Philadelphia City Hall

Philadelphia City Hall

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After soda tax switch, Philly City Council wants to know: Why are we broke?

City Council members were surprised to learn Wednesday that some of the revenue from a soda tax the body preliminarily approved will go toward bolstering the city’s coffers — and now they’re planning hearings to investigate “the true financial health” of the city.

Late Wednesday, a revamped 1.5 cent-per-ounce soda tax got a big thumbs up from City Council, but the public and council members learned that afternoon that not all the estimated $400 million in revenue over the next five years will go toward Mayor Jim Kenney’s initiatives like pre-K, community schools and parks and recreation.

If the city’s beverage tax is passed as is, some of the revenue will go toward boosting the city’s fund balance — that’s the difference between the amount of money the city spends versus what it brings in. Financial planners recommend cities have a “healthy” fund balance in order to have some financial flexibility. So think of it this way: You’d want a positive balance in your checking account, rather than having expenses exactly match income. If you don’t, it can negatively impact your credit rating.

The city aims to have its fund balance reflect 6 to 8 percent of revenue. That would put a healthy fund balance at somewhere in the mid-$200 million range. This year, the city’s fund balance decreased from $150 million (already low) to $70 million. It’s projected to dip below $42 million in fiscal year 2017 and could reach as low as $15 million in fiscal year 2018 if there are no new sources of revenue. For context, the city spent $40 million last year on the Free Library alone.

Why’d the fund balance drop so low? Finance Director Rob Dubow said Wednesday it had to do with ballooning labor costs, pension obligations and city contracts.

Today, Councilwoman Maria Quiñones-Sánchez introduced a resolution on behalf of Council President Darrell Clarke that called for the City Council Committee on Fiscal Stability and Intergovernmental Cooperation to hold hearings this summer on what council members learned this week about the city’s sagging coffers.

“City Council is deeply concerned about new information we have received in the last days of the budget process regarding Philadelphia’s true fiscal health,” Clarke said in a statement. “The legislative branch and the public we represent deserve greater transparency in how public dollars are raised, allocated, and utilized.”

Most City Council members are in favor of increasing the city’s fund balance, but they say they didn’t find out until mid-afternoon Wednesday — just before their “Committee of the Whole” voted — that soda tax revenue would go toward the fund balance.

During an evening City Council hearing Wednesday, multiple council members chastised the administration for failing to specify earlier that that’s where a portion of the money would go toward. Councilman Bill Greenlee asked Dubow if council members can expect greater transparency in the future. Dubow conceded the point: It should have been brought up sooner.

“We heard it was all about the kids,” Greenlee said. “Sometime this afternoon we heard it’s also about the fund balance.”

In a statement released after the vote was taken by the Committee of the Whole to approve the tax — it’ll have to be formally voted on again next week before it can head to the mayor to be signed — Clarke said legislative staff members discovered “weeks ago” that Kenney’s original 3-cent-per-ounce proposal would raise more revenue than needed to fund his initiatives.

However, several members were bothered that they weren’t explicitly told until Wednesday that $41 million of the anticipated $300 million in soda tax revenue over the next five years isn’t earmarked for the mayor’s initiatives.

“It was absolutely a surprise to Council,” Clarke’s spokeswoman Jane Roh said, “and a failure to disclose information that was beneath the level of a seasoned former colleague.” 

She was referring to Kenney, who before he was elected mayor last fall was a longtime member of City Council, himself coming out against proposed soda taxes in the past.

His spokeswoman Lauren Hitt said the fact that some cash from the soda tax would be going to the fund balance was in the budget “from the get-go,” but it “didn’t get a lot of public acknowledgement.” She said the administration initially wanted to send $19 million of soda tax revenue to the fund balance, but that was increased to $41 million at the request of council members during negotiations.

Council is in session this morning, but we have a call into freshman At-large Councilman Allan Domb, who apparently led the charge in plugging the budgetary holes.

Other city council sources indicated members didn’t find out until mid-afternoon Wednesday that money would go toward the fund balance. One council aide said that though it may have been said “in passing” that the city’s fund balance was low, it wasn’t explicitly communicated that revenue from a beverage tax would go toward bolstering that. The mayor’s five-year plan released earlier this year projects fund balances to be:

FY17 – $42 million

FY18 – $38 million

FY19 – $48 million

FY20 – $71 million

FY21 – $127 million

However, those projections included new sources of revenue. Without new sources of revenue, the general fund balance could fall as low as $15 million in fiscal year 2018, when the administration plans to divert $30 million worth of soda tax revenue into the fund.

Here’s what Kenney’s Chief of Staff Jane Slusser testified to in March with regard to the fund balance:

“Despite recovering from the recession of 2007-2009, the City still operates with very narrow margins, and any moderate change in revenues or expenditures can create real challenges within the City’s budget. Each fiscal year of the Plan ends with much lower fund balances than recommended by government experts. In FY18, the fund balance reaches a low of $37.7 million, less than 1% of revenues — and peaks in FY21 at $127 million — 2.8% of revenues – still less than half of the City’s 6-8% goal. Having a healthy fund balance would allow the City to have greater flexibility, mitigate current and future financial risks, and to ensure predictability of services.”

What the contribution to the fund balance will do is slightly bolster the city’s general fund, which is something closely watched by bond rating agencies. The city’s fund balance dipped into the negative in 2010 after the recession, and Moody’s downgraded the city and rated its outlook as negative.

Since August 2010, the city’s outlook has been stable. But the bond rating agency has continued to recommend the city strengthen both its fund balance and its pension fund, which is staring down a $5 billion pension obligation hole, in order to qualify for a rating upgrade.

Those who didn’t like the mayor’s proposed tax to begin with pounced Wednesday, saying the administration “pulled off a bait and switch job on Council and the citizens of Philadelphia.”

“This tax was never about the kids,” Teamsters Local 830 Secretary Daniel Grace said in a statement. “It was about paying down the city’s debt service. The Sugary Drinks Tax is a sham and I doubt it will survive the legal challenge that’s surely to come.”

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