Philadelphia officials on Monday expect to file to the city’s oversight agency a five-year budget plan that relies on state legislation that has yet to be filed.
The city is seeking to increase its 7% sales tax to 8% and defer a portion of pension payments in fiscal 2010 and 2011 to help balance budgets. Both of those initiatives require state legislative approval.
Absent the two proposals, city officials will need to find more than $250 million of reductions in the $3.84 billion fiscal 2010 budget plan and $700 million of cuts in the five-year proposal, according to Rob Dubow, Philadelphia’s finance director.
“The bills have not actually been introduced yet, which is not unusual,” Dubow said. “There are bills that will be put together and they’ll be introduced, but they just haven’t been yet.”
Once the Pennsylvania Intergovernmental Cooperation Authority receives the five-year budget plan, its staff and five-member board have 30 days to review the spending proposal and weigh in on it. Fiscal 2010 begins on July 1.
Uri Monson, PICA’s executive director, said the board members — four of which are appointed by the legislature and the governor — will analyze the proposed one percentage point sales-tax hike and pension deferrals as well as revenue collection estimates, spending reductions, and the anticipated savings from union contract agreements.
“PICA staff will be advising the board on looking at not only the reliance on the state — and obviously something could happen during those 30 days at the state level — as part of our normal review, we look at all the assumptions,” Monson said. “It’s not just those two state issues.”
Mayor Michael Nutter proposed his fiscal 2010 spending plan on March 19, which included boosting the city’s sales tax to 8% and temporarily decreasing its pension payments. Last week, Moody’s Investors Service cited the uncertainty regarding the legislative measures when it revised its outlook on the city’s rating to negative from stable. At the same time, Moody’s affirmed Philadelphia’s Baa1 rating on $1.32 billion of general obligation debt.
“Moody’s believes that without timely legislative approval, Philadelphia will face considerably more difficult challenges closing, at least, its fiscal 2010 budget gap and may be precluded from enacting certain contingencies, including increasing taxes,” the agency reported.
Fitch Ratings and Standard & Poor’s assign their respective BBB-plus and BBB ratings to the GO credit. Both agencies give the city a stable outlook.
Legislative inaction or rejection of the two proposals would force city officials to cut the fiscal 2010 budget by $256 million as opposed to implementing tax revenue measures, such as increasing property taxes, because the city cannot increase taxes after July 1, the start of the fiscal year.
“We can’t increase property taxes or any other taxes after a fiscal year starts, and since the legislature does not look like they’ll be done until sometime in July at the earliest, we would not have the option of increasing the property tax to balance our budget,” Dubow said. “So we will have to do it through service cuts.”
Conversely, the city coffers will receive $3 million in the near term after a Philadelphia judge ruled on two lawsuits between the city and the National Football League’s Philadelphia Eagles. Last week the team was ordered to pay the city $8 million relating to prior lease agreements, while this week the city was ordered to pay the Eagles $5 million for the cancellation of a preseason game, with Philadelphia gaining a net $3 million from the court decisions.
“I am pleased that this matter has finally been concluded,” Nutter said in a statement this week. “I look forward to continuing to work with the Eagles as partners in the community to improve the lives of Philadelphians in neighborhoods across this city. Finally, I wish them the best in the upcoming season.”
In looking at the city’s borrowing, the Philadelphia Municipal Authority Tuesday will sell $97 million of 30-year, fixed-rate tax-exempt debt to finance construction of a new juvenile justice center, according to city Treasurer Rebecca Rhynhart.
PNC is book-runner on the deal. The transaction carries the same ratings as the city’s GO debt.
“It’s lease debt, but the lease structure is not subject to appropriation,” Rhynhart said. “It’s an absolute and unconditional obligation of the city’s general fund.”
Following the PMA deal, the city by the end of July will refinance $312 million of Series 2007B GO bonds that are insured by Financial Security Assurance and have Dexia Credit Local as a liquidity provider. Philadelphia will refinance two-thirds of the variable-rate debt into fixed rate and keep the remaining third in floating-rate mode with a letter of credit from Wachovia Bank NA, Rhynhart said. Merrill Lynch & Co. will price the deal.
“The interest rate plus the swap rate makes the bonds problematic,” she said.
In the transaction, the city will terminate a floating-to-fixed-rate SIFMA swap with RBC Capital Markets as counterparty. As of this week, the cost to end the derivative is roughly $10 million.
Officials have opted to keep $271.4 million of Philadelphia Gas Works variable-rate demand bonds the city sold in 2006 in floating-rate mode after it acquired four different letters of credit for the debt. The LOCs will replace a standby bond purchase agreement with JPMorgan that expired in late January and help ward off a $30 million acceleration payment set for the end of July.
The LOC providers include JPMorgan for $106 million, Wachovia for $105 million, Bank of America LLC for $50 million, and Bank of Nova Scotia for $50 million.