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, 2022 through June 30, 2026. 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, 2021. 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 one sensitive assumption and two causes for concern that PICA should take into consideration while evaluating the Plan. Philadelphia, like cities across the country, has experienced unprecedented public health and fiscal crises since March 2020. With public health restrictions recently coming to an end, the city’s recovery is now underway, but the ultimate timeline and scale of the recovery remain unknown. In the face of this uncertainty, our office finds the City’s revenue forecasts to be appropriately conservative and in good agreement with our independent forecasts. However, the Plan relies on a substantial revenue stream from the PICA Tax in the final three fiscal years of the Plan, 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 the FY20-FY24 Plan.
As noted in the accountant’s report, 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 $7B in Wage and Net Profits Tax revenue for FY24 through FY26, inclusive of $1.8B 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
Over the life of the Plan, the City has set aside $200M for future labor obligations. Such provisions should anticipate future labor negotiations between the City and corresponding bargaining units following the expiration of contracts with each union at the close of the fiscal year. With all four major union contracts being renegotiated, it is our view that the budgetary allocations as specified in the Plan do not adequately account for the likely cost, particularly in final years of the Plan.
The City’s annual contribution to the School District is expected to grow over the life of the plan from $256M in FY22 to $288M in FY26, with a total contribution of $1.4B over the five years. If the City’s economic recovery in the coming years is weaker than anticipated, these promised contributions may place significant strain on City resources, forcing difficult choices regarding funding for vital City services. While funding through the American Rescue Plan has alleviated short-term budgetary concerns for the School District, the District’s latest adopted Plan includes a negative $378M operating deficit and negative $215M fund balance in FY26. This structural deficit could require increased City contributions to resolve, placing additional pressure on City finances in 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.