The Committee on Fiscal Stability and Intergovernmental Cooperation heard testimony on Feb. 25, 2020 suggesting that, while the city has made strides, it is not fully prepared for an economic recession.
The hearing was called due to early warning signs of a possible recession, including an inverted yield curve, a situation where long-term debt instruments such as bonds carry a lower yield than shorter investments of a similar quality. Inverted yield curves have preceded the previous seven recessions.
Marisa Waxman, city budget director, said the City was better prepared for the next recession than they were the last, but there are still tremendous weaknesses regarding the city’s fiscal health.
“These weaknesses will put vulnerable Philadelphians who rely upon city services in further risk during the next recession, when demand for those services can be expected to grow,” Waxman said.
According to Waxman, the City’s economic consultants expect the national and local economic expansion to continue, with just a 25% chance of a recession in 2021.
However, there is a greater chance of a downturn before 2025.
“With our high poverty rate, weak tax base and large fixed cost, Philadelphia remains vulnerable to a recession,” Waxman said.
Harvey Rice, the executive director of the Pennsylvania Intergovernmental Cooperation Authority, an organization which must approve the city budget and five year plan by state decree, said that while the City is on better financial footing than it had been in decades, it is still not in the strongest financial position to weather a severe economic downturn.
Rice identified a potential lack of economic growth as a risk that might impede the City’s ability to realize projected revenues.
“Fortunately, today, the economy has continued as expansion and therefore city tax revenues are coming in as projected, if not even higher,” Rice said. “However, we all know this good fortune will not last forever, and city officials have been taking measures to protect our city from any possible future decline and revenues.”
Compounding the vulnerability issues, Waxman said two of the biggest fixed costs in the budget, accounting for over 20%, are debt service and pension payments. In the event of a recession, these items, a fifth of the overall budget, are untouchable.
She highlighted steps the city has taken to be more prepared in the event of a recession, including stress-testing the budget, increasing pay-as-you-go capital spending, increasing the fund balance, as setting aside reserves.
Despite these steps, Waxman said if City revenues do not increase, or remain static over the next five years, a recession could have a deleterious effect on city finances in excess of a billion dollars-possibly closer to $2 billion.
The Government Finance Officers Association recommends cities create a yearly fund-balance of 17% of expenditures. However, Philadelphia falls short in this area, having only an 8% balance in 2019. A 17% balance would be enough to pay two months of the city’s bills.
Philadelphia has set aside funds in other reserves, Waxman noted, including more than $50 million in the FY 20-24 plan, which is a reserve protecting against reductions in federal funding.
“The City has also reserved funds for upcoming labor contracts and made a $34 million payment into the budget stabilization reserve fund aka the rainy-day fund,” Waxman said.
Rice said the City adopted the budget stabilization reserve fund in 2011, but took nine years before initiating funding.
“As part of the current 2020-24 five-year plan, the City made its first ever deposit of $34.2 million, with an additional $146.5 million projected to be deposited by the end of the five-year plan for a total of $180 million,” he said.
However, Rice said this five-year projection would only cover the City’s payroll for a matter of weeks in the event of a significant economic downturn.
Adding to the concern, Rice said while the City had experienced a general fund balance of $438.6 million, which was equal to 9.2% of general fund obligations, and was expected to have a fund balance this year, these balances are well below the Government Finance Officers Association recommendation of 17%.
Moody’s Investment Services rated Philadelphia’s fund balance second worst among the 25 largest cities in the United States, meaning that in all but the mildest recession scenarios, the city’s fund balance would not be enough to navigate a downturn.
In the current 2020-24 plan, the City projects fund balances to range from 4.2% of obligations in FY 20 to a low of 2.5% percent in FY 22.
Rice said the City’s largest financial burden is its pension obligation, representing 16-17% of the annual budget.
When asked by Councilmember Allan Domb how much it would take to fully fund pensions in the annual budget, Rice was unsure but offered a glimpse as to the scope of the problem.
“We’re at $6.1 billion in unfunded liabilities, or 46.8% funded,” Rice said.
Domb also asked if it were possible to pledge assets against the obligation instead of making payments, a strategy that has been employed in other states. Rice said PICA has recently started investigating the potential of that option but could not offer an opinion yet.
Councilmember Katherine Gilmore-Richardson said, based on projections, the City anticipated having a budget surplus for the second straight year.
“Many stakeholders will see this surplus as an opportunity to spend more money,” Gilmore-Richardson said. “[However], as duly elected representatives, we are charged with being responsible for our city’s finances.”
Gilmore-Richardson said the City had not been ready to deal with the 2008 recession, but had made strides since to prepare for an economic downturn, including the creation of four financial reserve funds.
Waxman said the City was looking to find potential savings across departments.
“This year, we asked each department for cut scenarios,” Waxman said. “We asked departments, ‘If you had to spend 3% less, 5% less, what would you do?’”
Part of requesting this information from city departments was recession readiness planning, Waxman said, so in the event of a recession, potential cuts had already been considered.
Waxman said the 2020 fund balance is projected to be $352 million.
Conversation at the stated meeting on Feb. 27, 2020, centered on the proposed safe-injection site slated to begin operation in the 2nd Councilmanic District, represented by Councilmember Kenyatta Johnson.
The site has generated controversy because of its proximity to day care centers and schools, but also because neither members of city council nor the public were notified of the location until a press conference was held announcing the location.
In response to the opening of the safe-injection site, Councilmember David Oh presented an ordinance designating safe-injection sites “nuisance health establishments” if they do not meet certain conditions prior to their opening, such as publicizing the proposed location to every resident, business, and institution within a one mile radius, and denying the site approval if at least 90% of those entities agree to its operation.
“[This] supervised injection site is presumed to be a nuisance health establishment, because it relies on drug addicted individuals bringing illegal controlled substances into the health establishment, to consume on premises and depart at will regardless of their condition and safety of themselves and the public,” Oh said.
Lawrence McGlynn is a recent graduate of Temple University’s Klein College of Media and Communication where he earned a Master’s in Journalism. For the next several months he will be reporting out of City Hall on various council and committee meetings, the city’s budget, and how these impact the daily lives of Philadelphians.
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