RUMORS OF THE CITY’S FISCAL COLLAPSE HAVE BEEN GREATLY EXAGGERATED

In recent weeks, the media has been filled with accounts of the looming fiscal crisis that Mayor-elect Nutter will inherit when he takes office in January.  On newsstands now, Philadelphia Magazine offers an article with a title that blares, “Congratulations, Mayor Nutter:  Boy, are you screwed.”  Citypaper echoed, “Congrats, Mayor Nutter (Now let’s show him what he’s won…).”  However, rumors of the city’s fiscal collapse have been greatly exaggerated.  In fact, while the city certainly has short- and long-term budget issues to face, the city’s fiscal state is enviable, not a crisis. 

Far from being broke, the city is currently flush with money and BUDGETWATCH is taking pride in its foresight.  When others saw dwindling funds, we saw growing surpluses.  At the beginning of fiscal year 2007, which started on July 1, 2006, the city anticipated a $141 million fund balance, which was adjusted upward to $172 million when the Street Administration released this year’s budget, and then again nudged upward to $215 million when the fiscal year ended this past June.  But BUDGETWATCH observed stronger tax collections and reduced spending, and predicted last January that the fund balance would be $242 million.  The final number, as released just last week, driven by strong tax collections, showed that the city ended the year with a fund balance of more than $297 million, approximately 8.0 percent of the city general fund, which is an enviable fiscal position, not a crisis.

The city budget presents opportunities for the next mayor to invest wisely to make Philadelphia a preferred place to live, work, and visit.  But, while the city budget does not have a deficit, even the healthiest fund balance does not reduce crime, create jobs, or clean neighborhoods.  Of course, the city is in desperate need of policies to help improve safety in our streets, grow jobs in our communities, and enhance quality of life in our neighborhoods. We must invest more in long-neglected city facilities and physical infrastructure.  In the future, we will have to address the budgetary threat of growing employee pension and health care costs.

BUDGETWATCH can absolutely see why some talk of a “budget crisis.”  The city’s current Five-Year Financial Plan anticipates the city finishing fiscal year 2012 with a $53 million fund balance, which is enough left over to keep us in the black just in case we never see the $45 million “loan” to the Philadelphia Gas Works, which nobody anticipates receiving, or the $8 million owed to the city by the Eagles as part of the deal to build luxury boxes at the Vet, which some believe will be negotiated away by the Street Administration in the coming weeks.  But, the Five-Year Plan estimate does not include the recent firefighter arbitration award, which would cost the city approximately $30 million over the course of the plan.  The Plan also does not count on what some anticipate as a last-minute deal by the Street Administration to retroactively increase benefits payments to city blue- and white-collar workers as part of a contract re-opener.  Most important, the Plan makes no provision for any increased costs associated with next year’s contract negotiations with the municipal workforce, which is absurd.  There are other assumptions involving increasing prison expenditures, the costs involved with the arrival of gaming, and the income from the Philadelphia Parking Authority that could prove to be wrong.  All these developments could certainly eat into the city’s healthy surplus.

But, BUDGETWATCH also sees many breaks in the budgetary clouds.  Since the city ended fiscal year 2008 more than $80 million higher than anticipated, we are already ahead of the fiscal game.  Months into the current fiscal year, tax revenues continue to surpass budgeted projections — and the recent initiative aimed at collecting delinquent real estate tax could yield tens of millions of dollars more in unanticipated revenue for the city over the next five years.  The Five-Year Plan still over-estimates some personnel-related costs and there are a few places where cash is stashed that will likely survive the final weeks of the Street Administration.  These factors could yield an additional $300-350 million over the life of the plan.

Things could get even better for the budget if the new Nutter Administration could compel PGW to actually repay its $45 million loan, if the city would stop refunding the utility’s annual $18 million payment, and if the city could bring more pressure to bear on the Parking Authority to provide more funding for the city.  While some worry about tax revenue downturns in the future, tax collections have remained strong and could grow if scheduled and anticipated tax reductions improve the city’s competitiveness and help spur growth.  Other rosier scenarios would project tax revenue growth associated with major construction projects including the expansion of the Convention Center, building of gaming facilities, and significant development of the Schuylkill’s West Bank at 30th Street.

So why the talk of budgetary doom?  The rhetoric of a “budget crisis” often proves useful to a Mayor who is then able to curtail pressure to spend by City Council and advocacy groups by cautioning the need for prudence.  Even with healthy fund balances, the ability to cite future threats to the budget can help deflect pressures to expand spending.  However, too often, that rhetoric is accompanied by discretionary spending from the city administration to create a situation where the Mayor is essentially saying, “we CANNOT afford your priorities, but we CAN fund my pet programs.”  Such an approach erodes the credibility of the Mayor and frustrates BUDGETWATCHERS. 

Mayor-elect Nutter is challenged to negotiate with municipal unions while at the same time trying to enact a budget that funds priorities outlined during the campaign (more park funding, more police hires, etc.).  Given the city’s favorable financial position, the rhetoric of “budget crisis” is counterproductive.  In his “An Honest Budget Now” position paper, candidate Nutter declared, “It’s time to put away the smoke and mirrors and bring out the sharp pencils.”  He vowed, “As Mayor, I will involve the public in a meaningful budget process that allows for discussion of the costs and benefits of city government, beginning with my campaign proposals.”  Establishing a transparent budget and then having a conversation about priorities and assumptions given budgetary constraints seems like a much more productive discussion.

The city budget certainly faces pressure from potential increased costs for employee salaries and benefits.  Fortunately for the city’s fiscal future, the fact that the next Mayor will be negotiating contracts with each of the municipal unions in the coming months means that the biggest “threat” to the city’s budgetary stability will be the subject of a bargaining process.  If an agreement can focus on providing the city workforce with the compensation and benefits they deserve at a cost that taxpayers can afford — in a way that improves city services for Philadelphians — then a lot of good things will happen.

At the risk of offending Chicken Little, the budgetary sky is not falling.  The city is in a reasonably favorable financial state.  However, if we do not take advantage of this favorable position to address long-term issues and, instead, squander our surplus, the rhetorical budget crisis could become actual. 

Given our current fund balance surplus, we can establish a Rainy Day Fund to set aside a cushion against any potential fiscal difficulties in the future.  Then, we can use our budgetary flexibility to invest in addressing looming problems.  If we embrace an open and transparent budget process and an honest discussion of fiscal priorities and assumptions, we can address the city’s long-term structural problems in a way that allows us to make Philadelphia the city we know it can be.