A severe economic downturn would trigger painful cuts to city services, while upcoming challenges will test Philadelphia’s fiscal stability, Kenney administration officials and a government watchdog group say.
Although Philadelphia is better prepared for the next economic downturn than it was for the Great Recession in 2008, “we still have tremendous weaknesses in our fiscal health,” city Budget Director Marisa Waxman said.
The key risk to city government’s revenue projections was economic growth, said Harvey Rice, Executive Director of the Pennsylvania Intergovernmental Cooperation Authority (PICA), which oversees city finances.
Rice doubted that city finances could weather a severe economic downturn and warned the city was not putting away enough reserves. The city’s fund balance last year was 9% of its general fund spending; the Government Financial Offices Association recommends a fund balance of 17%.
“Therefore, if an economic downturn occurred, higher fund balances would help the city less the impact on city services in the short-term,” he said.
On Tuesday, Waxman, Rice and others provided insight into city finances during a hearing before the City Council Committee on Fiscal Stability and Intergovernmental Cooperation ahead of Mayor Jim Kenney’s budget proposal next week.
For now, the economy continues to hum along, filling city coffers and putting the city on the best fiscal footing in decades.
In fiscal year 2019, the city logged a $438.6 million fund balance, or surplus. This year, the Kenney administration put away the city’s first deposit in the Budget Stabilization Reserve, also known as the rainy day fund, ($34.2 million) and another $20 million into a recession fund.
With an economic downturn expected sometime within the next five years, the city’s high poverty rate, weak tax base, and large fixed costs make Philadelphia vulnerable to a recession, Waxman said.
While testifying alongside city Finance Director Robert Dubow, Waxman said the administration has taken steps to prepare for the next economic downturn, including stress testing the city’s budget, increasing pay-as-you-go capital spending, increasing the fund balance and setting aside reserves.
This administration expected a drop in its fund balance compared to last year's. The projected fund balance for this fiscal year, which ends June 30, was $352 million, up from previous estimates of $307 million.
Waxman admitted the city’s current fund balance was not enough to survive all but the mildest of recessions.
“In all but the mildest recession scenarios, the city’s fund balance would quickly turn negative with deficits over $100 million as early as FY22 (fiscal year 2022) and the city would be forced to make painful budget choices,” Waxman said.
The city’s fund balance as a percentage of revenues ranked second to last among the top 25 largest cities in the U.S., according to Moody's Investors Service.
Other financial threats loom.
Among the biggest drains on city finances was Philadelphia’s pension obligations, Rice said. Pension obligations account for 16% to 17% of the city’s budget. The city’s unfunded pension liabilities amount to $6.1 billion and the pension fund is 46.8% solvent.
The Kenney administration’s projected contributions to the pension fund were expected to raise its solvency rate to 60% in five years, Dubow said.
All eight of the city’s labor union contracts expire this year. Rice said the city has put away $140 million over the next five years for those contracts, but PICA called for at least $240 million.
The School District of Philadelphia also faces rising deficits in the coming years — $76.4 million in 2022, $186 million in 2023, and nearly $320 million in 2024 — which pose a risk to the city’s five-year financial plan, Rice said.
“We have a, for a lack of better word, a school district recession on the horizon,” said at-large Councilman Derek Green during the hearing.
Waxman said the city’s five-year plan dedicates more than $1.2 billion to the district. The administration was attempting to balance the district’s immediate needs with putting away reserves.
“That is something that we carefully look at as we develop the budget and the five-year plan, and talking with the school district to understand what their needs are,” she said.
Kenney will deliver his budget proposal and five-year financial plan on March 5 before the City Council.