Fiscal Oversight Board Should Reject City Financial Plan

(July 2011)

"What does PICA stand for?" starts a budget-watcher joke. "Nothing," is the punch-line answer. PICA, the Pennsylvania Intergovernmental Cooperation Authority -- Philadelphia's state-created fiscal oversight panel -- should stand for honest budgeting so it should reject the City's Five-Year Financial Plan and force the Mayor and City Council to create a truly balanced plan to raise and spend public money.

Ever since Philadelphia flirted with bankruptcy in the early 1990s, the City has been obligated to produce, not just an annual budget, but a Five-Year Financial Plan to demonstrate that we won't be in the red and looking for another state bailout in the near future. The PICA Board, which comprises five individuals appointed by the Governor and state legislative leaders, must review the City's plans under threat that disapproval will create some severe negative financial consequences for Philadelphia.

Here are the basic rules of the game. The City must produce a Plan that projects revenues and expenditures for the next five years demonstrating that it will operate under balanced budgets with no projected deficits. While the City can pretty much aspire to spend what it wants, the PICA Board must judge revenue projections based on "current or proposed tax rates, historical collection patterns and generally recognized econometric models." 

That's all pretty straightforward. But the math in the city's plan doesn't add up.

By law, last year's "temporary" 10-percent Real Estate Tax increase will expire after the current fiscal year and the tax rates will revert to pre-2011 levels. But, in the Five-Year Plan, the City does not budget a corresponding decrease (of about $80 million) in projected annual Real Estate Tax revenues.

Similarly, this year's "temporary" four-percent Real Estate Tax increase will expire after the current fiscal year and the tax rates will revert to the pre-2011 levels. But, under the law that allowed for the state takeover of Philadelphia's schools and the creation of the School Reform Commission, the City is compelled to maintain its financial contributions to the School District into the future. So when the tax rates go back down, the City is still responsible for giving the District an additional $30 million each year. This amount is not reflected anywhere in the Plan.

Finally, the City's Five-Year Plan includes a line item for "Anticipated Workforce Savings" of $12 million per year that the Mayor hopes he will be able to save through negotiations with the City's municipal unions. It is much more likely that when the Mayor gets around to negotiating contracts with municipal unions, those contracts will be a net cost to the City and not a savings. So while we should all dare to dream, we must budget our spending plans realistically.

The City's Five-Year Plan as submitted to PICA shows balanced budgets and small end-of-year fund balances each year. But, if we throw out the shady math, the City dips into the negative a year from now and is drowning in red ink by more than $500 million after years of deficits at the Plan's end. By law, Philadelphia can't run on credit, so a no-funny-math reading of the numbers would mean we're belly-up financially.

The Mayor believes he will get Council to use the follow through on the Actual Value Initiative (the project to accurately reset real estate values for tax purposes) to set new tax rates to make those "temporary" tax increases permanent. He believes he will bend municipal unions to his will. But, the law that governs consideration of PICA's review of the Plan is clear that revenues should be judged based on actual current law, not wishful thinking. When exactly was the last time that City Council or municipal unions did what Mayor Nutter wanted?   And, to generate workforce savings, shouldn't the Mayor actually sit down and negotiate with union officials?

It is clear from the funny math in the City's proposed Financial Plan that we are in for dramatic tax increases or spending cuts to keep this ponzi scheme going. But, PICA can reject the sham of a Plan and force the City's leaders to come clean and produce legitimate numbers and a real financial strategy to place the budget in long-term structural balance. (And it wouldn't be bad if the City actually had long-term strategies to address the Philadelphia's pension crisis, reduce crime, improve schools, etc.).

Why does this matter? One of the reasons Philadelphia nearly went bankrupt was that our leaders passed budgets that were frauds; balanced on paper, but based on unrealistic assumptions and faulty math. We endured a fiscal crisis and the severe human consequences that went with it because our leaders played games with our budgets, hoping some future miracle would make ends meet.

PICA was created to stop such shenanigans, make our leaders make the tough choices they would rather avoid, and force the City to plan to live within its means. The PICA Board should stand up for budgetary integrity, reject the Five-Year Plan, and force the Mayor and Council to create a legitimate Plan with math that works.