The Mayor Says Our Budget Situation Has Stabilized. Can We Believe It?

(January 2011)  

Mayor Nutter tells us that Philadelphia's budget situation has "stabilized," that the tough choices are made, and that it is time to move forward. That sounds like a lovely message to send when heading into a re-election campaign, but it is far from reality. The truth is that the city budget is a mess. The Mayor will almost certainly be able to avoid tax increases or spending cuts during his re-election year because he balanced the budget with temporary tax increases and pension-payment deferrals. But, a realistic look at the city's budget situation shows that the city will soon be hundreds of millions of dollars in the red -- and that the budget hole will grow larger and larger into the future.

(I had quite an animated discussion with the Mayor about the subject -- check it out on video here.)

To deal with the international global meltdown and its tax-revenue-reducing impact on the city budget, Mayor Nutter did some nipping and tucking to city expenditures, but never fundamentally restructured city spending. Instead, the Mayor enacted two major but temporary tax increases, doubling the local sales tax for five years and increasing the tax on real estate by 10 percent for two years. In addition, the city deferred certain pension payments, which reduced costs in the short run, but will result in higher costs down the road. Combined, the taxes generate more than $200 million per year while they are imposed. Depending on one's assumptions, the pension-payment deferrals reduced costs by more than $100 million more in last fiscal year and the current fiscal year.

But those "solutions" are only stop-gap band-aids to our city's fiscal mess. Pension costs are projected to increase by more than $77 million next year and then by another $120 million the following year. While I will note that the Wage Tax was first introduced as a "temporary" tax and still burdens the city today more than 70 years after its enactment, when the temporary Real Estate Tax increase and temporary Sales Tax increase go away, city tax revenues will fall precipitously.

As approved by the city's state-appointed fiscal-oversight authority, Philadelphia projects to end the current fiscal year with a fund balance of about $34 million, which is less than one percent of its projected revenues of nearly $3.85 billion. The end-of-year fund balances for each of the years of the city's Five-Year Financial Plan are $34 million, $71 million, $49 million, $58 million, and $31 million, respectively. That is certainly not much margin for error.

More important, they are all wrong.

The numbers in the city's current, shaky, Five-Year Plan do not include the cost of the recent arbitration award for the city's firefighters. Mayor Nutter evidently does not even believe his own talk that the budget is "stabilized" as his administration has appealed the arbitration award, claiming its $167-million price-tag would sink the city's Five-Year Plan into the red.

Further, the city's projected Real Estate Tax numbers are baffling. While the 10-percent increase in the tax is only imposed for 2011 and 2012, the city's projections for future Real Estate Tax revenues remain constant in future years. The city projects that Real Estate Tax revenues, which totaled about $399 million in fiscal year 2010, will total $491 million this fiscal year and $484 million next fiscal year -- but, after the tax-rate increase expires, the administration plans on receiving $481 million, $488 million, and $498 million in the following three fiscal years. Either the Nutter administration is planning to pull a fast one and use an effort to fix the city's illegal assessment system as a back-door tax increase, or Real Estate Tax revenue numbers are grossly inflated.

Additionally, while the city plans on saving $25 million in each of the years of the Five-Year Plan through successful negotiations with the city's unionized workforce, given the Nutter Administration's losing record at the bargaining table, this projected $125 million savings will almost certainly turn into a significant cost.

My less-rosy look at the city budget shows the city ending the current Five-Year Financial Plan not with a skin-of-its-teeth $31-million surplus, but with a cumulative deficit of more than $500 million.

If one adds in the idea that the city budget will likely feel some negative effects from the School District's huge budget deficit as well as the predicted cuts from the new Republican administration in Harrisburg, that red ink gets deeper.

Talk that the budget situation is "stabilized" makes a nice sound bite, but it only seems to mean that the Mayor will not be forced to increase taxes or slash spending in an election year.

Looking ahead, the Mayor has not solved any of the city's ongoing budget problems. The pension problem that was "the crisis" Mayor Nutter inherited when he entered office was bad and has gotten worse -- deferring payments helped the mayor avoid even higher tax increases, but will make future pension costs grow. The high tax burden that hampers economic growth in Philadelphia has become an even higher tax burden and it doesn't look like it will get much better in the near future.

Talk of a "stabilized" budget situation cannot fix the structural imbalance in Philadelphia's budget that has costs going up faster than revenues can keep pace. The Mayor's happy chatter alone will not solve these problems and so our next Mayor will almost certainly inherit a very unstable mess.