COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON FISCAL STABILITY AND INTERGOVERNMENTAL COOPERATION - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, October 21, 2008 10:20 a.m. - - - PRESENT: COUNCILMAN DARRELL L. CLARKE, CHAIR COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN FRANK DiCICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN BILL GREEN COUNCILMAN CURTIS JONES, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN BRIAN J. O'NEILL COUNCILWOMAN MARIA QUINONES-SANCHEZ COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILWOMAN MARIAN TASCO RESOLUTION 080603 - Resolution authorizing the Committee on Fiscal Stability and Intergovernmental Cooperation to hold hearings regarding the City's Operating Budget for Fiscal 2009. - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good morning. This is the Committee on Fiscal Stability and Intergovernmental Cooperation. We have a quorum present. On my left we have Councilman Brian O'Neill. On my right we have Councilman Frank DiCicco, who is the Vice-Chair of the Committee, Councilman James Kenney, Councilman Wilson Goode and Councilwoman Joan Krajewski. We also have present Councilman Bill Green. I'll make a brief statement and then we'll proceed with the witnesses. The Committee on Fiscal Stability's role has been expanded under the new rules upon the new reorganization of the City Council of Philadelphia. One of the things that the Council President requested, that we have periodic budget briefings. The thought was that our ability to have a better handle during the course of the fiscal year would enhance our ability to make the 3 10/21/08 - FISCAL STABILITY - RES. 080603 appropriate decisions once we enter into our annual budget process. We earlier had anticipated, upon working on the scheduling of this particular committee hearing, that we would essentially deal with the status of the various departments. Unfortunately, we have been met with somewhat unpleasant news obviously on the national economy and it has filtered down to the local economy to a significant degree. So rather than us having the status of the various departments, because they probably are going to change over the next several weeks, we asked the Administration to come in, and they have concurred, to talk about our problem. I know a lot of people have been reading in the newspapers and other accounts the level of the problem in the City of Philadelphia. What we wanted to do was get into more detail to talk about the levels of specificity of how we got here. Today we will not talk about how 4 10/21/08 - FISCAL STABILITY - RES. 080603 we're going to get out of here. I believe there will be a number of statements from some of the members, both on the Committee and Councilmembers who are present, to talk about some of the initiatives that may be forthcoming. What we would like to do, because we have a rather lengthy -- by the way, Councilwoman Blondell Reynolds Brown is also present. We have a rather lengthy agenda. We would ask that most of the -- or pretty much all of the individuals testifying limit their statements, because there will probably be a significant number of questions. So with that, Mr. Carter, will you please call the first witness.
Rob Dubow, Finance Director. Steve Agostini, Budget Director. (Witnesses approached witness table.)
Good morning, 5 10/21/08 - FISCAL STABILITY - RES. 080603 Chairman Clarke and members of the Committee. Thank you for having us here today. We appreciate the opportunity to give you this update. My name is Rob Dubow. I'm the City's Finance Director, and I'm here with Steve Agostini, the Budget Director. He is going to walk you through a presentation and then we'll be happy to answer your questions.
Mr. Chairman, members, good morning. Steve Agostini, Budget Director.
I hope that all of you have copies of the presentation, and I'll try to walk through this quickly, but try to be clear. And if there are questions after, I'm more than happy to walk you through them. I would ask you to turn to of the presentation, which is really the sort of first page of substance in the presentation. 6 10/21/08 - FISCAL STABILITY - RES. 080603 When we began the deliberations for the 2009 budget, the underlying economic forecast that we used were from the Congressional Budget Office, which at the time had been projecting relatively modest growth and a small drop-off in economic growth in the national economy for 2009. In addition to using those forecasting estimates, we also then constructed our own forecasting models and tried to consume as much information at the time about underlying economic trends, because we were somewhat concerned that there was a slowing of the economy that was beginning at that time. And as you can see in the chart on 2, we then checked those estimates versus the Federal Reserve estimates that came out just after we had presented the budget to you in January, in February of 2008, and those estimates are in the chart. The original CBO estimates are 7 10/21/08 - FISCAL STABILITY - RES. 080603 in green. The Federal Open Market Committee, which is the rate-setting committee for the Federal Reserve Board, had two estimates. They had a low end, which is represented in orange, and in the yellowish bar, their high end, and as you can see, the Congressional Budget Office estimates fell within that range. On of the presentation, while we did use economic estimates from a variety of sources, we also thought it would be prudent to go and walk our estimates through with individuals in the local area who had some familiarity with the economy, had some sense of what was going on. And so we talked to the Pennsylvania Economy League, Pennsylvania Intergovernmental Cooperation Authority, who at the time told us that they thought that our estimates contained in the FY Plan were indeed reasonable. And what you see on the chart to the right on that page are those estimates that were included, and as you can see, with the 8 10/21/08 - FISCAL STABILITY - RES. 080603 exception of wages in 2010, they were all at or below inflation, which we were estimating at the time to be about two and a half percent for the metropolitan area. It also should be noted that wages and the business privilege tax, BPT, also included a schedule for rate reductions moving over the life of the Plan and is why in the first year you see the wage tax number below zero and in the out years the BPT numbers grow at one and a half percent or less than that. S. economy and for the international economy, that it was important to be cautious about moving forward. And we made some cautionary statements. We included them in the Five-Year Plan. We also provided them in testimony to the Council as it was deliberating. And what 9 10/21/08 - FISCAL STABILITY - RES. 080603 we said at the time is that all of the estimates in any of the Plan components were subject to changes that we could not foresee and could not capture that would unfold in the economy if indeed there was a recession that began over the life of the Plan and particularly in the first years. In addition, we also cautioned that because we lacked the final business privilege tax numbers, since they did not come in until April and May of 2008, that we would also be at risk if those numbers proved to be soft or did not meet our target estimates that we had included in the Five-Year Plan. And, finally, we also mentioned that at the time we were somewhat concerned about the potential for market turmoil, creating a situation where moving forward with the pension obligation bond that we had proposed as part of the Five-Year Plan would be difficult, as well as any other impacts 10 10/21/08 - FISCAL STABILITY - RES.
080603 that might be generated from that, most notably with pension earners and the impact on our pension payments. Moving to , before the introduction of the Five-Year Plan, we also lowered revenue estimates to reflect what were at the time deteriorating economic conditions. Most notably, we made an adjustment to the real estate transfer tax and reduced that number by approximately six percent to 12 million, because the information we were seeing at the time with respect to transfer taxes suggested that the numbers that we had originally built into the Plan would not be sustained over the first year of the Plan and in subsequent years moving forward. We also, as part of the final deliberations on the Five-Year Plan, made an adjustment to the savings we anticipated for the pension obligation bond and made the recommendation that the savings not be counted for FY09, that 11 10/21/08 - FISCAL STABILITY - RES. 080603 those be delayed until FY10, which shortened considerably the savings that we thought we would generate, but we thought it was prudent at that time, given what was happening in the markets. Moving to , in late August of 2008, about 60 days after the close of the fiscal year, it became clear to us as we were in the process of closing the books for FY08 that a number of the receipts, while performing well, some of the receipts had not come in as we expected, some of the tax sources. Real property, sales, parking and amusement taxes had come in at or above the target budget levels for FY08. 8 million, which is about a $39 million drop below the target of 438 million that we had in the budget. This is approximately a nine percent 12 10/21/08 - FISCAL STABILITY - RES. 080603 drop. Despite dramatic growth in the BPT through FY07 that you will see in the chart following, we did think that the BPT numbers that we should include in the Plan should be at nominal, if any, growth moving forward. However, that experience proved to be worse. In addition, the wage taxes have now proved to be slightly less strong than we had anticipated and they've come in slightly below our estimates. And if you would turn to 7, you can see a chart displaying that, where our wage taxes have come in slightly lower, but as you can see, the BPT numbers are significantly lower. On , there's actually an illustration of the growth rates associated with that, and I should say that these numbers have been so volatile and dramatic that the number actually there for FY08 Actual Collections for BPT should say nine percent. It's not the 13 10/21/08 - FISCAL STABILITY - RES. 3 percent. And as you can see, we had a peak of activity in FY05 for BPT, but that has now reversed itself dramatically, and the growth rates that we had included in the Plan for and 8 were less than one percent, and for 8, 9 even that very conservative assumption proved to be incorrect. Moving to , in addition to the results for BPT, we've also now experienced market downturns. Now, these market downturns are not inclusive of what has happened in late September and early October and the extraordinary times that we have now witnessed in the equity and credit markets globally. The market downturns through FY08 have reduced our pension earnings substantially. 7 percent, 14 10/21/08 - FISCAL STABILITY - RES. 080603 which is in stark contrast to the 17 percent increase that we experienced for FY07. And, as I said, these losses do not reflect the extraordinary market losses that we've seen in the beginning of the month. And because of these changes, we've made some additional changes to our savings on the POB, now suggesting that those savings may not materialize until FY11 and that they will be reduced from the original $50 million level that we had included in the Plan to something closer to 35 million in the last three years of the Plan. And if you turn to , you can see an illustration of those market returns.
And what we've done here is, we've included benchmark estimates, what we sort of rate ourselves against. 2 percent. 15 10/21/08 - FISCAL STABILITY - RES. 080603 Moving to , as you know, the Mayor on September 11th announced that just these two items, the business privilege tax impact and the market downturns, created a situation where we were looking at a $450 million shortfall for the balance of the FY09 through '13 Plan. Two-thirds of that was approximately due to the BPT revenues coming in at less than we anticipated, and about a third of that, about 150 million, the result of what we anticipate to be increased costs for our minimum municipal obligation to the pension system, as well as changes to the savings assumptions associated with the pension obligation bond. And at the time, the Mayor suggested that the economic outlook at that point, in September, suggested that the situation could get worse, and what we quoted at the time were reports from the September 3rd Federal Reserve Bank review of economic conditions for the 12 district banks, what's known as 16 10/21/08 - FISCAL STABILITY - RES. 080603 the Beige Book. And at the time, we were saying that the national economy was softening and that the Philadelphia economy, one of the districts of the Federal Reserve, was indeed showing softness in a number of areas of economic activity. On , as you know, we then -- the Mayor then, subsequent to that announcement in October, made a second announcement saying that based on the information that we had and based on what we were seeing in the market turmoil at the beginning of the month, that our view was now that the change in that shortfall had moved to a range of between 650 and 850 million. The primary causes of that were the original 450 million that we described on September 11th, as well as further losses that we were beginning to see in our existing taxing sources. Most notably, our transfer tax, real estate transfer tax, was, through the first quarter of FY09, performing at 17 10/21/08 - FISCAL STABILITY - RES. 080603 almost nine percent less than the budget projections and we were beginning to see a slowdown in sales taxes, which through September 30th of this year, the first quarter of FY09, was about two percent less than we had anticipated. In addition, we were saying at the time that we had increased concern that the emerging recession would be severe and result in further revenue contraction as we moved forward. I thought it would be illustrative to talk a little bit about one of those major taxes. I won't spend a lot of time on this, but I'll try to walk through it clearly and quickly. The FY09 receipts for transfer tax highlight what we're facing with respect to the economy. Our transfer taxes are at significant risk. Through this morning -- we did a check before we came over here. Through this morning we have approximately $6 million in receipts; 18 10/21/08 - FISCAL STABILITY - RES. 080603 that is, through more than half of the calendar month. Our estimates to make our FY09 numbers suggest that we would have to have close to million in real 6 estate transfer tax receipts through the 7 end of the month. It's our view at this 8 point that we will have a very tough time 9 making that estimate. If that's the case 10 and that trend continues for the balance 11 of the year, which is increasingly 12 likely, we are likely to have a rather 13 significant erosion in the transfer taxes 14 for this year. And if we were to then 15 take that out through the rest of the 16 Five-Year Plan, we would see 17 approximately a $105 million reduction just to the base adjustments, not including any subsequent growth projections, to the transfer tax. And what I'd like to do over the next four slides very quickly is walk you through a little more sort of analysis of what's going on with our transfer taxes. 19 10/21/08 - FISCAL STABILITY - RES. 080603 What you see on is a review of what's happened to transactions.
The transfer tax is the result of three items that function in tandem. One is the tax rate, the second is the number of transactions, and the third is the value of those transactions, the actual sale price. This chart shows you that through the last two fiscal years on a quarter-by-quarter basis, when you compare the quarter to the same quarter a year before, we have been showing dramatic drops in the number of transactions that we are recording that form the basis of our transfer tax, with the most notable and most recent experience being almost a percent drop 20 in transactions for the final quarter of 21 FY08, which ended on June 30th. 22 On , we've tried to get 23 a handle on what's happening with prices, and you'll see a somewhat confusing story here. We believe that condominium prices 20 10/21/08 - FISCAL STABILITY - RES. 080603 have actually been climbing over the balance of the last two years, but that single-family homes, row homes, detached homes throughout the City have actually started to show a decline in prices over the last two quarters, with a significant decline in the fourth quarter for FY08. Moving to , while condos are performing very well with respect to the single-family homes, based on the number of transactions, the condos only represent about nine percent of that activity. Ninety-one percent of that activity is the residential single-family homes. And if you then do a weighted price based on that, what you see here is that for the fourth quarter of FY08 prices are actually flat, and that moves in tandem with the Office of Federal Housing Enterprise Oversight indicators for Philadelphia. They have a monthly and quarterly indicator for prices for homes in the Philadelphia region, and their indicator in the last quarter, in 21 10/21/08 - FISCAL STABILITY - RES. 080603 the last couple of months, has actually started to drop for the first time in many years. So, finally, on , what does that mean? Well, what it results in is an actual decline in our receipts on a quarterly basis, with a rather severe quarterly drop for the last quarter of FY08. , where are we today? Where do we think we are today? Current national and international forecasts suggest that the recession has already started. The information that we're receiving from a number of sources, whether that's the Bureau of Economic Analysis, the Bureau of Labor Statistics or other official keepers of statistics, will have a lag associated with them, so there will be some time. I think the most recent information that we received was a loss of about 159,000 jobs for the month just ended reported by BLS at the beginning of October. 22 10/21/08 - FISCAL STABILITY - RES. S. economy on a quarterly basis, as well as the Blue Chip consensus, which tracks about 70 estimates of economic growth, suggest that for FY09 the likely estimate of growth is approximately a half a percent. If you then break that into subsequent pieces or components of that, they are suggesting that we will see contractions in the economy, actual slowdowns in the economy, over the next nine months. And the question now is exactly when that will start and how severe those contractions will be. While the CBO estimates that were released in September -- that's their most recent estimate since the January estimate -- now reflects slower growth, even those estimates are not current, because they do not include any of the turmoil, any of the economic activity that occurred at the beginning of this month. 23 10/21/08 - FISCAL STABILITY - RES. 080603 The Federal Open Market Committee's most recent estimates were from June and published in July. They anticipate releasing new estimates of the economy at the end of this month when the Federal Open Market Committee has its meeting October 30th to set interest rates.
And you can see from the chart on the right the actual estimates have actually declined, and you're seeing that the Blue Chip estimates are down in the blue from 2009 and are now approaching the lower end of the scale of the original Federal Open Market Committee. It's also, I think, important, some of the news that you're hearing, I think the most telling, from my perspective, was a poll that was done by the Financial Times, yesterday's newspaper, with respect to a number of former Federal Reserve Governors, including the Vice-Chairman, Alan Blinder, who is a Professor at Princeton, 24 10/21/08 - FISCAL STABILITY - RES. " Moving to , in addition to what's happening in sort of the underlying growth, there is the issue of what's ensuing and what the impacts will be of additional turmoil in the credit markets. The losses suffered in FY08 that we described for September 11th we believe will cost about $150 million for the reasons that are listed there. Again -- and I can't emphasize this enough -- those impacts were in advance of what happened in early October where we saw some extraordinary and, in some cases, unprecedented drops in the markets. That has had an impact on us directly and immediately. Our interest earnings have now declined, and we believe that that will reduce revenues by about $29 million over the Five-Year Plan. Just to give you a sense of 25 10/21/08 - FISCAL STABILITY - RES. 080603 that, Benchmark Three-Month Treasury rates typically trade in the three to five percent range. Last year, 2007, they were at three and a half. They are almost 350 basis points, hovering somewhere between half a percent and one percent in the last week or two. What does that mean for our estimates moving forward for our revenues? On , we have now adjusted our current revenue forecast as of this month. Using the current Blue Chip consensus economic forecast, we are using a half a percent GDP growth, and that ripples through our estimates of revenues moving forward. 7 percent forecast for national personal income growth for the next year; that housing prices drop, but they only drop by five percent for the next year; and 10/21/08 - FISCAL STABILITY - RES. 080603 that overall the economy performs slightly better in the recession than the nation as a whole. These new assumptions are listed to the right in the box, and as you can see, there's a rather significant decline in our revenues and revenue growth through '09, which has two impacts. One, it adjusts our base downward significantly and leads to lower growth in the out years. The combination of those changes, we believe, has reduced our revenues by approximately 653 million over the life of the Plan. Turning to , we've also been entertaining and looking at alternate estimates. As many of you have seen and read, there's a lot of uncertainty surrounding the economy and its performance. So we've been trying to take a series of sensitivity estimates here to get a sense of what the ranges might be. If you were to make some 27 10/21/08 - FISCAL STABILITY - RES. 080603 significant adjustments to those assumptions, the underlying economic assumptions, and basically suggest that the personal income growth for the City performs slightly worse than the national economy and that housing prices drop by ten percent as opposed to five percent, which is at the low end of the scale for most of the major markets in the United States, and that we perform more or less the same in every other aspect of the economy, the national economy, that we would generate probably another $200 million of losses on the revenue side, and those estimates are represented on the right-hand side in that box. Moving to , as you know, the Mayor provided you with a range early October of 650 to 850 million. We believe we are now closer to the high end of that range. 5 million over the five 28 10/21/08 - FISCAL STABILITY - RES. 080603 years of the current Five-Year Plan. 5 million shortfall for FY09.
It's important to keep in mind that at the beginning of the Plan, we had a surplus of approximately -- a fund balance of approximately 117 million. That means that for the Plan, we've had a $200 million plus change in the first year. Somewhat more detail of that is provided on . 5. Obviously that suggests that we do nothing to correct it, which is not what we are doing, and I'll talk about that in a moment. On , I think the uncertainty that is enveloping any ability to understand what's happening in the economy, any ability to get a good handle, a good grip on what's happening with revenues is very important to 29 10/21/08 - FISCAL STABILITY - RES. 080603 underscore here. This current range may worsen over the coming weeks, if not the coming months. The impact of the credit turmoil is still to be played out. That's another source of uncertainty. The beginning of the worst part of the recession is unknown. It could happen this month; it could happen next month. There is a debate about the length of the recession, whether it will be a short recession lasting two or three quarters or something longer, and in some instances there are estimates that it could be significantly longer than the current estimates. And then we do not know what the impact on businesses and unemployment and employment will be. Prior recessions have offered little guidance. I have gone back to look at the performance of the Philadelphia economy in the 1972, '74, '82, '90 and 2001 recessions, and my sense is that they're going to provide us with very little guidance moving forward, in large 30 10/21/08 - FISCAL STABILITY - RES. 080603 measure because the most severe recession of those in the last quarter century was the 1982 when the City was much more of a manufacturing-based economy as opposed to a service and professional service-based economy that it is today. So it's very hard to gauge what those impacts might be moving forward. On , as you know, the Mayor has stated that the Administration is taking proactive steps to rebalance the FY09 budget. We're not waiting to take action. We are not approaching this with an across-the-board reduction, but looking at reductions in programs, everything is on the table. That includes program reductions, it includes changes in services, and it includes the scheduled wage and BPT tax cuts that have been included in the FY09 Plan. It's also important to note that we are not alone in this. Almost every other major city, state government is facing this. And if you look on 10/21/08 - FISCAL STABILITY - RES. 080603 and 27, we tried to give you a flavor of what other large cities in the United States are facing as they work through this. 2 billion gap and anticipates losing 165,000 jobs. That number has changed dramatically. I think about a month to six weeks ago it may have been half of that number. Los Angeles is anticipating a $406 million FY09 shortfall. Chicago, 469 million. Houston has not announced major budget cuts or layoffs, but they are concerned about oil prices on the economy. Phoenix is looking at a $250 million shortfall and they have provided targets to their departments of between 15 to 60 percent. San Diego on is looking at a $43 million gap. Baltimore has not announced a gap, but they're still going through their projections. Boston has 32 10/21/08 - FISCAL STABILITY - RES. 080603 not announced a shortfall, but is looking at a series of steps and has actually postponed a planned borrowing of $600 million for their capital improvements. Washington recently announced a $131 million gap for FY09, and Atlanta, $140 million gap for their General Fund in FY09. Finally, on , I think it's important to recognize there are two continuing risks moving forward. Economic growth could be worse than projected in this presentation. It's very hard to gauge that at the moment.
And the continued volatility in the credit and equity markets increases pension liability and further destabilizes the world economy, which could have all manner of impacts on us. That concludes my presentation. Thank you, and I'm happy to answer questions.
Somewhat depressing. 33 10/21/08 - FISCAL STABILITY - RES. 080603
I'd like to, first of all, recognize that there are other members present at the Committee hearing. The Council President has joined us, the Majority Leader Tasco has joined us, Councilwoman Blackwell. Councilwoman Quinones-Sanchez has also joined the Committee hearing. I'd just like to ask you a couple of questions, and I know there are a number of questions from members of the Committee. One, first, when we talk about the projected $300 million drop in the BPT collections, is there a particular sector -- because this is somewhat dramatic both in the timing and the scope of the amount. Is there a particular sector that we can look to as possibly having reductions in revenue that we need to be looking at to possibly stimulate that particular sector?
Councilmember, I have not looked at all of the returns. I 34 10/21/08 - FISCAL STABILITY - RES. 080603 actually in the last month and a half pulled the returns for the top 50 payers on the BPT for the last two years to try to get a handle on that. I don't have a good answer. At the moment, I would tell you it looks across the board, but I'm trying to see if there are patterns. And at the moment -- I'll have to do an extract working with the Revenue Department to look at something broader, but at the moment, it looks like it's across the board.
As a result of that, the reduction in wage taxes, is that as a result of the reduction in business privilege tax; therefore, people are probably getting laid off or there's not hiring as a result of that slowdown and, therefore, the wage tax is going down?
Councilmember, one of the things I tried to do was exactly that, to try to match up BPT 35 10/21/08 - FISCAL STABILITY - RES. 080603 returns with wage tax returns, and the mix is a little different. The top 50 wage taxpayers are a little different universe than the top BPT payers. But right now it's hard to tell. The top wage taxpayers are a universe of education and medical institutions, government institutions and a sprinkling of private institutions, and in some cases, particularly in the privates, you are seeing lower returns to us on the wage tax side. And so we've been watching that. It's not dramatically lower, but it's slightly lower on a quarter-by-quarter basis. So we're trying to watch that, but we'll have to do a little more analysis to get in depth on that.
Are you making any assumptions for the possibility of other government entities, particularly the state reduction in revenues to the City of Philadelphia, in your assumptions as we move forward? 36 10/21/08 - FISCAL STABILITY - RES. 080603
Councilmember, as we have been looking at our plans to try and address this particular shortfall, we have kept front and center the prospect that the federal government is looking at a sizable increase in its budget deficit, as is the state government, and that that will have an impact on a range of payments to us, most notably in the medical and welfare -- health and welfare area. We're particularly sensitive to medical assistant payments and Medicaid payments and how that will roll down. We don't have any hard data to estimate what that is, but we are trying to plan somewhat for that, but it's been difficult. But you're absolutely right. If they make reductions at their level and that rolls down to us, this will be significant.
One last question before I turn it over to the Committee members. In the earlier 37 10/21/08 - FISCAL STABILITY - RES. 080603 testimony -- and correct me if I'm wrong -- at the budget hearing you talked about -- I think we had this conversation about some concerns about the projections, that we use essentially the Congressional Budget Office indicators. Are we now not going to do it? Are we going to use a more conservative indicator, since apparently they were a little optimistic, more optimistic than we should have been?
Well, I think in fairness to them, I think they and everybody else were a little optimistic, because I think the Federal Reserve in their estimates actually produced a range that had higher growth estimates for GDP. But your point is well taken, and to that, what I am pulling currently are International Monetary Fund estimates that are done quarterly, the Organization for Economic Cooperation Development, which also includes a forecast for the United States. Those are also done 38 10/21/08 - FISCAL STABILITY - RES. 080603 regularly. We have subscribed to Blue Chip economic indicators, which has 70 of the top forecasters in the United States and they produce a consensus forecast. I'm looking at the Congressional Budget Office estimates that were produced in September. And, quite frankly, I'm looking at our receipts, along with my staff, particularly my Deputy, Peggy VanBelle. We're looking at that daily, because we're trying to get a good handle on what's happening.
I'd like to say good morning, but it doesn't sound like we're having one. A couple of things. One, a lot of people, including yourself, suggest that Philadelphia may be a bit different in receiving some of this downturn from the recession based on us being now a service economy as opposed to an industrial economy. I've had a couple of 39 10/21/08 - FISCAL STABILITY - RES. 080603 meetings with large institutions in my district, major employers, schools that really don't want to go on the record today about the nature of their problem, but some of the things that we can anticipate is that they are going to be impacted, based on the fact that one institution lost close to 30 percent of its portfolio, 30 percent, and are negotiating with the holders of their stock portfolio to try to reduce some of that, if in fact they stay with them. Donors, givers, people who provide scholarship information are already alerting them that there will be a reduction in their giving and, therefore, the amount of scholarships that will be available to young people and, therefore, the amount of slot seats available within their institutions, which means reduction in staff and reduction in wage payers to our coffers. So even though we are an industrial economy, the pebble that hit 40 10/21/08 - FISCAL STABILITY - RES. 080603 in the center of the pond will ripple differently on the City, but may ripple and -- have you had any discussions with these large institutions yet?
Councilmember, that's a very good point, and, no, we haven't had conversations, but I'll tell you, Finance attended a roundtable with the Federal Reserve hosted by the Pennsylvania Intergovernmental Cooperation Authority this past Friday and there were economists from a number of the large economic and government data sources in the Philadelphia area, and we had a conversation about this particular thing, which I think is particularly pertinent given a Business Week story that has run in the last week or so suggesting that Philadelphia, because of its concentration of medical and educational institutions, is somewhat, quote/unquote, safe from the recession. We have concerns about that for the very reasons that you have described in terms 41 10/21/08 - FISCAL STABILITY - RES. 080603 of endowments have been -- I can't think of a better word -- hammered in the last couple of months. That will put pressure on the ability for those institutions to continue their plans. And if there is indeed a rollback in terms of federal support for Medicaid, medical assistance and that range of institutions' income streams, then it's conceivable you will see some contraction in the hospital sector here. So I think your point is well taken, that we need to be cautious in watching those sectors, because if we have some difficulty there, we'll notice it.
So at some point are we going to have a roundtable with some of our larger non-profits to find out how it will trickle down to them?
The second 42 10/21/08 - FISCAL STABILITY - RES. 080603 question I would have is, I saw the largest welfare check ever issued to Wall Street recently. Is there going to be a re-thinking of CDBG allocations for urban areas, and has there been discussions with our congressional delegation about whether or not in fact there would be relief coming from Washington or parts nationally?
Councilmember, I'm not aware of those discussions. I do know that part of the economic plan that Senator Obama has mentioned included two potential forms of assistance to state and local government. One was sort of a lending facility; another was some form of an aid package. I've been trying in the last week or so to get further detail, but I don't have that now. But with respect to discussions with other congressional representatives, I'm not aware of that.
Okay. So as we brace ourselves, we need to kind of 43 10/21/08 - FISCAL STABILITY - RES. 080603 coordinate the relief effort almost as if this were Katrina or something like that. So from the federal standpoint, if there is going to be some relief, we as a municipality need to be figuring out that option as well.
Finally my question would be, as we look to the bond markets for capital and as those markets seem to be less healthy than they were three months ago, can you tell me a little bit if in fact, for example, the Youth Study Center, which I understand was relying on some dollars, bond dollars, bond proceeds, to do the new facility, somewhat in the neighborhood, I'm going to guess, 98 million, was it? How is that impacted and does that impact the timetable?
There are three issues that we're looking at over the 44 10/21/08 - FISCAL STABILITY - RES. 080603 next few months. One is the new Youth Study Center, one is borrowing for our basic infrastructure needs, and the third is our cash flow borrowing. Each of those could be affected by what's going on in the market in one of two ways. One is if the markets stayed frozen like they have been over the last month, we may not be able to borrow at any rate. So we may have to push back when we do those issues, which could create a severe cash problem for us. The second and what looks more likely, given what's been happening in the market more recently, is that we would be able to issue those, but at a higher rate so that our costs would be higher. So that's probably the more likely scenario, that we would get hit with higher costs for our borrowings.
Thank you, Councilman. 45 10/21/08 - FISCAL STABILITY - RES. 080603 Councilwoman Brown and then Councilman Goode.
Mr. Chairman, I have a meeting in my office. Could I be allowed to ask a short question first?
Thank you. Just a short question. In the Budget and Brief for Fiscal Year 2009, on you talk about initiatives, snapshot, what's new in the Plan for 2009. How will all that you've presented today affect these new programmatic plans and investments?
We are going through a process of trying to figure out how to keep our Five-Year Plan in balance with all of the things that are happening 46 10/21/08 - FISCAL STABILITY - RES. 080603 to the economy, and as part of that, we're reviewing everything that we do, all of our expenditures, all of our revenues to try to figure out how to get ourselves back into balance, and literally everything that we do and everything on that page is on the table for changes because of what's been going on with the economy.
Thank you. Thank you, Mr. Chairman, and thank you, Councilwoman.
I'd like to follow up, if I may, on Councilman Clarke's question regarding the reality that there will be reductions coming from the state, and I'm curious to know what plan of action does the leadership across government have in mind with regards to 47 10/21/08 - FISCAL STABILITY - RES. 080603 bringing employees along and helping them understand that some of the decisions that are forthcoming may have little or nothing to do with the City's financial state but in every way tied to financial decisions happening at the state level?
In the process, Councilmember, in the process of looking at our options, we are trying to gauge where we might have to be if we receive a significant reduction, and I will tell you that that planning process is still early. We're still looking at that. Because we don't know -- and I don't think the state or the federal government know, to be honest, the size of their particular problems, and ours could shift depending on what they do -- it's really hard to gauge that now. But I think your point with respect to information to employees and communicating what's happened and how some of this is -- how most of this is part of a much larger picture that is 48 10/21/08 - FISCAL STABILITY - RES. 080603 national and global has to be done, and we'll take that back.
That's precisely my point, because just as we have informally in our offices asked questions and not been sure, this grid really presents a picture in a real tangible way that at some juncture down the road, I'm of the view that employees deserve that same level of consideration. On you talk about and you say everything is on the table, including program reductions, changes in services, and I recognize that this is a work in progress, so if you're not ready yet to elaborate on that, that's well understood. Might you have a formula that you've discussed that will in some way drive how you make decisions in those areas or some strategy that you will use so that there's, in some ways, equity across the board in how you proceed with program reductions and/or change in 49 10/21/08 - FISCAL STABILITY - RES. 080603 services?
Councilmember, in the process that we have been engaged in for the better part of two weeks, maybe a little longer than that, we've actually taken up that specific question about the equity of what we're doing and the impacts across, and I'll tell you that right now we're in the process of trying to gauge what that is for some of the proposals. We're sensitive to it, very sensitive to it. We are also very sensitive to the fact that we have to balance that with also trying to balance this budget, and that's proving challenging, and you understand that. So we're cognizant of that. We're trying to factor that into the changes that we're making in services and reductions or that we're proposing to make in programs and services, but it's not finished yet and we're still going through it.
Okay. 50 10/21/08 - FISCAL STABILITY - RES. 080603 Lastly, you say on one of these pages we cannot look to recessions in past years. We can look to best practices in other municipalities of similar size to see how they are approaching what is a universal national problem. So where is that in the thinking of the leadership across government?
Councilmember, we have canvassed and are continuing to canvas pretty much every one of the top 25, 30 cities in the United States. The list that I showed you here, those two pages --
-- we actually have a much longer list consisting of what they are actually doing in terms of the size of reductions, the type of reductions, the number of changes to their services, to employees. We have a very lengthy list, and not surprisingly, it runs the spectrum of options. 51 10/21/08 - FISCAL STABILITY - RES. 080603 So we're keeping -- and we're looking to see what other places are doing, and in the meetings that we're having, if you were there, you would see us asking questions like, Well, what is this city doing or what are other cities doing or what have other cities been doing in this. So we're trying to stay on top of what our colleagues, if you will, are doing across the country.
Thank you for your testimony. Thank you, Mr. Chairman.
Thank you, Councilwoman. Councilman Goode and then Councilwoman Tasco.
Thank you, Mr. Chairman. Let me first commend the Chairman for his new focus of this Committee. I think it's not only timely in terms of the crisis right now, but actually reviewing the budget several 52 10/21/08 - FISCAL STABILITY - RES. 080603 times a year I think actually would be helpful to both the Administration and Council and the constituents and taxpayers. Over my years here, I have often become frustrated by the fact that we see departments for only one time a year and they come here and testify for an hour or two or more and then they're gone, and at the end of the day, our oversight is somewhat gone, except for holding hearings, but in all actuality, most of our oversight is gone within that one- or two-hour budget hearing. With that being said and the fact that this Committee will review budgetary and fiscal responsibility matters more often, we don't know how many twists and turns this economic crisis is going to take, because it's a global economic crisis. But aside from review and aside from hearings, I don't think we want to be in a position where we're making, quote/unquote, major decisions too many times over the next 15 53 10/21/08 - FISCAL STABILITY - RES. 080603 months. We would make those decisions as often as needed, but how many times do you anticipate our having to make major policy decisions over the next months? 6 I ask that because of the high 7 level of anxiety that all of us are 8 feeling and the fact that we should not 9 have to come back and revisit decisions 10 because, to be blunt about it, those 11 decisions were not tough enough. 12
I mean, our goal 13 obviously is like yours, to limit the 14 number of times we have to do that. We 15 are trying as we go through this process to actually go beyond the 841 and a half million dollars that we've showed you today, because we think like you, that it's going to get worse. So we're hoping that it's not -- we don't have to do this again in a month. I can't say that we won't have to do it again over the next year and I can't say if there's some sudden surprise three weeks from now that we won't have 54 10/21/08 - FISCAL STABILITY - RES. 080603 to come back, but we are trying to avoid that.
I won't mention the scenarios under which it might happen, but we won't be coming back four times hopefully.
I mean, we will be coming back. I thought what your question was, when we come back to do the Five-Year Plan, for example, will most of the things that are painful choices have been made now as opposed to then. That's what we're trying to do.
For example, we're in a fiscal stability hearing now, which is part of a new process for this Committee. We will have a budget process that will include the Five-Year Plan. Beyond that, there are other decisions that must be made that are major decisions that affect this city. I can anticipate that it may require a third time. So the question is, what are 55 10/21/08 - FISCAL STABILITY - RES. 080603 you foreseeing in terms of process for us outside of this Committee process in terms of how many times we'll revisit this issue?
Well, I guess there are a couple answers. One is, obviously there's the budget process. There's this Committee process, which I think we've talked about doing every quarter. So we'll at least keep you up to date every quarter. And then the other part, which is less easy to predict, is when there are substantial changes that require modifications to our Plan, we would come back to you and we'd want you to be apprised of that and be involved in those processes. But because of what's going on in the economy, I can't give you a number of whether that's one time or two times. I mean, we're obviously hoping to limit that, but I don't think that we know that answer.
56 10/21/08 - FISCAL STABILITY - RES. 080603 Councilwoman Tasco.
Oh. Councilman Green stepped out for a moment, so I'll take advantage of the moment. We -- I won't say we, but the Administration has negotiated contracts with the municipal unions, one-year deals, and we will shortly -- and I'm assuming that there are ongoing discussions about the longer-term contracts. In your assumptions and your projections, has any of that been factored into your Five-Year Plan as it relates to any potential increases in benefits or increases in wages or decreases in both of those?
I mean, what we did in this year's Five-Year Plan which was different from earlier plans is, we actually included a number for what health and benefit increases would cost 57 10/21/08 - FISCAL STABILITY - RES. 080603 over the five years, and that number is about $400 million. So in kind of our base case, that's the assumption we have for increases.
That was based -- no. That was based on what we thought we would do over the five years.
Right. We have not -- in looking at our base assumptions, we haven't changed those projections.
And in those -- and I know you don't want to talk about negotiating in this particular forum.
Let me try it a different way. In terms of the one-year costs of the contracts, they came in right around where we had budgeted them. So we haven't modified, in looking at our 58 10/21/08 - FISCAL STABILITY - RES. 080603 base here, we haven't modified that yet.
Okay. So I'm trying to ask this question without telegraphing your union negotiations.
But there is -- and I'll put it to you like this -- there is a concern by members of the rank and file City employees based on a number of things, history, based on some of the reports we hear in the newspapers, that the way you cut expenditures in government -- and this happens throughout federal, state, municipal -- is that you reduce your employees or reduce your employee benefits, and I believe we actually have a couple of representatives from the unions here today to voice some concern with respect to that. So if you're saying here today under the current scenario that -- and I understand that this is a very volatile situation under the current projections 59 10/21/08 - FISCAL STABILITY - RES. 080603 that you have before us -- you're anticipating holding forth what you had earlier projected.
The projections you show show the size of our gap. Those projections don't change our $400 million assumption. But these are the projections before we take any corrective action.
Okay. Vice-Chair. You must defer to the Vice-Chair. COUNCILMAN DiCICCO: Thank you.
Councilman DiCicco. COUNCILMAN DiCICCO: On and 16 you identify the real estate transfer tax and you cite that condo prices are rising. Obviously there are more sales of condos. I think you're suggesting that condo sales are up 60 10/21/08 - FISCAL STABILITY - RES. 080603 compared to --
Councilmember, all of the sales across the City are dropping. That includes some of the condo sales. The prices of condos because they've gone up have basically helped to stabilize that drop from being worse. COUNCILMAN DiCICCO: Would you happen to know -- and if you don't have it now, would you supply the Chair with the number of condo sales in the last fiscal year and the average price?
I can get that for you. COUNCILMAN DiCICCO: Thank you. I don't have any other questions, Mr. Chairman.
Do you see the increase in the downward spiral of the sales and residential housing in Philadelphia, do you think we've reached 61 10/21/08 - FISCAL STABILITY - RES. 080603 our peak point or do you further project lower sales?
Councilmember, that's tough to say. If you looked at the largest markets in the United 7 States, you will see on average a price 8 drop over the last 18 months or so that 9 is approaching 20 percent. We're not 10 included in that particular database. 11 It's a database provided by Standard and 12 Poor's. 13 If you looked at the Office of 14 Federal Housing Enterprise Oversight, 15 their price activity for us is starting 16 to stabilize and drop ever so slightly, 17 and I think what will determine what 18 happens for the next six to 18 months is 19 how much inventory there is out there 20 currently, what happens to people's incomes and their ability to support purchases and mortgages, what happens to the credit markets and the ability to make mortgages available to people. If all of those things are different than 62 10/21/08 - FISCAL STABILITY - RES. 080603 they were six months or months ago, then it's conceivable we'll see some further deterioration, but at this point it's hard to predict, and what's been somewhat surprising to me is that we have held up prices this long in the teeth of what is probably the worst housing recession in at least the post World War II history of the United States.
It's not particularly low yet, but as the year goes on, it gets lower and lower. We generally -- our cash amount generally goes down until we get our property taxes and our business privilege taxes. So you'll see that going down, and a month and a half from now, two months from now 63 10/21/08 - FISCAL STABILITY - RES. 080603 it will start to get low.
How do you compare our current cash balance to prior years?
Our cash balance this year looks similar to the way it did earlier in the decade, 2002, 2003, but it is much lower than it was last year and the year before.
And I guess part of the other -- I mean, that is a cause for concern and we are spending a lot more time focusing on cash this year and looking at ways to manage it to slow down our cash outflow over the next few months so that we don't get to a position where we're dangerously low.
Real briefly, I know Councilman Jones had a question. With respect to our cash flow, earlier in your testimony you indicated our ability to go in the market to borrow money that would essentially provide cash 64 10/21/08 - FISCAL STABILITY - RES. 080603 flow. Understanding that we have a cash balance of approximately 300 million, is there a realistic change that if the market continues to go down, that our ability to access money for our cash flow could be at a point where we were, I guess, a decade and a half ago when we were rushing to the banks to cash our checks because we believed our checks were going to bounce?
We're not near to that point yet. If we can't do our cash flow borrowing, we would get -- I mean, maybe not to that point, but we would get to a point where we would have serious concerns about how low our balance would get.
Let me ask you this question, then I'll turn it over to Councilman Jones. We have recently seen the State of California essentially go hat in hand to the federal government to ask for relief, and I think that we were experiencing or anticipated 65 10/21/08 - FISCAL STABILITY - RES. 080603 experiencing an inability to pay for government. I guess basically are we going to get in line?
Well, the California case is probably kind of a good example of how this has worked. They wanted to do a $7 billion cash flow borrowing, and when they first tried to do that, they just couldn't get to market and they said that they were going to go to the federal government. Eventually they were actually able to sell, I think, about 4 billion worth, and that got them through their cash needs. So they wound up not going to the feds. And that's the process we've seen with a number of borrowers, that it takes them longer than they expect and it costs them more, but they eventually are able to get into the market.
We can get back to you on that. I mean, it was higher than 66 10/21/08 - FISCAL STABILITY - RES. 080603 they would have paid last year.
So are we taking the position as a city that we're not at the point where we need to possibly entertain such a scenario where we can actually look to the federal government for some assistance in any of these categories that we find ourselves?
In terms of cash, no, we're not there. We are in the process of trying to get our trans done, and we're getting our ratings this week. We got one of them last week. We get the other this week. Once we've done that, then we can go to the market, and then we'll have a better sense of how realistic it is that we'll be able to sell our notes at an acceptable rate.
Is there any other category locally that we think we could possibly need some assistance from the federal government? And I'm asking these set of questions because it seems like the national bailout is 67 10/21/08 - FISCAL STABILITY - RES. 080603 changing every day, and some of the things that were put in that package, that initial package, frankly speaking, were quite amazing. I only wish that some of our local elected officials on the federal level would have gotten some of those earmarks for the City of Philadelphia.
One area that seems like it would be logical, given our needs, is kind of basic infrastructure, investment in infrastructure, and that's one of the things that they're talking about. One of the things that hasn't been talked about, which would also be very helpful, is if they did some kind of help for municipal and state pensions, because pensions in general have been hit hard over the last couple of months, and ours has been hit hard, too. So that would be another area that would seem to be a good fit.
Okay. I promise my last question before I turn it 68 10/21/08 - FISCAL STABILITY - RES. 080603 over to Councilman Jones. With respect to pensions, you assume the pension obligation bond, the growth on that was what? What did you --
We assumed that the pension obligation bonds would not be issued for basically two years. We've put them in the 2011 budget, and we assumed a lower savings. We had originally assumed about 50 million in savings. We assume about 35. So the assumption is that by that time, the market will have settled down.
I mean, are there any indicators that -- is this more wishful thinking or is there an indicator that the market will in fact --
Well, I mean, part of the reason that we're waiting -- that we have it pushed out to 2011 is, we thought that assuming that next year would be clearly wishful thinking, but if there's -- if this is a year and a half problem, which seems to be what some of 69 10/21/08 - FISCAL STABILITY - RES. 080603 the forecasts are, then a bond issue at the end of that period doesn't seem like it's just wishful thinking.
Thank you, Mr. Chair. Whether you talk about a household or a government, there's a couple of ways to balance the budget. One is increase -- or reduce costs. The other is increase revenues. We have had conversations with you, and I want to state for the record that those conversations have been forward thinking and in the spirit of cooperation. So I'd like that to continue. And I appreciate the fact that we are not Washington, DC and that we're not approaching this in a partisan manner versus executive versus legislative. We're looking at all hands on deck and all of us cooperating. Yesterday three of my 70 10/21/08 - FISCAL STABILITY - RES. 080603 colleagues introduced recommendations for revenue enhancement. One of those recommendations was a -- raised the issue that the Commonwealth of Pennsylvania actually reimburses the City of Philadelphia's departments, dozens of them, for exact costs that they incurred that were mandated by the Commonwealth of Pennsylvania. That process currently is done through paper, physical checks to the tune of $250 million approximately annually coming from the Commonwealth to the City of Philadelphia. We've done some modest estimates on what it costs us annually by way of lost checks, physically just missing, lost in the mail, lost on someone's desk, but also lost interest payments from the time that we get an approval from the Commonwealth to the time it actually winds up in the bank, and I've shared -- and the only reason this is now, it's not a question of grandstanding, it just was delivered just 71 10/21/08 - FISCAL STABILITY - RES. 080603 now. And it is astonishing, astonishing to me and I would believe based on some of the stuff that we are looking at right now where we have and we estimated somewhere in the neighborhood of days 7 delay. I'm looking at, by department, 8 somewhere's upwards of 30-day delays in 9 the time it is approved to the time it is 10 actually cashed by departments. This is 11 a report generated by the Commonwealth of 12 Pennsylvania. And we have to look at the 13 low-hanging fruit first before we even -- 14 and I know we have to fight this battle 15 on a number of fronts. We have to look at what's coming, but we have the ability right now to turn the spigot off or at least turn the spigot on to overnight interest payments to us by low-hanging fruit that doesn't cost us anything. So I would urge you, the Administration, to consider some of these things in an urgent manner before we move down the road too far and have to make even more drastic cuts, because those 72 10/21/08 - FISCAL STABILITY - RES. 080603 costs, the meter is running as we speak. And just to give you a couple of them, I have a document here that says that to the Department of Public Health, we had a $434,000 check, that it took, from the time of approval to the time it wound up in the bank, 30 days. I have a number of these, whether we talk about the Police Department, the Office of Housing and Community Development. I have a quarter of a million dollar check here that it took ten days for us to get into the bank. And with technology today, overnight transfers, I don't understand why we're still using Fred Flintstones' Pony Express to get money into the bank.
Well, we agree with you. We are looking through every avenue for generating revenue, for collecting revenues more aggressively, and we appreciate the fact that you set up the meeting with people from the state to help us with this process, and it's 73 10/21/08 - FISCAL STABILITY - RES. 080603 something that we want to move on.
Okay. Because we have the information here I'm going to share with the Chairman.
Thank you, Mr. Chairman. First of all, I also want to thank you for holding these hearings. I think it's very important for us to get together and to provide oversight and review the budget at least on a quarterly basis, and I want to thank you for pulling this together.
I really 74 10/21/08 - FISCAL STABILITY - RES. 080603 appreciate the presentation you gave us today. It's very thorough. I think as you discussed, hopefully we're going to take a very conservative approach to the situation; in other words, plan for a rainy day and hope for the best rather than the other way around. To that end, I think it's important to clearly define the scope of the problem, and I'm not sure we've done that. And I just wanted to turn to 23, if we could, and go through a few things and let's make sure we're -- the scope of the problem is clearly defined so we know what the bogey is in terms of the revenue that we have to come up with or experiences that need to be reduced. I don't see increased interest expense in the potential negative adjustments. Is that something that's in there?
For the sake of clarity in some of these, we rolled them up together into categories just to get 75 10/21/08 - FISCAL STABILITY - RES. 080603 everything onto the page. But I can pull that out for you in a different display if you're interested.
Actually, I'm sorry. It is here. It's economic downturn interest.
No. We'll get you the number on increased interest cost. That line looks at lost interest earnings.
Okay. The other thing is, am I to understand that reductions from the state are not part of this billion dollar number?
That's correct. We do not know what the size or scope or timing of that would look like.
And in terms of the schools, which obviously are important for our future, even though we 76 10/21/08 - FISCAL STABILITY - RES. 080603 don't control their expenditures, we do contribute to their revenue through our taxes. They had a $35 million shortfall, I think, this year. Is that number included in the potential negative adjustments?
No. I mean, our assumption is that they will close that gap, and from my understanding, they are working on that.
And when you look at the long-term increase in funding from the state for the schools, that was dependent upon the state having a balanced budget and other criteria had to be met in order for the School District to get the extra funding that the Governor put in the education funding for the next -- I think he rolled the extra money in over four, five or six years. I don't remember the time. But it's the life of our plan. If the state is experiencing problems, that funding, which is 77 10/21/08 - FISCAL STABILITY - RES. 080603 significant to the School District, is in jeopardy. Is that included in the potential negative adjustments here?
No. Like I said, we don't have additional funding for the School District in here.
I don't have that. You're talking about the remaining debt capacity? I don't have that with me. We can get back to you on that.
Could you give us a debt limit by year based on what you think property assessments will be citywide over the Five-Year Plan?
Okay. If we aren't able to issue a pension obligation bond, right now we're looking at a billion dollars; is that correct?
I'm not sure what you mean. 78 10/21/08 - FISCAL STABILITY - RES. 080603
The savings from POB, you have -- if you look at the number under Fund Balance after Potential Negative Adjustments.
Assuming that we are unable to do a POB in terms of looking at the worst case and hoping for the best.
Well, I think it's reasonable to budget for it, but not to budget for it within the next couple of years.
In terms of the loss in the pension fund in '08, that will increase our MMO for FY09 --
No. I'm sorry, 79 10/21/08 - FISCAL STABILITY - RES. 080603 I'll let you finish.
It is. That's the first line, Failure to Achieve Pension Savings and Earnings Reduction. It's in there.
And how much of that 51 million is an increase in the MMO?
I think over the five years -- I don't know it by year. I think over the five years it's roughly a $120 million increase.
So if we are unable to issue the POB in FY11, the MMO, assuming the market stays roughly the same through the end of this fiscal year for the pension system, we're probably 80 10/21/08 - FISCAL STABILITY - RES. 080603 looking at an additional $30 to $35, $40 million increase in the MMO in those years?
If the market stays where it is or doesn't go up significantly, given the eight and three-quarters.
That's possible. We've actually asked the actuary to give us a kind of mid-term valuation, to do the valuation earlier so we can see what that would look like.
Okay. So could you provide the Chair with that information also?
And Increased Property/Parking Tax in terms of potential positive adjustments, could you explain what that line is?
What those lines are, Councilmember, is, we've made 81 10/21/08 - FISCAL STABILITY - RES. 080603 adjustments based on what we received in FY08. Both the parking and the real estate tax performed at higher growth rates than we had anticipated. And to date on the parking, we're still seeing that growth in spite of what's happening in the economy. And so we have included those adjustments into the base because the base is now larger moving forward.
Okay. Well, I do want to say that we met with you last week and went through some of the things that we proposed, and I appreciate you sitting down with us. I look forward to trying to be proactive to work with the Administration to help resolve this budget crisis, and we have -- I have a few more things that I'd like you to consider as you put together the Plan. I'll just run through them real quick.
Would this make it like the freshmen 18 if you had three more?
In fact, I 82 10/21/08 - FISCAL STABILITY - RES. 080603 have more. 3
Review 5 collections policies. We give up -- and 6 many of these come from Curtis and Maria 7 also. 8 Review collections policies. 9 We give up a lot of money owed to us by 10 collection agencies. 11 Increase parking meter rates. 12 I know that's something you guys are 13 discussing, but that can provide School 14 District shortfalls if we don't take it 15 into our General Fund. I think it's something we ought to move on immediately. Negotiate discount rates with PECO. I believe that some of our rates on poles and other things are a per pole basis, et cetera, rather than being meter --
I'll get you 83 10/21/08 - FISCAL STABILITY - RES. 080603 the list.
Negotiate better terms for leases of City-owned property to SEPTA; review City office space needs to identify savings, including by moving departments from leased space in privately owned buildings to City-owned buildings; join cooperative purchasing program, which allows state and local governments to purchase information technology and other goods under federal GSA schedules; explore joining existing purchasing collectives in Philadelphia, such as the one that exists for Penn, Drexel and other universities; issue an RFQ inviting private industry to make a business case that the Water Department sewage treatment can be a money-making venture through generating raw materials -- through generating energy through the raw materials. There should be state funding for this given the Governor's $850 84 10/21/08 - FISCAL STABILITY - RES. 080603 million initiative in this area. Issue an RFQ to explore revenue, creating opportunities related to hydrogen-generated fuel, including -- and this is Councilman Jones' idea -- using existing utility infrastructure to transmit the same. Let's sell our surplus property in Public Property. In Baltimore they have something called the SCOPE Program, which allows realtors to make proposals to the city for city-owned property by putting a list of all those properties available on the Internet and promising realtors a fee for making a proposal. We can increase the speed at which our abandoned properties get sold. Ask businesses and our institutions to pay real estate taxes early. Many times it's in escrow already. And also for institutions to make PILOT payments early so that we have less of a lending need towards the end of the year when cash is tight as we're 85 10/21/08 - FISCAL STABILITY - RES. 080603 waiting for them to come in. By collecting the revenue early, the City has to borrow less money. Try to meet the Street Department's goal of increasing the residential recycling rate from to 8 percent and avoid disposal fees from -- 9 would go to 8.1 million. I know that 10 this is not currently in the Five-Year 11 Plan. 12 Review licenses and fine 13 structures in light of the recent change 14 to state law. We can now charge a max of 15 1,800 versus 300 for many things. So if 16 you look at violations for L&I, et 17 cetera, we can increase our fines over 18 the $300. And explore public-private partnerships. I recently made a proposal to the Fairmount Park Commission to have some private person come in and renovate Northwestern Stables. It would have saved Fairmount Park $750,000 that it has spent in its capital program. And 86 10/21/08 - FISCAL STABILITY - RES. 080603 there's many opportunities to do things like that. That is it. I'll get you the list. Thank you.
Thank you, Councilman. Anyone else have questions for these members of this particular panel? (No response.)
Can one or both of you stay around? Because I'm sure there are going to be some other questions as we proceed.
Right now I'd like to call up the next panel. Ms. Cathy Scott from District Council 47. And I believe we just got a call from District Council 33 that Mr. Matthews has 87 10/21/08 - FISCAL STABILITY - RES. 080603 an emergency and cannot be available today. So we'll hear from Ms. Scott. (Ms. Scott bringing up testimony.)
You don't have to do that. We have people to do that. They're not in the union, but that is their job responsibility. Thank you.
-- members of the Oversight Committee and other members of City Council. My name is Catherine Scott, President of AFSCME District Council 47, which represents the administrative, professional and technical workers and first-level supervisors of the City of Philadelphia and the First Judicial District. Thank you for the opportunity to provide testimony on the crucial matter of reduced revenue which the City is 88 10/21/08 - FISCAL STABILITY - RES. 080603 presently experiencing. Our union believes that the City does not need to act precipitously cutting services, which are needed more in a time of crisis. The City entered this year with a sizable fund balance available for appropriations, approximately $174 million. Any reevaluation of services needs to factor in the possibility of an economic stimulus package for state and local governments which Congress may be considering now or with a new Administration in Washington. Hopefully information will be forthcoming about relief for local governments in the next month. Our members believe that there are some areas of the City budget which could reap savings. Presently, the City contracts out significant professional work. 2 million in portions 89 10/21/08 - FISCAL STABILITY - RES. 080603 of the Health Department if the work had been done by City employees. Every personal services contract should be evaluated for cost savings and moved to the City doing it through City employees. The City should emphasize applying for more grants so that services which are now paid out of the General Fund could be paid by grants. While it is a good start for the Administration to hire one person dedicated to seeking out grants, much more staff and attention needs to be devoted to this area. We would suggest that the City consider significantly increasing its Payment in Lieu of Taxes, or PILOT program. As non-profits, especially hospitals and universities who do not pay taxes, increase their real estate holdings, the real estate tax base shrinks, placing more of the tax burden for both the schools and City services on the remaining real estate which is taxed. Non-profits need to recognize their 90 10/21/08 - FISCAL STABILITY - RES. 080603 commitment to the City and their home communities. The projected increase in the Mayor's Office from over $5 million to over $7 million and the Managing Director's Office from million to 8 million are areas for review since the 9 operating departments are the departments 10 which provide direct services to the 11 public. 12 Our union believes that revenue 13 increases are the answer to this problem. 14 City Council must rethink cutting 15 business taxes, especially the gross 16 receipts tax, and institute methods such 17 as allowing business to deduct their 18 gross receipts tax from their net profits 19 tax so that we give tax relief to those 20 who really need it and encourage 21 businesses to stay in Philadelphia. 22 I would also like to add to my testimony. It is not here, but listening to the questions from you, Councilman Clarke, about the contract negotiations 91 10/21/08 - FISCAL STABILITY - RES. 080603 over the Five-Year Plan, I would like to point out that the $400 million that was budgeted over the Five-Year Plan is not just for wages, but it's also for benefits, which includes pension payments and healthcare payments. And listening to the Finance Director this morning talk about this year's costs being within what they budgeted, it is important to note that there was no increase in healthcare for District Council 33 or District Council 47 and actually a decrease in the amount that was paid to the Fraternal Order of Police, as well as the firefighters. And we have a history of the City meeting the minimum monthly obligation for pension and we know that part of the reason that the City is in the circumstances that they're in today is because the pension payments were so underfunded for many years.
So we think that there are significant issues that come up in the question that you raised, and we 92 10/21/08 - FISCAL STABILITY - RES. 080603 certainly would not look toward four years of either stagnant healthcare payments or reductions in healthcare payments, because, of course, that would affect the benefits that people receive. So we think that that really is an area that needs to be focused on also as we go through the budget and look at it. So I thank you for the opportunity to testify today, and I am happy to take any questions.
There have probably been extensive studies -- and I know you can provide them -- that weigh contracting out versus in-house services. And generally what has been some of the findings in most of those? 93 10/21/08 - FISCAL STABILITY - RES. 080603
Well, on the whole, we believe for the services that my union provides, professional services, that it is much more expensive to contract out that work. You are paying a much higher hourly fee than you are paying for someone who is working in-house, even when you factor in the benefit costs of healthcare and pension. And I think that part of the problem with contracting out -- and I know frequently this is seen as self-serving. I would like to sort of take this more to the macro level than talk about individual things, because I think that there are policy decisions that drive contracting out that are just flawed policy decisions. For example, one of the reasons that most of the physician work in the City and the health clinics is contracted out is -- the argument is, well, the City is not competitive in its salaries. When the new Mayor came, when Mayor Nutter came in and he looked at the salaries for 94 10/21/08 - FISCAL STABILITY - RES. 080603 cabinet-level people, Managing Director, et cetera, he saw that the salaries were not competitive with what he would be able to do to get someone that he considered to be competent. He didn't say, Oh, the salary isn't competitive, so I'm going to contract out the Managing Director's Office and the Finance Director's Office. He raised the salary. And it just seems like there are foolish ideas about how contracting out -- you move to contracting out if you're not competitive salary-wise. Pharmacists, I think this is a very good example. Our union went through pay appeal after pay appeal. We did multiple pay appeals to get the pharmacist salary to be competitive. The City, because they couldn't hire pharmacists, was paying $525 a day for a pharmacist. Now that we have gotten the salary competitive and they are actually able to hire pharmacists, they're saving a lot of money. 95 10/21/08 - FISCAL STABILITY - RES. 080603 So that's why we're saying we think that the contracting out, especially for professional services, which is what I'm talking about, needs to be evaluated, looked at, why is this work being contracted out and is there something that could be done to bring it in-house. I think there are just a couple of examples of where it's the easy, maybe the lazy, maybe not the best way to get work done, because you still have to have doctors and pharmacists in the health centers, and that's why we're suggesting that the professional -- contracting out professional services should all be looked at to determine if it could be done cheaper.
Equally, has there been an analysis to look at how we dispense overtime and what the equilibrium point is when we should just go ahead and hire another body?
I don't think that 96 10/21/08 - FISCAL STABILITY - RES. 080603 analysis has been done, but, I mean, one of the things that we see is, some of our members work incredible amounts of overtime. Not because they necessarily want to do it, but because they have to do it because there's nobody else to do the work. And I know there are analyses that are done where there's a tipping point, and beyond that point, not only are you hurting your work staff because you have people doing dangerous jobs that are tired, they're not as alert, so your health and safety problems go up, but also it becomes much more cheaper to hire a person who is a new employee.
And, finally, I guess I would ask to reach out from this legislative body like we're reaching out to the executive branch, that we all come to the table in good faith and all come to the table with ideas for cost saving, and I think probably the best source of those ideas are the people who actually do the work. 97 10/21/08 - FISCAL STABILITY - RES. 080603 So I'm asking that the union actually do a roundtable to discuss ways we can cost save and ways that we can reduce our expenditure and increase our revenues.
Actually, that's a very good point. This Administration has been very open to that. Yesterday I met with the Managing Director, the Finance Director and City Solicitor. We had a very, I think, good meeting. I had the opportunity to make significant suggestions about what we see as cost savings, and I think that the follow-up by them is impressive.
Ms. Scott, it's good to know that we're all in this together and, yeah, we have different viewpoints of the problem, but we recognize that it's a problem.