Philadelphia’s five-year budget plan received a stamp of approval Tuesday from a state oversight board.

The Pennsylvania Intergovernmental Cooperation Authority unanimously approved the city’s long-range fiscal plan while also noting concerns about a lack of reserves. City officials are estimating general fund revenues for the 2018 fiscal year of $4.405 billion with roughly 75% derived from taxes.

“The City’s revenue projections have consistently been outperformed by actual collections in recent years,” PICA said in its 43-page report. “PICA feels confident that the City and its consultant are effectively monitoring tax performance in a way that will allow adjustment to changes in economic growth.”

Independence Hall stands in Philadelphia, Pennsylvania, U.S., on Saturday, May 9, 2015.
Bloomberg News

PICA noted that while the City projects a positive fund balance the next five years, there are risks at play such as rising labor, pension and healthcare costs along with business tax revenue volatility. The fund balance is projected at $75.5 million in 2018, or 1.7% of general fund obligations. Reserves are slated to rise in each of the five years up to a peak of $123.1 million in the 2022 fiscal year, or 2.6% of projected obligations.

“While the lack of a reserve is a concern, the City has historically been able to address low fund balances through controlled spending and managing the budget,” PICA said in the report.

Philadelphia Finance Director Rob Dubow said Wednesday that its fund balance target goal is 6% to 8% of revenues, but that two sets reserves should help withstand potential economic downturn that may arise over the five-year period. The city has established a reserve of $200 million for potential labor cost spikes and another one of $270 million to combat possible state and federal budget cuts.

“We think having those reserves gives us some more breathing room than we have had in the past,” said Dubow. “We share PICA’s concern of getting fund balances higher and they do increase over the life of the plan.”

Philadelphia issued $331.75 million of Series 2017 general obligation bonds last week for capital projects and to refund certain maturities on debt sold in 2011 and 2013. The city’s GO bonds are rated A2 by Moody’s Investors Service and A-minus by S&P Global Ratings and Fitch Ratings.

Philadelphia set aside $296 million for debt service in the 2018 budget. City officials estimate a 17% growth in budgeted debt service over the course of the five year plan to $356 million for 2022.

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