Philadelphia will look towards addressing an estimated $450 million deficit over the next five years as the city anticipates declining business-tax revenues and growing pension costs.
In addition, Mayor Michael Nutter last week announced that the city will not go forward with a planned $4.5 billion pension bond deal until market conditions improve, with officials now hoping to sell the taxable bonds by June 30, the end of fiscal 2009. JPMorgan and Citi are the co-senior managers on the transaction.
"The turmoil in the credit markets has led us to conclude that it would not be prudent at this time to issue a [POB] in the current financial market environment," the mayor said during a press conference on the city's finances. "We had already delayed assuming the savings from the current year to fiscal 2010, and now we'll move that assumption back further. When market conditions improve and we find a deal that is advantageous to taxpayers, we plan to execute the bond deal."
While the city faces the $450 million shortfall over the next five years, that gap includes an immediate deficit of $90 million within the current $3.97 billion operating budget. The funding gap comes, in part, from lower-than anticipated business privilege tax revenues and increasing pension costs.
Officials anticipate that Philadelphia's business privilege tax will drop this year by nearly $40 million this year and by more than $300 million over the next five years, according to the city's budget director, Stephen Agostini.
In addition, officials expect to use $150 million of additional general fund revenues over the next five years to offset lower-than expected returns on Philadelphia's pension fund. The fund generated a 4% return in fiscal 2008 compared to the target performance of 8.75%.
These challenges will require officials over the next few weeks to devise spending reductions, cost efficiencies, and possibly revising proposed business privilege and wage tax reductions that the city had planned on incorporating in its five-year plan. Nutter's goal is to have a proposal to show the City Council by the end of October. The mayor said debt service payments and pension payments will not change nor will programs that are reimbursed with state and/or federal money, but everything else is open to possible alternatives.
"I have also instructed my budget and finance team to begin a comprehensive review of all city spending and all city programs," Nutter said. "Everything, everything is on the table, including scheduled tax cuts."
In response to the mayor's fiscal announcement, Steve Wray, the executive director of the Economy League of Greater Philadelphia, said the administration's quick and open response to declining business privilege tax revenues and pension challenges will help the city as it finds ways to tackle Philadelphia's fiscal difficulties.
Wray added that he approved Nutter's plan to postpone the pension bond deal. The ELGP is an independent, nonprofit research group that analyzes fiscal public policy in the Philadelphia region.
"The mayor's announcement makes it clear that the city is facing economic challenges similar to those that businesses across the city and region are facing," Wray said via e-mail. "By acting quickly and publicly, the mayor is sending a clear signal that the city cannot do everything, and that the limited resources available to the city must be focused on the outcomes and priorities crucial to future success.
Standard & Poor's and Fitch Ratings rate the city BBB and BBB-plus, respectively. Moody's Investors Service rates the credit Baa1.
