The Long Fiscal Road out from State Fiscal Oversight

07/21/17

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eBlog

Good Morning! In this a.m.’s eBlog, we look at Philadelphia’s fiscal challenges as it seeks to fully emerge from state fiscal oversight.

Liberty Bell City. The Board of the Pennsylvania Intergovernmental Cooperation Authority this Tuesday unanimously approved the City of Philadelphia’s Five Year Plan for FY2018-2022, concurring with the assumptions and estimates that the City’s Plan were reasonable and appropriate, and that the Plan projects positive year-end fund balances for the next five fiscal years. The state authority, created in 1991 by state law, is charged with reviewing Philadelphia’s five-year plans—with state funding to the Liberty Bell city dependent on PICA approval thereof.

While the approval of the long-term fiscal plan was unanimous, the Board noted concerns about a lack of reserves. City officials are estimating general fund revenues for the 2018 fiscal year of $4.405 billion with roughly 75% derived from taxes. In its 43-page report, FICA noted: “The City’s revenue projections have consistently been outperformed by actual collections in recent years…PICA feels confident that the City and its consultant are effectively monitoring tax performance in a way that will allow adjustment to changes in economic growth.” The Board noted the FY2017 results suggested another year of solid performance for most taxes, and that the city continued to manifest signs of ongoing economic expansion since the end of the Great Recession, while continuing to implement certain reforms in order to increase its tax competitiveness. The Board also noted the City has set aside a $200 million provision to fund upcoming labor costs, as well as a $274.6 million contingency fund should the City lose grant funding as a result of federal and/or state actions. The staff noted some key fiscal risks, including pension costs, and the increased volatility of business income and receipts tax revenue.  Thus, the fiscal report card demonstrated improvement, but apprehensions about the future—especially perceptions of sluggish growth. That is, there are concerns with regard to economic growth and U.S. census data indicating more people are moving out of Philadelphia than are moving in. In its most recent manufacturing survey (this month), the Philadelphia Federal Reserve reported the index declined from 27.6 last month to 19.5 this month—with the index gauging new orders, shipments, employment and work hours, which were all positive, but which fell from June levels, with the new-orders index in particular plummeting to 2.1 from 25.9 in June. The New York Federal Reserve also found a July deceleration, or, as Joshua Shapiro, Chief U.S. economist at MFR Inc. described it: “The preponderance of recent survey data point to improving conditions in the manufacturing sector, and we expect the underlying trend of reported output to gradually accelerate in the months ahead. However, an ongoing inventory adjustment in the automotive sector will likely dampen headline factory output data over the near term.” In its report, PICA noted that while the City projects a positive fund balance the next five years, there are risks, such as rising labor, pension, and healthcare costs along with business tax revenue volatility. (The fund balance is projected at $75.5 million in 2018, or 1.7% of general fund obligations; reserves are slated to rise in each of the five years up to a peak of $123.1 million in FY2022 fiscal year, or 2.6% of projected obligations. On Wednesday, the city’s Finance Director, Rob Dubow, said the City of Brotherly Love’s fund balance target goal is 6% to 8% of revenues, but that two sets reserves should help withstand potential economic downturn that may arise over the five-year period. Philadelphia has established a reserve of $200 million for potential labor cost spikes and another one of $270 million to combat possible state and federal budget cuts—or, as Mr. Dubow describes it: “We think having those reserves gives us some more breathing room than we have had in the past…We share PICA’s concern of getting fund balances higher and they do increase over the life of the plan.”

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