-based. If the goals included in the contract are not met, Hutchinson has agreed that he and his firm will not be paid for their services, according Barb Nicol, a spokeswoman for the school board. The contract is expected to be finalized in mid-December, she said.

As superintendent, Hutchinson intends to streamline the school system by increasing accountability at every decision-making level, according to Babak Armajani, chief executive officer of Public Strategies Group.

Rating agency officials said that the concept of selecting a school superintendent from the private sector is innovative and have praised Hutchinson's efforts to date.

Dan Aschenbach, a vice president in the central regional ratings group at Moody's Investors Service, said that Hutchinson has been responsible for "getting financial factors on track" for the school district since February.

However, Aschenbach said that Moody's is "concerned" about the district's credit standing and intends to review its rating in December. He said that the school district's financial reserves are below 1% of general fund revenues, compared to the desired 5% level.

Other financial pressures include the future impact of a new teachers union contract and a proposed $130 capital improvement bond issue planned for next year, Aschenbach said.

"The major thing here is that the district take steps to resolve its current problems," Aschenbach said.

Michael Forrester, an associate director at Standard & Poor's Corp., said that the rating agency's negative outlook reflects the financial problems that the school district has experienced. The problems are attributable in part to spending that has outpaced revenue collection in recent years.

"We have concerns about the [district's] financial deterioration," Forrester said.

The school district has about $72 million of general obligation debt, rated AA with a negative outlook by Standard & Poor's and an Al rating by Moody's.

Prior to serving as president of Public Strategies, Hutchinson worked for various nonprofit, government, and for-profit organizations. He served as Minnesota's finance commissioner in 1990 and 1991.

Hutchinson and two associates created Public Strategies Group three years ago to help public organizations redesign their services and internal operations to provide efficient quality service for their customers.

Though school districts in cities such as Baltimore have hired private consultants to assist with the management of schools, the hiring of a superintendent from the private sector is a novel idea, according to Mary Fulton, a policy analyst for the Education Commission of the States. She said that superintendents in most school districts rose through the traditional educational ranks.

"Hiring a superintendent who is not an educator and is a businessman is very innovative," Fulton said. "It shakes up the status quo."

Fulton said that many large city school districts will closely monitor the Minneapolis school system to see if the new management makes a significant difference in operations and educational productivity.

Increasingly complex financial and reform issues in many districts, especially those in urban areas, highlight the need for school leaders who can manage fiscal affairs and resolve conflicts, not just those with teaching experience, Fulton said.

"Urban school districts may need to rethink the role of large city superintendents," Fulton said. "Many large city superintendents may not have strong backgrounds in fiscal management and conflict resolution."

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