2007 Budget Preview: BUDGETWATCH Sees Dead Presidents

Next week, Mayor Street will unveil his proposed budget for the fiscal year that begins July 1, 2007.  So now is a really good time to take a look at how things have changed for the budget in recent months, how those changes will affect the current budget, and how new developments will determine what the city can raise and spend in the future.  The bottom line?  BUDGETWATCH sees dead presidents.  The city will actually end this fiscal year with more than $100 million more “in the bank” than the city budgeted.

Anyone who has ever counted on a weather forecast understands that it is impossible to predict the future with pinpoint accuracy, and budgetary forecasts are no different.  However, the difference between projected and actual revenues and expenditures plays an important role in framing a larger debate about the ongoing effort to make Philadelphia a preferred place to live, work, and visit.  If the city’s revenue projection is set too low, citizens and elected leaders will miss opportunities to fund programs or reduce the financial burden on taxpayers.  If revenue estimates are too aggressive, the city may find itself in the red, unable to provide the services it promised to its citizens.  In recent years, significant underestimation of city revenues has led to fights about cuts at the beginning of the budget year, when we should have been having debates about how to best spend (or whether to spend) available revenues.

For the current fiscal year, which will end on June 30, 2007, Philadelphia has budgeted to raise $3.6 billion, spend $3.7 billion, and end the year with a fund balance of $141 million to be saved for future needs.  (The plan to spend more than we raise is possible because we would be spending some of the fund balance generated in past years.)  The BUDGETWATCH team has been carefully monitoring the city’s fiscal condition over the course of the fiscal year, as well as the economic factors (including both those beyond the control of local leaders such as changes in the national and international economies and those at the sole discretion of local officials like the introduction of new programs and management initiatives) that impact government finances.

Philadelphia typically follows national economic trends, but the timing and amount of city job growth tends to lag behind national increases.  After losing jobs in 2001 and 2002, the nation has been adding jobs since 2003 while the city lost nearly 30,000 jobs from 2001 to 2004, and has added just more than 2,500 jobs since then.  In general, given larger economic trends and a favorable position that should shield the city against any crash in the local housing market, it appears that the city continues to be on fairly firm financial footing in the short term.

Given this modestly favorable economic outlook, BUDGETWATCH foresees that the city’s tax revenue collections for the current fiscal year will exceed budgeted projections by about $75 million even with the continuation of Wage and Business Privilege Tax rate reductions.  In fact, while the city has reduced tax rates, tax revenues have exceeded budgeted estimates consistently over the course of the last decade.  BUDGETWATCH foresees growth in tax revenues generally with significant growth in Sales and Realty Transfer Tax revenues.  However, other anticipated locally-generated revenues are unlikely to materialize (the city is unlikely to receive the $8 million the Philadelphia Eagles have owed to the city since 2001 and the city has not made much progress in an effort to generate $10 million from asset sales or $2.5 million in strategic marketing fees).  Revenues from the state and federal government may also come in lower than budgeted.  All in all, revenues should exceed budgeted projections by more than $4 million.

BUDGETWATCH foresees that the city will spend more on salaries, but less on contracts and debt service so city spending will likely be less than the amount outlined in the adopted budget.  Lower-than-expected costs due to delays in filling positions and awarding contracts, offset by certain areas of increased spending (including about $20 million in additional costs as the result of arbitration awards and adjustments to existing municipal-union contracts) will mean that overall spending will only be reduced by about $25 million this year. 

Given revenue and expenditure predictions, and since the current fiscal year began with a much higher fund balance than expected (due to significant increases in revenues unanticipated by the Mayor’s last budget), BUDGETWATCH foresees that FY 2007 will see the city end up with a fund balance more than $100 million higher than budgeted.  While a variety of factors that BUDGETWATCH cannot foresee will lead to changes in the final revenue and spending tally, our analysis suggests that at the end of Fiscal Year 2007, the City of Philadelphia will have more than $242 million left in the bank.

FY 2007 General Fund Budget
In Thousands Adopted Budget City QCMR Projection BUDGETWATCH Projection
Prior Year Fund Balance $183,560  $254,506    $254,506
Revenues  $3,618,000  $3,600,419  $3,622,417
Obligations  $3,679,019  $3,674,511  $3,654,091
Adjustments  $18,000  $18,000  $20,000
Year End Fund Balance  $140,541  $198,414  $242,831
Note(1) The General Fund is the portion of the city budget that pays for the services we generally think of as "city services" including police protection, trash collection, park maintenance, etc.   Note(2) The City QCMR Projection is the city administration’s updated budgetary figures from the most recent City of Philadelphia Quarterly City Managers Report, for period ending September 30, 2006

Of course, the fund balance is no measure for the state of the city.  As the city struggles to address critical issues such as the growing homicide rate, ballooning prison population, and crumbling infrastructure; and as the city continues to put off comprehensive tax reform, efforts to address growing health-care costs, and restoring the under-funded pension fund some may question whether the city is making the wisest budgetary choices. 

The city raises and spends money in an effort to keep streets safe and clean, provide high-quality recreational opportunities, create an environment of economic opportunity, and do everything possible to make the city a place where firms and families want to be.  Many would argue that the city should focus on reducing the high cost it places on taxpaying residents and employers.  Many argue that the city should focus on spending more to improve the quality of life and the quality of the marketplace in Philadelphia.  Many would argue the city must both reduce costs and improve services.  Given the need to reduce our onerous tax burdens to help attract and retain jobs and residents, and our need to make quality city services a reason to locate to or remain in Philadelphia, it is clear that if our spending is not creating positive results, we must make changes so that every dollar is being used efficiently and effectively.

The budget conversation always begins with a discussion of what resources are available since the Mayor has the sole discretion to establish the city’s revenue estimate for the budget.  If, as he has in past years, the Mayor underestimates the beginning fund balance for FY 2008 (the FY 2007 year-end balance) in his proposed budget, City Council and the public will be forced to have a different public policy discussion about what we can afford and what we should fund than if more accurate figures are used.  BUDGETWATCH foresees that more money will be in the bank when the next fiscal year starts (about $100 million more than budgeted and about $44 million above the city administration’s current estimates), and recent tax collections suggest that current predictions for FY 2008 tax collections are significantly low. 

If these extra resources are not part of the budget conversation, the citizens of Philadelphia and their elected leaders will not have the opportunity to decide how to best allocate those resources.  Should we invest in additional tax reform, pay down the City’s debt, support investment in the City’s crumbling infrastructure without taking on new debt, expand criminal justice programs, allocate more money to improve the School District or SEPTA, or make additional payments to fund our unfunded pension fund?  BUDGETWATCH can make its predictions, but it is up to the citizenry to use the information to improve the budget debate.