The city of Philadelphia has barely anything in the bank.
It has yearly revenues of about $4 billion but a fund balance — basically its savings account — totaling $100 million. Now, $100 million might sound like a lot of money, but it’s actually just 2.5 percent of the city’s total revenue.
How low is that? Imagine Philadelphia were a fairly typical young college graduate, making $50,000 a year. A savings account featuring 2.5 percent of its annual revenue would be about $1,250. To make it worse, Philly isn’t saving right now. With expenditures due to outpace revenue the next couple years, the fund balance is expected to slip to $47 million if nothing changes by 2018, about 1 percent of its revenue. In college graduate terms, you’d be talking about having only $500 in savings. A serious health issue or car trouble would be catastrophic.
Philly is in the same situation. A major emergency, like an economic downturn or a damaging court ruling, could force it to raise taxes or cancel city services. And unlike recent college graduates, who can order a few less drinks or skip a Shore trip, Philadelphia will have more difficulty changing its financial habits.
The city’s general fund problem first came up in June, when Mayor Jim Kenney’s soda tax passed. As part of the deal, $41 million in tax revenues were directed to go to the fund balance, and surprised Council members announced they wanted hearings on how to fix the fiscal situation. One of those hearings finally took place Wednesday.
The financial discussions weren’t always exciting. Two hours into the hearing — and deep into the weeds — only three members of City Council remained (Allan Domb, Bill Greenlee and Mark Squilla). But the session did unveil some information about what’s causing the city’s financial difficulties and what it can and can’t do to increase its savings. Here are five main takeaways.
The immediate problem
The possibility of an emergency is just that, a possibility. But Philly’s low fund balance is already causing problems, and it has to do with the city’s ability to borrow money.
Moody’s announced Tuesday it was downgrading the city’s outlook from a Stable to Negative. This change indicates a greater possibility Philadelphia’s credit rating could decline. Right now, the city holds an A2 credit rating — already low compared to peer cities. A drop in credit rating means Philly would have to borrow money at a higher interest rate. The higher interest rate falls back to us regular citizens. If a city has to pay more to borrow money, it would need to cut back on city services or increase taxes.
Why did Moody’s move its outlook on Philly to Negative? In large part because of its low reserve levels right now and the city’s projection its general fund balance will fall farther, to that 1 percent level.
Almost the only one
Philadelphia would ideally like to have a fund balance somewhere between 6 percent and 8 percent of its revenue, about $280,000,000. Some experts recommend an even higher percentage, somewhere around 15 to 20 percent.
Other cities have a fund balance representing a much higher percentage of revenue. Of the 17 other cities Philadelphia City Council’s Finance and Budget Team examined, the average percentage was 17 percent. Boston, Phoenix and Atlanta all had fund balance representing above 25 percent of the city’s revenue. The only city with a lower fund balance percentage was New York City, at .6 percent.
In what is likely related to our low fund balance, Philadelphia’s credit rating from Moody’s, A2, was lower than all but two other cities, Chicago and Detroit.
The other problems
New York City’s fund balance would seem scarily low and for Philadelphia it would be. But New York is different in that it has had a growing population for much longer, a much higher median income and a higher percentage of a working-age population. New York’s latest budget has also increased the amount it plans to add to its reserve fund.
These other cities with higher credit ratings have one or two problems, say a low median income or an aging population. Philly has many problems: a population that peaked 60 years ago, the low fund balance, low income and an average population of people working-age population.
And don’t forget our pension issues. Philadelphia’s pension is about 45 percent funded, and its pension debt is on pace to equal 15 percent of the city budget next year.
What Philly can (and might) do to increase the fund balance
- Collect more delinquent taxes: Through earlier warnings about collections and better data practices, city finance director Rob Dubow said the city expects to collect about $70 million more delinquent taxes in the next five years.
- Reassess real estate: This is Councilman Allan Domb’s big suggestion. He has routinely said properties in Philadelphia, particularly commercial properties, have been assessed at lower values than they’re currently worth. He estimates the city could be collecting at least $75 million more in taxes with more accurate assessments.
- Reduce overtime: Councilwoman Maria Quinones-Sanchez brought up the issue of overtime being used to compensate certain employees. Dubow said the Finance Department will monitor certain department’s spending for ways to better manage overtime.
- Lessen poverty: This one will clearly be difficult. The Kenney Administration hopes expanded Pre-K and community schools will give more families a chance to escape poverty. The economic effect could be substantial but will likely take many years before it takes place.
What Philly can’t do to increase the fund balance
- Tax almost anything new (other than soda): Philly has one of the largest tax burdens in the country. In other words, Philly has taxed almost everything, at least almost everything cities typically tax. The soda tax represents a new path to revenue, but after that, finance director Rob Dubow acknowledged in his testimony to Council the city “faces only extremely difficult taxing options.” In fact, Dubow laid out reductions in business and wage taxes as ways to improve the city’s economy.