Philadelphia mayor announces $5 billion budget proposal

Philadelphia Mayor Jim Kenney says his proposal will boost the city’s pension and reserve levels while avoiding any tax increases.

Kenney outlined a $5 billion 2020 fiscal year spending plan last week that would increase the city’s pension funding by 4.17%, or $29.8 million, after an estimated 3.4% decrease from 2018 to 2019. The city’s pension system is only 46.8% funded with $4.4 billion in liabilities. The city has set a goal of achieving an 80% funding level in the next 12 years through a combination of measures like decreased fees, lower discount rates and better investment returns.

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The Democratic mayor, who is up for reelection in November, also noted during Thursday's budget address that a larger-than-expected final 2018 fiscal year surplus provides an opportunity to sure up reserves in preparation for an economic downturn. Kenney is proposing a $34 million deposit into the city’s rainy day fund on top of another $20 million payment planned for the 2019 fiscal year that ends June 30. The city has set a goal of having a $92 million rainy day fund by 2024.

Philadelphia finished the 2018 fiscal year with a fund balance of $368.7 million that was $140 million higher than projected under the city’s five-year budget plan. The higher surplus combined with a forecast for a 4.58% increase in tax revenues in 2020 allowed for $191 million of increased spending in the budget. The city is anticipating real estate taxes will increase by 8% with sales taxes spiking 6%.

"The budget makes assumptions about increases in wage taxes, real estate taxes, and business taxes based on strong economic conditions continuing in the next year," said Villanova University School of Business professor David Fiorenza. "I would caution against this overoptimism, since the latest GDP was showing signs of slowing down.

Fiorenza also cautioned against using too much of the city's healthy fund balance because it is way below Government Finance Officers Association-recommended 5% to 15% range of expenditures at around 3%. The City's fund balance target is 6% to 8% of expenditures.

Strengthening economic conditions and improved city finances prompted Moody’s Investors Service to revise the credit outlook to stable from negative on Philadelphia's A2-rated general obligation bonds in November. The city’s debt is rated A-minus by Fitch and A by S&P Global Ratings.

The city's 1.5 cent-per-ounce sweetened-beverage tax, which is helping support debt service for bonds under the “Rebuilding Community Infrastructure” initiative, is expected to generate $1 million less in 2020 than 2019 at $75.8 million. Revenues from the beverage tax in its first full year in 2018 came in at $77.4 million, 15% less than the $91 million projected.

The biggest spending investment in the budget is a $214 million contribution to the Philadelphia School District that is in line with Kenney’s pledge last year to provide the cash-strapped system with support to combat a $900 million deficit projected in 2023. The city, which assumed control of its public schools last July after more than 16 years of the district being run by the state-dominated School Reform Commission, is committed $1.2 billion of funding over the next five years, according to Kenney.

“The City is providing 1.2 billion dollars, over seven hundred million dollars in new funding, to ensure the School District continues its positive momentum and never again is forced to make devastating cuts,” said Kenney in his budget address remarks.

Moody’s upgraded the Philadelphia School District’s underlying bond rating two notches to investment grade Baa3 from Ba2 with a stable outlook in December citing the city’s fiscal upswing coupled with strengthening governance after the city resumed control. The upgrade put the long-struggling district into Moody's investment-grade category for the first time since 1977.