Philadelphia has been making strides toward preparing for an economic downturn many experts agree is fast approaching.
Philadelphia Budget Director Marisa Waxman said that the expected economic downturn is “really front and center in our minds” as the city ramps up budget negotiations.
“Even though we’ve been making this great progress, we’ve been taking steps, we really are trying to get our hands around what is going to be the scale of the problem,” Waxman said.
Speaking alongside Finance Director Robert Dubow inside their offices in the Municipal Services Building recently, Waxman said officials have conducted a preliminary analysis of how a potential recession would impact Philadelphia.
The effects of a recession could be swift and deep.
City officials expected to haul in a $439 million surplus for the fiscal year that ended June 30, according to Philadelphia’s Annual Financial Report released Monday. That’s up 47% from previous estimates.
Yet the city’s surplus, known as a fund balance, would pay Philadelphia’s expenses for only about 33 days in the event of a recession. It is well short of the two-month, $821.5 million target the Government Finance Officers Association recommends.
A recession could flip that surplus into a deficit of more than $100 million within a year, forcing leaders to make budget cuts.
Employment would drop and city tax revenues would decrease across the board in the case of a recession, hurting the collections of the Wage Tax, Business Income & Receipts Tax, real estate transfer tax, and the sweetened beverage tax, among others.
If revenues remain flat after this year, a recession will rip a $1.3 billion deficit through the city’s five-year plan through fiscal year 2024. Declining revenues, on the other hand, would only put Philadelphia’s finances more in the red.
A drop in the fiscal markets could cause Philadelphia pension fund investments miss their targets, requiring the city to contribute more to the pension fund. Unemployment increases will place more burden on the city’s social services network, while state and federal funding would also expect to decrease.
Waxman and Dubow said they did not yet plan cuts to the 2021 budget and evaded questions about a possible real estate tax increases next year.
“We won’t know until we’re there, but those are serious conversations,” Waxman said.
Mayor Jim Kenney called for raising property taxes two years ago, which was quashed by City Council.
Although Philadelphia has seen unprecedented growth in recent years compared to its own history, it has lagged other cities, including New York City and Austin, Texas.
City spending has increased nearly a billion dollars since Kenney took office in 2016 and property values have skyrocketed in parts of the city, including Center City and swaths of formerly depressed areas South Philadelphia.
Roughly 25% of Philadelphians remain in poverty, while half of them are mired in deep poverty.
Officials have begun planning for the upcoming recession by reducing revenue growth expectations, limiting borrowing, increasing the city’s surplus, and setting aside reserves, including plunking down $34 million this year into the Budget Stabilization Reserve Fund, also known as a rainy day fund.
As budget negotiations ramp up in the coming weeks weeks, officials will conduct stress-tests of the city’s budget and finances for possible recession scenarios to prepare for Kenney’s budget proposal in March.
“We want to make sure that we’re anticipating things that, even when we don’t know exactly what’s coming, that we’re ready,” Waxman said.
Philadelphia still continues to claw its way out of the Great Recession of 2008.
Within months of the collapse of the markets more than a decade ago, the city struggled to account for $2.4 billion in shortfalls to its five-year plan. Some taxes dropped precipitously, the city missed earnings targets for its pension fund, services were cut, and more than two dozen schools were shuttered.
“It really quickly turned and required some really drastic action very quickly,” Dubow said about the last recession.
Economists have forecasted a coming downturn well in advance compared to the Great Recession and experts do not expect another historically bad crash.
Dubow maintained the city was in a better financial position today for another recession by setting more conservative revenue estimates and squirreling away more reserves.
But the effects of a recession won’t be known until it hits.
“So we’re probably better prepared,” Dubow said, “but depending on what happens in a recession, you can never be totally prepared.”