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, 2019 through June 30, 2023. 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 26, 2018. 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 particularly sensitive assumption and three additional causes for concern that PICA should take into consideration while evaluating the Plan.
As noted in the accountant’s report, the City set aside roughly $103M for future labor obligations. Such provisions should better anticipate future labor negotiations between the City and corresponding bargaining units that will occur once the existing contracts expire. 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 Budget Office’s revenue projections for the Wage Tax are particularly optimistic in the later years of the Plan, resulting in a significant difference from our office’s estimates over the life of the Plan. Such optimism is concerning given recent economic uncertainty, e.g. sluggish growth in real wages, diminishing returns from the Tax Cuts and Jobs Act, and historically low unemployment. The City’s reliance on the Wage Tax, a tax susceptible to wider economic trends, as its dominant revenue source compounds the risks associated with these forecasts.
- The City budgeted for $1.16B in its contributions to the School District over the lifetime of the Plan. The City’s annual contribution will grow from $181M in Fiscal Year (FY) 2019 to $262M in FY23. In the event of lower-than-expected revenue receipts, the City would likely have to compensate for such shortfall. It should be noted that the optimistic Wage Tax projections and significant budgeted contributions to the School District may place the City at risk. The commitment of funds to the School District, while not directly dependent upon the Wage Tax—contributions will proceed from the General Fund—may impose a burden that compromises the City’s planned budget allocations in the future. In the event of economic downturn, significant adjustments will be required to meet these obligations.
- The Plan lacks a strategy to address the loss of Beverage Tax revenues in the event of state legislative action or a decisive ruling against the City from the Pennsylvania Supreme Court. If the Beverage Tax were eliminated or deemed unconstitutional, the General Fund would face a shortfall for funding planned obligations.
We recognize that as projections reach further out and the economic outlook grows more uncertain, discrepancies are likely to occur between forecasted and actual revenues. Moreover, unforeseen events and circumstances demanding further expenditure, including but not limited to extreme weather, poor returns on pension investments, and federal spending cuts, could have significant impacts on annual spending. Consequently, we believe that the current economic climate warrants greater fiscal prudence in 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.