City of Philadelphia Forecasted General Fund Statements of Operations Fiscal Years 2023-2027

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, 2023 through June 30, 2027. 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 30, 2022. 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.

Philadelphia, like cities across the country, has experienced unprecedented public health and fiscal crises since March 2020. While the local economy has shown steady improvement over the past fiscal year, serious challenges remain, including the long-term impact of remote work policies, the highest inflation rate in decades, and growing fears of a recession. I recommend that PICA approve the Plan; however, in reviewing the projected annual budgets, our office noted three causes for concern that PICA should take into consideration while evaluating the Plan. As discussed below, our office estimates more conservative revenue growth over the life of the Plan, particularly for the Realty Transfer Tax (RTT), than the City. Additionally, while grant funding from the American

Rescue Plan Act (ARPA) supports higher spending levels in the earlier years of the Plan, the City’s fund balance is forecasted to decline sharply after these funds expire in FY25.

Causes for Concern

1. Our office’s revenue projections are more conservative than the Budget Office’s estimates, resulting in a difference of $555M over the life of the Plan. In particular, our office’s projections for the RTT are significantly more conservative than the Budget Office’s estimates. Our projections anticipate a slowing real estate market over the life of the Plan, consistent with the latest housing market data and expert forecasts. While the current fiscal year has seen record collections, this uptick has been driven by policy changes to the Ten- Year Tax Abatement, and our forecasts do not expect this increased demand to continue. With inflation at the highest level in decades and rising interest rates, our office considers the Budget Office’s RTT revenue forecasts, which remain higher than pre-pandemic levels throughout the Plan, to be overly optimistic and a cause for concern.
2. The Plan’s use of ARPA grant funding grows from $335 million in FY23 to $449 million in FY25, the last year the funds can be used. As these funds run out, the City is projecting a significant operating deficit in FY26 and FY27. This fiscal cliff represents a substantial risk to the City’s fund balance, which is forecasted as $87 million in FY27, the lowest year- end fund balance over the life of the Plan.
3. The City’s annual contribution to the School District is expected to grow over the life of the plan from $270M in FY23 to $288M in FY27, with a total contribution of $1.4B over the five years. These promised contributions may place significant strain on City resources in the future, particularly with growing fears of recession and the end of ARPA federal aid in FY25.

Additionally, we would like to acknowledge the recent extension of PICA beyond FY23. Our office first noted the risk associated with the City’s reliance on the PICA Tax in our review of the FY20-24 Plan. With the extension of PICA, this risk has been remedied.