Description
Pursuant to its mandate as specified in Section 12720.209(f)(1) of the Pennsylvania Intergovernmental Cooperation Authority (PICA) Act, the Office of the Controller conducted its annual review of the Forecasted General Fund Statements of Operations for each of the fiscal years ending June 30, 2020 through June 30, 2024. The Statement of Operations, also known as the Five-Year Plan (Plan), was prepared by the City of Philadelphia’s Office of the Director of Finance and submitted to PICA on June 18, 2019. My staff conducted its review of the Plan in accordance with attestation standards set forth by the American Institute of Certified Public Accountants. Attached please find the independent accountant’s report signed by my deputy who is a Certified Public Accountant.
I recommend that PICA approve the Plan; however, in reviewing the projected annual budgets, our office noted two sensitive assumptions and two causes for concern that PICA should take into consideration while evaluating the Plan. In particular, the scheduled dissolution of PICA at the end of fiscal year (FY) 2023 represents a serious risk to the Plan as indicated in the sensitive assumption detailed below. Our office expects the City to provide a plan with concrete steps for its course of action to resolve this issue by the next budget cycle.
Sensitive Assumptions
The Plan does not anticipate the dissolution of PICA at the close of FY23, following the City’s repayment of outstanding PICA bonds. In the current iteration of the Plan, the City assumes $2.5B in Wage and Net Profits Tax revenue for FY24, inclusive of $628M that will no longer be collected by the PICA Tax. This assumption represents a significant risk to the Plan and requires either state legislative action to reinstate PICA or City Council legislation to amend the Wage Tax rate to account for the discontinued PICA portion.
As noted in the accountant’s report, the City set aside roughly $140M for future labor obligations. Such provisions should anticipate future labor negotiations between the City and corresponding bargaining units certain to occur upon the expiration of existing contracts. It is our view that the budgetary allocations as specified in the Plan do not adequately account for the likely cost of such renegotiations.
Causes for Concern
The City’s annual contribution to the School District was $104M in FY18 and is expected to grow over the life of the plan from $222M in FY20 to $273M in FY23. Over the lifetime of the Plan, the City budgeted for $1.3B in contributions to the School District. While not overly burdensome at present given the strength of Philadelphia’s economy, in the event of lower-than-expected revenue receipts, these obligations may place significant strain on City resources. To meet these obligations during a potential economic downturn, budgetary adjustments may be required at the cost of vital City services.
Our office’s revenue projections are more conservative than the Budget Office’s estimates, resulting in a difference of $200M over the life of the Plan. In particular, our office’s projections indicate the possibility of an economic slowdown, and subsequent weaker tax revenues, in the earlier years of the Plan. Given the recent uncertainty in both the national and global economies, as well as the City’s reliance on the Wage Tax, our office believes that the current economic climate warrants fiscal prudence when appropriating for the future.
In closing, my office expresses its gratitude to the management and staff of the Office of Budget and Program Evaluation for their cooperation and assistance during this review and looks forward to our continued relationship.
Read PICA’s full report here.