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, 2021 through June 30, 2025. 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 29, 2020. 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 three causes for concern that PICA should take into consideration while evaluating the Plan. Philadelphia, like cities across the country, is facing simultaneous public health and fiscal crises. The magnitude of the ultimate economic impact of the COVID-19 pandemic and the scale of the subsequent recovery remain unknown. As discussed below, our office estimates a more conservative recovery in revenues beginning in fiscal year (FY) 2022, particularly for the Business Income and Receipts Tax (BIRT). Furthermore, the Plan relies on a substantial revenue stream from the PICA Tax in FY24 and FY25, after the scheduled dissolution of PICA. The City has provided no concrete steps to remedy this matter, which our office first noted in our review of last year’s Plan.
Sensitive Assumptions
In the recovery from the COVID-19 pandemic, the City anticipates a 30 percent growth rate for BIRT in FY22, representing a single-year increase of about $142M. While the tax base for BIRT has been historically volatile, this would represent the largest year-over-year increase in BIRT receipts in recent history. Our office’s anticipated growth rate is substantially more conservative and given the Plan’s low projected fund balance in FY22, the City’s assumed rate warrants concern.
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 more than $5B in Wage and Net Profits Tax revenue in FY24 and FY25, inclusive of $1.3B 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.
Causes for Concern
Beginning in FY22, our office’s revenue projections are more conservative than the Budget Office’s estimates, resulting in a difference of nearly $700M over the life of the Plan. In particular, our office’s projections indicate a weaker post-pandemic recovery driven primarily by BIRT receipts (as noted above) but also lower collections for the Sales, Wage, and Parking taxes in the later years of the Plan. Given the unprecedented uncertainty in both the national and global economies, our office believes that the current economic climate warrants fiscal prudence when appropriating for the future.
The Plan includes about $75M in reduced General Fund debt service in FY21 due to a restructuring of the City’s pension obligation bonds. Financing operating expenses through debt restructuring is a practice that should generally be avoided if possible. While the City has noted that it would forego the restructuring if direct federal aid were to become available, the adopted Plan relies on this debt service savings in FY21 rather than spending reductions in other areas to meet its projected fund balance.
The City’s annual contribution to the School District is expected to grow over the life of the plan from $253M in FY21 to $288M in FY25. Over the lifetime of the Plan, the City budgeted for $1.4B in contributions to the School District, an increase relative to last year’s Plan. If the City’s economic recovery from the current crisis is weaker than anticipated, these promised contributions may place significant strain on City resources, forcing difficult choices regarding funding for vital City services.
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.