The coronavirus crisis has pushed City emergency spending up, and the resulting business closures necessitated by social distancing have sent tax revenues plummeting, leading the Kenney administration to announce they’re scrapping their proposed $5.2 billion budget and starting over. They plan to release a new budget before May 1st, and officials aren’t dancing around the fact that there could be some harsh cuts involved, according to Michael D’Onofrio of the Tribune.

Unlike the federal government, state and cities have balanced budget requirements and can’t run a deficit from year to year, so big drops in revenue end up requiring service cuts and tax increases right away. This, in turn, feeds a negative spiral where laid-off public employees cut back their personal spending, city revenues decline even more, and even more cuts become necessary. 

Philadelphia will undoubtedly experience a reduction in service provision in the next fiscal year, and the balanced budget requirement could very well hit City spending over the last few months of this fiscal year, as well. As Managing Director Brian Abernathy explained, “unless the federal government provides direct support for city operations beyond reimbursement, we’re going to have to make some very difficult decisions.” One big lingering question here is how the Kenney administration plans to approach the existing local aid available in the CARES Act.

As we noted in last week’s newsletter about the state and local aid portion of CARES, Philadelphia appears to be the one city in Pennsylvania that can apply directly to the US Treasury for aid, and can legally be awarded up to 45% of Pennsylvania’s allocation. We don’t yet know how much the Kenney administration has requested, or plans to request, from the Treasury, but that number is going to be crucial in determining the extent of the budget cuts proposed.

Additionally, Congress should be trying to head off these cuts as much as possible by including more aid to state and local governments in their Phase 4 package—a key demand that House and Senate Democrats are attaching to a Republican proposal to replenish the Small Business Administration’s loan fund. Democratic leaders Nancy Pelosi and Chuck Schumer are calling for $150B more for state and local governments, although some economists have estimated the size of the state and local budget hole at closer to $300B. The Fed will also be purchasing up to $500B in four-year notes from states and large cities and counties to get emergency money to those governments.

It's worth noting that the budget Mayor Kenney presented to Council on March 5th anticipated the possibility of a more traditional economic downturn. His budget included both a one-time allocation of $195M to the Rainy Day Fund, and a plan to squirrel away $56M+ each year from FY21 to FY25. In aggregate, the Mayor’s discarded FY21 budget anticipated $229M+ in reserve allocations over the next five years.

But as Laura McCrystal reports, the City’s $439 million reserve fund would cover just about a month’s worth of expenses, and Councilmember Allan Domb is quoted estimating that the drop in revenue “could put us into the negative next year by a couple hundred million dollars.”

On top of everything else, there are some less obvious fiscal challenges the City will face over the coming year. One concerning statistic is that suburban commuters who work in Philadelphia contributed about $640 million in wage taxes last year, according to PlanPhilly, but those working from home are now seemingly eligible to avoid paying. With many of those Philly-working, suburban-living taxpayers now working from home, there is every reason to anticipate a significant hit to Philadelphia’s largest revenue stream.

The City is also going to weather another near-term cash hit as a function of a revised tax payment schedule. At the end of March, the City announced that it would follow the IRS’s lead in postponing the deadline for the tax payments. This new calendar pushed Property Tax payments until March 31, and doesn’t require business tax payments, including BIRT, until July 15th. The delay in payment of the second and third largest revenue streams will further impact current service provision and FY21 expenditures.

Philadelphia’s heavy reliance on the wage tax, in general, is also a big liability at this moment. Robert Inman, professor of finance at Penn, tells the Inquirer that Philadelphia is uniquely ill-positioned because of our under-reliance on property taxes as a municipal revenue source relative to other big cities, and our overreliance on wage taxes. The wage tax accounts for more than one-third of Philadelphia’s general fund revenue, about $1.7 billion in the last fiscal year.