State board's approval of Philadelphia's fiscal plan stresses recession risks

A state oversight board approved Philadelphia’s latest five-year financial plan with some caveats about the city's revenue projections in the event of a recession.

The Pennsylvania Intergovernmental Cooperation Authority unanimously green-lighted Philadelphia’s long-range financial plan from fiscal years 2020 to 2024 Tuesday, noting that it expects the city to achieve positive fund balances over this period. PICA, which formed in 1991 by state legislation to review Philadelphia’s long-range budgets while it encountered a severe financial crisis, said in its analysis that revenue projections were based on “reasonable” and “appropriate” assumptions, though it highlighted potential risks posed by any economic downturn that may arise in the next few years.

PICA said Philadelphia’s revenue continues to outpace projections and that the city’s assumed revenue growth of 2.8% annually accounts for slower economic growth than in recent years. However, the city’s forecasts, which project general fund revenues rising by 10.7% over the course of the five years to $5.445 billion, do not account for the lower end of possible growth rates, according to PICA, which hired an economist who predicted a recession may begin in the next two years. Revenue from taxes is expected to jump to $4.1 billion in 2024 from $3.6 billion in 2020.

“City tax bases and actual revenue collections are sensitive to macroeconomic trends,” PICA said in its report. “Overall, the revenue streams where the City stands to see the largest declines during an economic downturn, in dollar amounts, would be the wage and real estate transfer taxes.”

PICA credited Philadelphia with taking steps to boost reserves with the city’s first contributions to a Budget Stabilization Reserve Fund established in 1991. The city is planning a $34.2 million contribution in 2020 followed by continued contributions each subsequent year of the five-year for a projected total of $180.8 million in 2024.

A year-end fund balance of $297.6 million is estimated for 2019 a $158.2 million increase over what was projected in the city’s 2019-2023 five-year plan. For 2020, city officials are anticipating a $209.9 million fund balance.

“We are being good fiscal stewards, and making choices and investments that will benefit our community for decades to come,” Philadelphia Mayor Jim Kenney said in a statement. “Our spending priorities will allow the City to remain fiscally responsible, build on the momentum we’ve achieved, and address the challenges ahead.”

PICA noted that Philadelphia is taking steps to improve the health of its underfunded pension fund by steadily lowering the assumed rate of return on investments and increasing its contributions. The city is on course for its goal for attaining an 80% funded ratio by the 2029 fiscal year, according to a recent analysis by the Pew Charitable Trusts. The pension system is currently around 47% funded with $4.4 billion in liabilities.

The pension burden and uncertainty related to plans for increased school district spending contributed to Philadelphia receiving a credit downgrade to A from A-plus last year from S&P Global Ratings. The S&P rating is on par with Moody’s Investors Service, which rates Philadelphia general obligation bonds at A2, and one notch above Fitch Ratings’ A-minus mark. Philadelphia’s debt ratings were previously all at B-level before the city received four upgrades in the early part of this decade.

“Though the City has made progress in recent years, shoring up fund balances and projecting revenues more accurately, to the point that major rating agencies have upgraded the City’s credit rating, the City must now focus on maintaining these improved financial practices and planning for the long-term,” PICA said in the report. “The City should continue to focus on spending within its means, or at a minimum, keep, spending levels within ranges of projected revenues.”