Philadelphia reports progress in preparing for next recession
Philadelphia officials say the city is taking proactive steps to combat a potential recession.
Mayor Jim Kenney’s administration has implemented a series of measures to prepare for leaner times. Officials say as a result, the city’s fiscal condition is far healthier than a decade ago during the last downturn that lasted from December 2007 to June 2009. While forecasts for the next recession vary, city officials are preparing for the possibility that one could strike in the next year.
“We have done a deeper dive with what a recession might look like for Philadelphia,” said budget director Marisa Waxman. “We want to give ourselves a cushion.”
Waxman said the city during recent budget cycles has factored in possible slowdowns in the economy, resulting in projections of lower revenue growth along with more pay-as-you go financing for capital projects to cut down on borrowing.
More recently the Kenney administration established a $20 million recession reserve and made the city’s first contribution of $34.2 million into a rainy day fund that was established in 1991. The city is also setting aside $55 million annually from 2020 to 2025 to guard against potential cuts in federal aid.
Philadelphia ended the 2019 fiscal year with $439 million fund balance, which comprises about 9%, or 33 days, of spending. While Philadelphia’s surplus levels are higher than then were during the 2008 recession, the city is still far below the Government Finance Officer Association’s fund balance recommendation of 17%.
“We are pleased to end fiscal 2019 with a $439 million fund balance, but we know that would not be enough to weather a real storm,” said Waxman, who was appointed Philadelphia budget director in June after previously working as the city's first deputy revenue commissioner since 2016. “We are making incremental strides.”
The previous recession wreaked havoc on Philadelphia finances with the city’s fund balance not recovering to pre-2008 levels until last year. Philadelphia finance director Rob Dubow recalls beginning his post under newly elected Mayor Michael Nutter in January 2008 just before the depths of the last economic downturn were known and how quickly the challenges escalated.
“We were really responding on the fly,” Dubow said. “That was hopefully a once in an eight-decade recession.”
City departments have been asked to prepare possible cutback plans based on various stress scenarios so that the city is positioned to weather any storm that might strike. Waxman said that in nearly all possible scenarios Philadelphia could see its fund balance go negative by the 2022 fiscal year making a forward-looking approach that much more vital.
“We have started to stress-test our budget,” Waxman said. “We’re looking at historical data.”
Major cost-cutting measures in the wake of the Great Recession helped land Philadelphia four rating upgrades between 2011 and 2013. The city’s debt is now rated A-minus by Fitch Ratings, A by S&P Global Ratings and A2 by Moody’s Investors Service.
Philadelphia’s improved financial footing contributed to strong investor demand for a $293.4 million GO bond offering Aug. 1 that was more than 10 times oversubscribed and netted $15.9 million in interest savings compared to its previous GO deal.
The Philadelphia Authority for Industrial Development is slated to issue $120.4 million of 2020A federally taxable GO refunding bonds on behalf of the city.
Ahead of that deal, on Nov. 21 S&P revised Philadelphia’s credit outlook to positive from stable citing strong revenue growth coupled with the city’s focus on pension funding, school district support, boosting reserves and establishing a rainy day fund. The city’s revenue growth has been aided during the last decade by economic growth largely through competitively diverse healthcare and higher education sectors, according to S&P.
“Revenue growth has been one of the major reasons why they are able to build up their reserves, but they have also been very disciplined,” S&P credit analyst Lisa Schroeer said in a phone interview. “Contingency budget planning has been very beneficial for them.”
Philadelphia’s pension system is only at around 47% funded with $4.4 billion in liabilities, but the city has made progress in recent years through a combination of steadily lowering assumed rate of returns and increasing contributions. Philadelphia is on course toward attaining an 80% funded ratio by the 2029 fiscal year even if a large economic downturn were to occur, according to a recent stress test analysis by the Pew Charitable Trusts.
“Given the many competing needs in the city they have done a very good job at managing everything,” Schroeer said. “We are seeing a lot of positive trends.”
Philadelphia has taken on more expenses in the last two years as part of Mayor Keeney’s $1.2 billion spending plan for the city’s school district over the next five years, in response to the system's projected $900 million deficit by 2023. Villanova University School of Business professor David Fiorenza said despite the extra responsibility imposed on the city from implementing a mayoral-appointed Board of Education last year following nearly two decades of state control, higher-than expected revenues have created healthy fund balance conditions.
“The city of Philadelphia has many revenue sources from hotel taxes to parking taxes,” said Fiorenza, a former chief financial officer of Radnor Township, Pennsylvania. “When the economy is thriving, the wage taxes and business taxes will increase which help create a positive fund balance for the city.”
Fiorenza stressed that Philadelphia is set up to weather nearly any recession scenario based on the city’s tourism offerings, professional sports teams and a vibrant nightlife that can help bolster revenues. He noted that Philadelphia provides an alternative to New York City or Washington D.C. for Northeast vacations and also draws in many day visitors from surrounding Pennsylvania counties as well as heavily populated New Jersey.
“This will continue to keep the city vibrant, even during times that show strains of a slowdown in the economy,” he said. “This will ensure that the city of Philadelphia is more recession proof than cities that are one dimensional.”