COUNCIL OF THE CITY OF PHILADELPHIA FISCAL STABILITY AND INTERGOVERNMENTAL COOPERATION Room 400, City Hall Philadelphia, Pennsylvania 19106 Wednesday, February 26, 2025 11:49 a.m. PRESENT: COUNCIL PRESIDENT KENYATTA JOHNSON COUNCILWOMAN NINA AHMAD COUNCILMAN MICHAEL DRISCOLL COUNCILWOMAN KATHERINE GILMORE RICHARDSON COUNCILMAN JIM HARRITY COUNCILMAN CURTIS J. JONES, JR. COUNCILWOMAN RUE LANDAU COUNCILWOMAN QUETCY M. LOZADA COUNCILMAN BRIAN J. O'NEILL COUNCILMAN NICOLAS O'ROURKE COUNCILMAN ANTHONY PHILLIPS COUNCILMAN JEFFREY YOUNG, JR. RESOLUTION: 240886 - - -
Good morning, everyone. This is the public hearing of the Committee of Fiscal Responsibility and Intergovernmental Cooperation. The purpose of this public hearing is to hear testimony regarding Resolution No. 240886. Ms. Helen Loughead, can you please call the roll.
Here. Thank you. A quorum of this Committee is present. This hearing is now called to order. Will the Clerk please read the title of the revolution before the Committee today.
Resolution 8 240886, authorizing the Committee on Fiscal Stability and Intergovernmental Cooperation to hold quarterly hearings that include monthly reporting requirements, to discuss the fiscal position and overarching social impact goals of the City, including and as related to the Five-Year Plan and reporting requirements set forth in the Quarterly City Manager's Report and as submitted to the Pennsylvania Intergovernmental Cooperation Authority.
Thank you very much. Will the Clerk please call the first panel.
Yes. Rob Dubow, Finance Director and Sabrina Maynard, Budget Director. (Witnesses approached Witness table.)
Just state your name just for the record. Please begin your testimony. But good morning, Rob. Good morning, Sabrina.
Good morning, Council President Johnson and members of the Committee. I'm Rob Dubow. I'm the City's Finance Director. I am joined at the table by Sabrina Maynard, the City's Budget Director. Thanks for the opportunity to update you on the status of our finances. As we'll discuss, we are testifying before you at a time of heightened risk for the City's finances. In addition to that risk and to the end of our $1.4 billion in COVID relief funding, we face our legacy challenges of a fund balance that is lower relative to those at peer cities. A Pension Fund that, while improving in health, is a funding percent that's still in the 60s. We also face high infrastructure costs, high level of fixed costs. We have a high poverty rate that both depresses our revenue base and increases the demand for services. We also face the usual risk of potential economic slowdown. That risk is heightened however by the uncertainty around the actions of the federal government, and that uncertainty creates multiple threats to the City's finances. Perhaps the largest are the threats to our grants and to our tax base. To put that in context, in FY24 we received about $2.8 billion in federal grants. The new federal government's review of all grants raises doubts about the timing of receipt of those grants, and in the worst case could mean some grants might not even be received. And then we've seen in the recently passed budget by the Federal House about $880 million in Medicaid costs, actually obviously will have a really big impact on people's ability to get the medical care that they need. Federal government may also make cuts that will affect what has been kind of the bulwark of our City's tax base, medical institutions, educational institutions and government. In FY24 education and medical institutions and government accounted for more than $1 billion in wage tax collections. That's almost 45 percent of our reductions. The federal government has already cut the number of staff employed in Philadelphia, and potential cuts to research funding could lead to additional job cuts. Those job cuts would obviously be reflected in our wage tax collections. Understanding that there are always potential threats to our budget, we've taken steps to guard our fiscal condition. We've built up a fund balance that the recently released quarterly report shows will end this fiscal year at about $580 million. That's about 9 percent of revenues, which is slightly higher than our internal goal of having a fund balance of between 6% and 8% of revenues, but it's much lower than the roughly 17% recommended by the Government Finance Officers Association. We've also built up the Budget Stabilization Reserve Fund, which will add an extra layer of protection for the city. And in the quarterly report that was just released, we added an $80 million reserve against federal policy changes. As we monitor potential threats to our finances, we need to continue providing essential services, improving the City's competitiveness and making the investments that will make Philadelphia the safest, cleanest, greenest big city in the country with access to economic opportunity for all. The quarterly report shows changes driven by one of those investments as it reflects the increased spending to prepare for the 2026 events that was included in the Mid-year Transfer ordinance that was voted out of committee last week. The Mayor's second budget which will release this month -- next month, sorry, will show additional crucial investments and we'll continue to balance those investments with the City's long- term fiscal health. That concludes my testimony. We're happy to answer any questions you have.
Thank you very much. Thank you for your testimony. Just a question: So we're seeing a projected fund balance you just talked about in the amount of 584.3 million for FY25. That's 16 million higher than the approved Five-Year Plan and 58 million less than the projected fund balance last quarter.
So talk to us about how the projected fund balance aligns with our goal of being fiscally stable.
Yeah. So we have an internal goal of having a fund balance that's between 6% and 8% of revenues. The fund balance we're projecting is around 9% of revenues, so it's higher than our internal goal. The Government Finance Officers Association, kind of our trade group, recommends you have a fund balance that's equal to two months' worth of revenues which is about 17%, and that actually is not inconsistent with what other large cities have. For us we always have to balance that against the need for investments, against our ability given the high poverty rate here, so we balance where we know we should be according to what the Government Finance Officers Association says versus what we think is reasonable given our needs.
And I remember doing a reading over the Five-Year Plan. And just correct me if I'm wrong, there's a projection of negative job growth that's a part of that particular plan. Are you familiar with that in the Five-Year Plan that we really originally --
Yeah. So we base our projections on work with an outside econometric firm and then they give us recommendations. We test that at a meeting that PICA hosts for us down at the Fed. So we use projections based on that back-and-forth. And our wage tax is a combination of what we see in job growth and what we see in wages. And there's kind of an interplay. So our econometric firm thought that nationally the job markets get very tight and that's why you're seeing some job loss. The flip side of that is then you see larger wage growth than you would if the job growth was stronger. And I should also add that we have the new plan coming out in just two weeks and that will have a new set of projections.
Okay. I just want to get clarity. So the firm that we use projected negative job growth throughout the Five-Year Plan --
A couple of years in the last plan, but that may look different in what's coming up in a couple of weeks.
Okay. So the one that's coming out will probably have a whole different outlook differently?
Because things are changing as we move forward.
I only asked that question because I remember going over the Five-Year Plan and then also looking at the negative job growth assumption. And then how are we figuring out to create job growth if we know going down the next few years it's going to be negative, our strategy actually to grow as a means to address poverty.
Do we anticipate -- I know we just did a transfer ordinance, $45 million to the various groups that are going to be supporting on the celebration of the 250th year of our country. Do we take in consideration doing that celebration any job growth during that period because we're investing so much City dollars and promotion?
So our econometric firm kind of looks at all of that as they do their projections. They'll look at something like that and say, okay, that might have a positive impact --
I mean us as city. I'm sorry. Not the outside firm.
Well, we base our projections on what the outside firm gives us.
So they will take that information into account when they come up with their suggestions that they then show to us and we then value test down at the Fed.
Okay. All right. The City's FY24 fund balance was 942.9 million, which was 414.2 million higher than the adopted budget. The fiscal year prior to the City's FY23 fund balance was 981.6 million which was over 600 million higher than the adopted budget. What were the major drivers behind the higher-than-expected fund balances and have those trends continued this year?
Yeah. So one of the biggest things that's been driving our fund balance has been our challenge with hiring people so we have usually big underspends in our Class 100. We've put a large emphasis on trying to increase the number of positions that are filled. So we're starting to see some of that turn around. There are some departments like L&I, for example, they've been able to hire more inspectors or the Law Department has been able to hire more lawyers, HR's (inaudible) work. So we're starting to see some improvement there which we're hoping will then cut into that underspend because while that underspend winds up helping our fund balance, we actually want to fill those positions and want to provide the services. So that's been the biggest single driver of the increase in our fund balance. We also have a business tax that's particularly hard to project because it doesn't come in until the end of April, so it usually comes in after we've finished our budget. And for the last couple years, it's come in higher than we anticipated. So that's been a help too.
So you say the business tax has been coming in more?
The report also shows a projected increase of million in revenue from last quarter. Can you provide more context for why these revenues perform better than expected, particularly when we just talked about real estate transfer tax?
Yeah. So 9 the transfer tax had really rapid 10 growth before the pandemic. And 11 then for a couple of reasons 12 including changes in the market, like increases in interest rates and the changes that we all made in the abatement, there was a kind of downturn in the number of transactions. That has started to moderate a little so that's meant that there have been more transactions. Real estate transfer tax has been a little better than we thought it would, which is a good indication that there's been activity in the real estate market.
Do you think based upon those changes, the changes in the abatement had a chilling effect on the market?
No. I think what happened is there was a rush to market before the change in the abatement. And so, because there was that rush a lot of activity that would have happened over the next year or two --
Because I do know everybody did a rush to pull those permits and kind of crashed the system early on.
Yes. I think the thing that had the bigger impact on the market was the jump in interest rates.
Give us an idea in terms of the economic climate how are we doing compared to other major cities right now. I mean, we got the title of being the largest, poorest city in America. However, we're doing some things to move the City of Philadelphia forward. How do we fare, so economically?
Yeah. So I think we still -- if you're talking about the poverty rate, we're still high compared to the other top 10 cities. On the other hand, our poverty has been coming down steadily and is the lowest it's been in a while. And obviously, we all agree there's a lot more we want to do. We have started to see some movement in the right direction there.
Okay. The Chair recognizes Councilmember Kathy Gilmore Richardson.
Thank you, Mr. President. And thank you very much both to Rob and Sabrina for all of your work over the last several weeks. I wanted to start here and I can circle back obviously, but I wanted to talk about some of the sort of overarching things that were notated in the QCMR. And I wanted to go back to the question specifically that Mr. President asked around the higher-than-anticipated fund balance. And you know that this typically happens each year. And we know that staffing assumptions are a big part of this, right --
-- particularly in the Public Safety portfolio. So I wanted to ask the question in advance of budget around the staffing assumptions and if you are realistically placing the vacancy rate and the budget in advance so that we have a more realistic picture of where we'll be at the end of the fiscal year and then for each fiscal year moving forward?
Yes. So we are and have been and will continue, but we're increasing the vacancy rate to kind of acknowledge that positions won't be filled. So, yes, we're doing that. In the longer term what we really want to do is peel back on the number of positions that we're showing, acknowledging that they won't be filled and then you'll see the vacancy rate come down and the budget will reflect more like what's likely to happen.
Can you speak to specifically the Public Safety portfolio? Because obviously we know that we have a lot of overtime. There has been a number of things happening. As the Mayor stated our Black Swan event in the Northeast, which our public safety professionals were just stellar in responding to but because we know we're so short-staffed, a lot of overtime, same thing thankfully for the Eagles parade and a few other things that have happened over the last several months. And so, I asked specifically about the Public Safety portfolio because even if you look at PPD, we know that we're off by at least from filled positions to budgeted positions about 1400 vacancies. We know we can't fill 1400 positions in a year. So the question remains is how are we looking at vacancies with a real lens so that we understand what our fund balance will truly be? We don't have the wiggle room of the federal money anymore. So I know you all typically go to departments and ask about the vacancy rates and sort of what they believe they are able to do for the year. But what are you all doing specifically in that Public Safety portfolio so that we know we're accounting for what we could actually do? Because I don't know that, you know, we don't know what we don't know right now about what will happen moving forward.
So a few things to say on that. One, the hiring challenge in public safety is a national issue, not specific to here. We have been trying to take actions to address it with things like hiring and retention bonuses and kind of looking at things, prisons for example, that would help attract people. But with that said, there are still a number of vacancies. We've gotten to the point, at least with police, where we're not losing ground anymore. We're at least kind of staying steady. But you'll see in the budget that there is a healthy -- upcoming budget, that there is a healthy vacancy allowance --
There's not enough funding in the budget to actually fund the positions that we show because we're assuming that they would be vacant for portions of the year, and that's really the way we handle it now.
So I guess my request and my ask would be if we could have an actual real picture for the upcoming budget this year so that we know what to anticipate. Okay. Because I think that'll help us be able to look at the budget differently and understand what we really need to do. Okay.
I read the QCMR when we first received the information. And I wanted to talk about -- and are you prepared to talk about the next Mid-year?
I think I saw around million in new spending?
Yep. So the big portions of that are that federal reserve that we talked about and increasing that as kind of a safety measure against what we're seeing.
Hi. Sabrina Maynard, Budget Director. So there are other items in there. So that includes --
So that was only about a third of the money, right?
Yep. So there are a couple of other items in there as well. There are off the top of my head -- I can go back and pull some Wellness investments. We had put in some -- thinking about doing PAYGO for the remainder of the phase of the Wellness project that had been unveiled in January. And we took care of the law piece and the 2026 piece in the Mid-year from last week. Let me go back. Sorry.
And while you're looking so I don't use up all of my time, my last question will be specifically on of the QCMR around purchase of services analysis for selected departments in the General Fund under Managing Director. So you've listed CPOC, Defender, Public Safety, and then that's all other departments from the Managing Director's Office, is that correct, with the 41 million?
And that's all under just Managing Director. And that's not including Public Safety, correct?
That's not including the new Public Safety office, that's right.
Right. And could you just talk about that a bit while Sabrina will do the last answer.
So -- yep. So the Managing Director's piece is largely, predominantly Wellness- related costs. So I think there's an operating component about 35 million and a PAYGO component of about 30 million.
Sorry. PAYGO, Pay As You Go capital for the Riverview facility.
Just a point of information, can you just clarify. It's Pay As You Go you said, correct?
Yep. So that means we're not borrowing for those costs. That's just transferring from operating over to capital.
I know what Pay As You Go means. I just want to get an idea in terms of the operation, funding for the Wellness Center, are they contracts that we're going to be using or is this inhouse?
Yes, sorry. So there are a number of items in there. We took care -- so there are a couple of departments where -- in reference to what Rob was speaking about earlier, we are seeing higher -- we're actually seeing people be retained and positions be filled. And so, that's concentrated in a couple of places. We are seeing higher overtime in Fire. So that's a piece of that. Sustainability, the Law Department, the District Attorney's Office, a couple of places where we are making adjustments there. The other adjustment in the transfer ordinance is moving the funding from the Labor Reserve out to the departments that had collective bargaining agreements, so making sure that those go out to the departments that will need them. We also are proposing making a contri -- not a contribution, making an investment in the prisons for a number of items that we know we need for the litigation. So building maintenance, body cameras, continuing the lock project to replace locks, air-conditioning, training and some other programming and investments. Those are some of the items.
You're welcome. I just want to ask a question before I call the next member regarding the projected increase in the General Fund balance obligations is 295 million more than budgeted, roughly $300 million more than what's budgeted. And so, I just want to get an idea of what's driving that increase?
So the biggest single thing is the reserve we put in against federal funding, $80 million. But there's also the money that we put in for 2026, the increase in indemnities cost that was also --
Separate from the Mid-year or the Mid-year is a part of that number?
That was in the Mid-year. So both of those things from the Mid-year also added to our cost. The things that Sabrina was talking about with prisons, some of the wellness investment and then the smaller things in other departments that are actually hiring people.
And 2026. Okay. And then the last thing before I call on my next member, do you have an update on the following in terms of spending: I know we did 100 million investment to build a wellness ecosystem. And so, we saw the results of that. 10 million to support workforce development, employer partnerships that include commitments to employment, another 130 million to expand PHL Taking Care of Business, 500 million for the street repaving, 18 million for citywide residential cleaning program, and 12.3 million, which I'm a beneficiary of, twice weekly trash collection. Do you have an idea of how much you spent totally in each of those categories?
Yeah, we can get you that. Some of that is for multi-year numbers, but we'll get you that and get you a breakout on those items.
Thank you very much. The Chair recognizes Councilman Curtis Jones.
Does this surplus -- how does this surplus rank over the past eight years by way of amount? Is it the largest?
So two years ago was the largest. We were up in the high nines. What we're projecting now is about 580, so it's lower than it's been the last couple years but still higher than our internal goal.
Out of the taxes that we receive, there are seven taxes, correct, major taxes?
Roughly. Okay. Of which the business tax represents about 70% of our City's revenue; is that correct?
So real estate tax -- I'll actually do that. So our total taxes are about 5 billion I think, and -- let me find the real estate tax number. So total taxes we're projecting actually at 4.3 million.
Billion, sorry. If it was million, then we'd have a lot bigger problems than we're talking about today. And then the property tax is about 900 million, so about 20%-ish. It's a bigger percent for the School District. But for us it's a little below 20%.
What is our taxable total properties for the City of Philadelphia, what is the amount?
Yeah, the taxable real estate. I don't have it off the top of my head, but I can get it.
I don't know the -- I know amounts that we collect them. I don't have the total assessed value here.
It's my understanding it was somewhere in the neighborhood of 1.6 -- nope, 168.
Which I would say is probably the largest taxable amount in our history.
Yeah. We also until 2013 we based assessments on a fractional assessment. So we were showing assessed value as like a third of their value. So making that change meant the assessed value immediately tripled. But then the market has been strong since 2013. So, yeah, values have been going up.
So because of AVI we have seen the largest amount of increase in taxable properties in the City's history, correct?
Yeah, it's a combination of AVI and the strength of the market.
All right. That's fair. So my question becomes we used to get annual requests to adjust the millage rate. You guys would come to us and say, we need X amount of millage rate adjustment in order to get this amount of revenue coming into our coffers so that we can operate the government, correct?
So there were very few millage rate changes. I think it may be only a couple of years where there were millage rate changes. So that didn't happen a lot for the General Fund.
So what I'm asking I guess is, is it time that we based on AVI and the increase in value and the market rate, because I know the tax report came back saying eliminate the BIRT, let's take care of big businesses, isn't it time to give the little guy a break?
Yep. So the way we've been doing that is through relief measures. So for last year, for example, we put in that low-income freeze on the property tax so that your property tax won't increase if you meet the guidelines. We've increased the Homestead so that homeowners see reduced value. And because of the way we've increased it, it's a particularly beneficial impact for low-value houses. We have the LOOP program. We have payments -- the OOPA program. We have a really wide array --
I'm familiar with OOPA and all of that. The question becomes for me has those programs not outpaced the value that we are receiving based on AVI and based on market rate and is it time for a millage adjustment downward to help out people who own real estate in our communities? And I say all of that to say, Rob, that I put in a bill to look at neutralization of that amount to kind of evaluate where we are, evaluate how much we take in and whether or not in lieu of the fact that we're doing all this for businesses, isn't it time that we take a hard look at reducing the burden of property owners in Philadelphia? And that's a trick question.
Yeah. But really there's -- it's really a question of approach, right, because what we've been doing over time is taking a targeted approach to help people and you're asking should we look at a more generalized approach helping kind of everybody or is the targeted approach better. And I think that's a good discussion to have during the budget process.
So I put in -- play on words. I have put in that bill, Mr. President, for us to take a look at our resolution. And we'll be submitting a subsequent bill 13 because we are able to do that, but do we regularly do that is my question. And in areas that you have protected in South Philly and we have protected citywide with the reality of AVI, some places have disproportionately been overassessed. And I've had individuals come into my office and say that we have appraised the property at let's say $200,000. But the reality is they couldn't get $150,000 for it in the real world and therefore they are out of sync, out of loop with reality. And so, what I'd like us to do is take a hard look at that population, although it only represents 20% of our budget but to homeowners it is everything. And so, with that I would like us to take a hard look at when is it time to give the little person a break and not just big business. Thank you, Mr. President.
You're welcome. The Chair recognizes Councilmember Jim Harrity.
Looks like everybody's sleeping here. Get it a little livelier. Rob, I just got a couple questions. But, one, I don't usually feed into rumors but this one disturbed me, so I figured let me ask even if it just turns out to be false. Are we allowed to spend the soda tax money or is it being held up in escrow? I was told -- the rumor was that the money that's going from the soda tax is right now held up in escrow because of some court battles or something that are going on?
No. When the soda tax was first implemented, there were court battles and it wasn't imposed. But then those battles -- won those battles --
Good. All right. Then to my next question which is what is the total revenue a year from the soda tax?
Okay. How much of that goes to the day care, childcare?
So we have -- actually it is divided between that and debt service on Rebuild --
We get you that split. We're actually at the point where the cost of the programs and the debt service is more than what we bring in, in the beverage tax, so it's supplemented by the --
How about this, is it around million 6 for day care? Is that number -- 7
10 More than that? What would you think, anywhere around?
Okay. But you'll get me those numbers and you'll get me the numbers of how much goes to Rebuild. And I pulled up another question. So Rebuild, you just said that we are paying off loans for Rebuild. Is that with that money? Is that --
Yes. So Rebuild is funded by borrowings and then the debt service of that borrowing.
So we're borrowing money to pay for something, right, but --
-- the money is supposed to be there. So why are we borrowing money to do the projects if $66.6 million is going in there every year? I don't understand why we're not just paying for these projects instead of also paying interest on these projects. That's my --
So the cost of the projects is -- and this is rounding. So let's say $300 million. And in order to fund that upfront, we borrowed. So we'd get money that we could then use to make investments in recreation facilities, libraries --
So essentially spending money that we didn't have yet?
Well, no. 6 We borrowed. And the reason you borrow for something, it's the same like getting a mortgage on your house because you're going to be using that facility for 20, 30 years. So there's a rationale that you will be paying debt service while you're getting the benefit of that. You wouldn't borrow for operations. You wouldn't borrow for day care, for example, because that's something you're using up that year. It's gone. But --
My thing is about the fiscal responsibility of it. You know, if we have money to build, let's build. But to take a loan to pay for something that the money's supposed to be there for, that's where my disconnect is.
There's not enough money that comes in from the beverage tax each year to pay for all of the facilities. There is enough money to help us pay the debt service over time. We would not have been able to make the investment that we made in facilities just by using beverage tax money as it came in. And we get the benefit from these facilities over time. So it makes sense financially.
Okay. I mean, it makes sense to you. Doesn't really make much sense to me.
Well, also we have capital guidelines that we base on what industry standards are for what it makes sense to borrow for and what it doesn't and we follow those.
Okay. I guess I'll be happy with that. Okay. I'll give you some more investigating.
Thank you very much, Member. I just had another question in regards to let's go back to the millage rate that Councilman Curtis Jones was talking about and obviously want to make sure that we're providing relief for homeowners. He talked about a targeted approach versus a general approach. Give me an idea between the difference in the approach.
Yeah. So targeted approach is doing things like the Low-income Freeze that we did or the Senior Freeze or Homestead, which just helps people on the residential side. If you just lower the millage because of the way state law works, you can't, for example, lower the millage on the residential side. You lower it for everybody. So --