So your target approach is because you want to focus on those most in need?
Follow-up question -- it's like third rail but I'm still going to ask it -- have we ever explored PILOTs, right, because we're talking about real estate and taxable real estate, right? And this came up in part of a conversation yesterday with some Tax Reform members just having the general conversations where you have a certain institution and they have millions in property, right, millions and millions in property but they're not being taxed. But yet the CEO might make eight figures, so to speak, I guess seven figures, right. And it'd be pretty well off as a nonprofit with property and land. Have we ever explored maybe certain thresholds?
So there was a time when there were PILOTs from those institutions. There are PILOTs we get related to specific projects. We don't receive PILOT payments now from those institutions.
Have we explored it? As a revenue can't you --
I think there have over the years been ongoing discussion. So I think, yes, it's been explored over time.
Thank you, Council President. So, Rob, I just have a question on what Council can do to help in this situation. So there's high fixed costs, including like debt service that continue to be a challenge. Are there any strategies in place to restructure, reduce these costs without compromising essential services? And also, is there anything that we as City Councilmembers can do to help in this regard with you?
So on the debt service side, one of the things that we do all the time is look to see whether there are opportunities to refund our debt the way you refinance a mortgage to see whether we can lower our cost. That's a little more challenging now that interest rates have gone up, but we still look at that. Also, we talked a little before about doing things like do pay-as-you-go financing for capital. That really helps us in terms of reducing how much we have to borrow. So those things help with fixed costs. I think in terms of what Council can do -- there's a lot of what Council already does, which is kind of be thought partners with us as we kind of go through what we're going through, particularly with the uncertainty that we're facing.
I think, you know, my initial instinct was to say just pass whatever budget we send over. That would be helpful. But I thought --
Thought partners. I only mentioned that because all while being fiscally responsible is important, we absolutely do, that's our responsibility. We still have a lot of concerns that take place in the city. And our residents are still going to want to see action, so that was important. And lastly, what are the -- I'm not sure if you talked about this deeply, but are there any alternatives to the federal cuts that are going to impact the City that we can turn to in terms of foundations or any of the private investments beyond?
Yeah. I think we need to look for anything we can like philanthropy or whether there's any ability at the state. But I think the scale of what we could face, the federal government probably far outweighs anything that we could get there. So I think one of the key things is to try to work with our delegation to make sure that the worst doesn't happen.
Yeah, absolutely. I mean, just from your standpoint, we want to balance long-term financial health as I mentioned earlier. Yet we still need to improve public services and economic opportunity. Where do you see our city going with our public services and economic opportunity with all these potential changes that are happening?
Yeah. I mean, I think we still have to -- we still have to make the crucial investments. We still have to make sure -- we've been seeing increases in public safety. We have to make sure that continues. And seeing the city get cleaner, we have to make sure that continues. To continue to look for ways to increase economic opportunity, I think that's what you're saying. We have to make sure all that still happens in the face of the uncertainty we're facing.
Thank you. And I have my last question and then we'll bring up Marisa Waxman from PICA. Have we, Rob, done an internal analysis for efficiencies in terms of just how we spend money as a government, like not an outside person such as a controller but within our own purview of the administration just to kind of look at how we go about spending our dollars to save dollars?
Yep. And it's an ongoing thing, everything from looking at what people buy for events, like we're not buying 100 pineapples for example or everything is kind of done responsibly. Part of our budget review is working through with every department looking at how they spend their money and make sure that it makes sense, so it's an ongoing process. So I think the answer is, yes, we do that --
Through the budget process we find economies of scale sometimes. So we find like multiple departments will maybe be working on communications or what have you and we are in a position to make those connections on behalf of folks. And so, that's one of the things we look for.
All right. Thank you very much. Any other questions from members? Councilwoman Katherine Gilmore Richardson, Majority Leader.
Yes. Thank you. Thank you very much, Mr. President. I apologize. I wanted to come back around and be mindful and thoughtful of my colleagues. But one thing I wanted to talk about that we've noticed and particularly with the increase of some of the spending that we've had to do this year for obvious reasons is that our spending continues to outpace our collection and we know that that's not a sustainable practice forever going forward. And so, one, I heard the President talk about how you all are looking for cost-saving measures internally. But I wanted to go back to something that was brought up in the past administration, something that I think Montgomery County was able to do very well. You know where I'm going with this. And you all have implemented program-based budgeting, right, but have not really achieved real savings as a result of that implementation. So is there any thinking around implementing a zero-based budgeting model for the City that we kind of start from zero, start from scratch to try to get us in a better place around spending? Because I mean it's like you said, it's like having your own house. If I only have $10,000 a month and I'm spending 12, I'm short 2 every month. And so, what are we doing about that?
So I do think that our budgeting process, the performance-based budget, does give us a good idea of what we get for what we spend and whether that investment makes sense. I think zero-based budgeting is a -- I think we would need to significantly ramp up our administrative capabilities to do that.
Right. And you know I brought this up in the past.
But I think over time we are spending much more than what we have in previous years, and we know the staffing allowances and the vacancies that we have and the need to address over time and all of those things. But with the real realities that we face over the next three to four years, I think it's incumbent upon us to do all that we can to reduce the overspending so that we're in a better space.
And I think that is something we can do given the budget process we use now.
Okay. And then if you could give me a written response on what it would take to move us from our current budgeting model to a complete zero-based budgeting model for the City, that would be helpful.
And what it would take from a staffing perspective so that we can see that from a staffing perspective, so that we can see that if from a staffing perspective it even has a return on investment.
Yes, and even whether we have the ability to hire that many people.
Thank you, Majority Leader. The Chair recognizes Councilmember Quetcy Lozada.
I just have one really quick question, and I'm responding to some of the concerns that we are experiencing in the District as it relates to some of our, I guess, water infrastructure or the pipes in the city of Philadelphia. I have in my District about to sinkholes. And so, 5 considering that some of the 6 infrastructure in the city is so 7 antiquated, are we prepared to 8 respond to the growing number of 9 sinkholes that we're seeing in I'm 10 sure it's not just in the 7th 11 Council District but across the 12 city of Philadelphia, understanding 13 that some of that money comes from 14 the federal government? Are we 15 prepared to respond to some of those issues that we're going to see over not just the winter months but of course entering into the summer? Are we prepared for that?
Yeah. And so, I know Water has substantial capital investments that they have planned over time. I do think there are some federal matches for that. So I think that is probably one of the uncertainties we face, is what that federal funding looks like going forward. So I agree with you it's really important to be able to make that investment and to avoid having what is happening with sinkholes.
I have to get back to you. I have to kind of talk to Water about it, but it's a substantial amount.
Thank you, Member Lozada. Are there other questions for this panel? (No response.)
Thank you very much for your time, Rob and Sabrina.
Thank you very much. Will the Clerk please call the next panelist.
Marisa Waxman, Executive Director of PICA. (Witness approached Witness table.)
Just state your name and title for the record and please begin your testimony.
Great. Good afternoon, Council President Johnson and members of the Council's Committee on Fiscal Stability and Intergovernmental Cooperation. My name is Marisa Goren Waxman. I'm the Executive Director of the Pennsylvania Intergovernmental Cooperation Authority, also known as PICA. PICA is grateful to this Committee for convening today to provide an opportunity to highlight the need for the City to maintain and enhance its financial condition. As you know, this is why PICA exists. In the early 1990s, the City of Philadelphia was on the brink of bankruptcy. Revenues fell short of projections. The City didn't have cash to pay for its operations and no one would lend it any money. Local- and state-level stakeholders rallied and cooperated to address the fiscal crisis, and the Pennsylvania legislature passed the PICA Act to bolster Philadelphia's fiscal condition and restore access to capital markets. The passage of the PICA Act also created PICA as an independent state authority with a bipartisan board that assists Philadelphia in solving financial and budgetary problems and helping it achieve and maintain access to capital markets. Today a large part of PICA's work is reviewing and approving the City's five-year financial plan and monitoring the City's finances to ensure that the City sticks to that plan. This cooperative approach has been working. Revenues have increased, improved. Fiscal and budgetary practices have been put into place. The City's bond ratings have improved, and fund balances have generally grown. But ongoing fiscal stability is not insured. Local decisions, changes in the economy and policy choices at other levels of government can either improve or undercut the City's fiscal condition. It's important to remember that we don't just want fiscal stability to get a good bond rating or an award from the Government Finance Officers Association. Maintaining and enhancing our fiscal condition means that Philadelphia can predictably provide critical services to residents, be ready for the unexpected, whether it's a mega snowstorm or Super Bowl parade and avoid overburdening its taxpayers at the same time. PICA's the City's fiscal lifeguard. If the City is in real fiscal distress, we dive into the pool and use all of the tools at our disposal to ensure the City doesn't go under. Much of the time when things are going well financially, we're just watchful, scanning the pool for potential danger either from outside like an oncoming storm or from within the pool like imbalanced pool chemicals or horseplay that could turn dangerous. We issue reminders to brush up on your breaststroke, have flotation devices available and be aware of upcoming weather conditions. Over the past month, there have been announced changes from the federal government that may have a material impact on the City of Philadelphia's finances. Changes to the nature and level federal grants directly to the City may have an impact on service delivery and infrastructure investments. Changes in grants to organizations and institutions across our region may also impact social services, cultural offerings and more. Loss of jobs at those organizations or Philadelphia-based federal employees would have a negative impact on Philadelphia's tax collections. Policy changes related to tariffs could raise costs for items that the City purchases, requiring more funds or scale back projects. Many of the proposed changes are not entirely clear, face legal challenges, and this creates fiscal uncertainty as the City manages its current year budget and develops the FY26-30 plan. PICA uses a group of nine indicators to monitor the City's fiscal condition. Although a single data point can reveal if a city's in distress like a negative fund balance, assessing relative fiscal health in Philadelphia's trajectory requires more varied inputs. These indicators are grouped in five categories: Debt, fiscal management, pension, reserves and revenues.
While for most of the indicators, they're not specific targets or thresholds that are legally mandated or universally identified as correct, PICA has identified thresholds to categorize whether the City's performance raises minimal, moderate or significant concern. As PICA's entire reason for existing is to maintain and enhance the City's fiscal stability, we'll always have at least minimal concern about any indicator. When PICA reviewed the FY25-29 plan last summer, it had minimal concerns about three of the measures, the City's credit rating, wage tax collections as a percent of estimates and the change in tax and local government, nontax revenue collections. PICA had moderate concern about one indicator related to debt, long-term obligations as a share of General Fund spending. There were five measures however at levels raising significant concerns for Philadelphia's financial health. That was the operating surplus or deficit as a percent of revenues, the percent of the pension funded, the change in fund balance, fund balance as a percent of revenues and total reserves for unanticipated conditions. The City's FY25 Q2 Quarterly City Manager's Report released on February 18th offers more recent data for some of the fiscal indicators in FY25. The City's updated projections show a significantly larger operating deficit in FY25 than presented in the FY25-29 plan. The Q2 QCMR shows a small reduction in revenues and a large increase in spending. Initially, the City planned to spend 96 million more than it collected in FY25. That has been updated to 395 million. While this is possible due to the larger than projected FY24 fund balance, the City cannot spend more than it collects indefinitely. The City's Q2 projections show a small increase in fund balance over the adopted Five-Year Plan with an additional 16 million raising the expected FY25 fund balance to 584 million. This is a small positive step, but the level of fund balance remains well below recommended levels. And given that the FY24 fund balance was significantly higher than presented in the FY25-29 plan, there's now a larger percentage decline from the prior year to the next. Ideally, fund balances would grow each year, at least until the City can achieve more reasonable levels of reserves. The City has made tremendous improvements in its fiscal condition since the crisis that precipitated the creation of PICA in the early 1990s. In the past five years, the state has had notable successes, including navigating the economic and operational challenges of a global pandemic, while maintaining positive fund balances, achieving its highest credit rating in more than four decades, depositing funds in the Budget Stabilization Reserve for the first time and making subsequent deposits, progressing towards a fully-funded Pension Fund and making the final payment on the PICA bonds. PICA recognizes and celebrates these achievements and commends successive Mayors and City leadership, City employees, City Council, City unions, Pension Board members and many other stakeholders for this progress. But PICA simultaneously continues to have concerns about the City's fiscal stability. Looking ahead, PICA recommends that the City sustain and expand its efforts to maintain and enhance its fiscal condition, by allocating additional resources for expected and unexpected circumstances. With uncertainty coming from federal funding and policy changes, upcoming labor contracts, continued community needs and other potential challenges, planning for reserves is a prudent step to avoid future fiscal crises. Setting aside more reserves, whether in fund balance, the Budget Stabilization Reserve or other reserves is not without drawbacks.
There are trade-offs with other policy priorities and estimating the correct amount of needed reserves can be challenging, but there are many benefits as well, including less need to reduce spending and services when a crisis hits and potential for improved credit ratings and lower borrowing costs. Improving development of detailed and accurate budgets for planned initiatives is recommended as well. Launching new initiatives and expanding services, apps and comprehensive budgets may expose the City to cost overruns and budget shortfalls. Since the budget was adopted, the City's financial reports indicate the need for significant resources for programs underway that haven't been approved by City Council. 7 million for expanded Fire services, and the report from the first quarter outlined the need for tens of millions or more for contracts for the new wellness centers that had not yet been legislated and aren't reflected in the City's approved FY25-29 plan. PICA also recommends continuing the commitment to achieving 100% funding for the Pension Fund by 2033. If the City stays the course as planned and the Pension Fund is 100% funded by FY33, the City's normal cost will be less than 200 million annually, rather than the nearly 900 million we are paying now each year. At that point, the City will have the flexibility to set aside funds for incremental adjustments to improve the health and safety of the Pension Fund while also freeing up hundreds of millions of dollars in revenue previously dedicated to fixed costs for other priorities. PICA is pleased to continue its support for the City of Philadelphia's financial health and is grateful for the ongoing cooperative relationship with the administration. And as City Council gears up to consider the FY26 budget and the FY26-30 year plan, PICA remains, as Rob suggests, another thought partner and a resource for thinking about the impacts of Philadelphia's fiscal stability. And please remember to sign up for our E-newsletter and follow us on LinkedIn to stay up-to-date on our monitoring and analysis of the City of Philadelphia's fiscal condition. Happy to answer any questions you have and thank you.
Thank you very much. I think you answered a couple of my questions in your summary. I want to get an idea of -- and you pretty much summarized our overall health, right. I think right now you said we're spending more than we're actually collecting. And so, we have to stabilize it as we move forward. I'm going to do this. Councilmember Kathy Gilmore Richardson.
Thank you. Thank you, Council President. And thank you, Marisa. It's so good to see you and thank you for all of your help over the years. I wanted to go to the part of your testimony where you concentrated on the total reserves for unanticipated conditions. And you talked about PICA setting additional benchmarks for the City relative to the total reserves. And so, could you just talk about that a bit more? You know that we worked together so that we can increase the contributions going to the Budget Stabilization Reserve, particularly after COVID. That was a very glaring experience to go through together. So if you could talk about those higher benchmarks. You heard the Administration talk about the Federal Reserve and the money that was set aside in the most recent Mid-year. And so, in light of that updated information can you talk about what you all are thinking about for the total reserves?
Certainly. I'll start -- and thank you, Councilmember -- by noting that the PICA Act, the state legislation, only requires the City to have a positive fund balance in order for the PICA Board to approve the plan, right. So when we're looking to approve the plan, if they've got $0.67 less than the price of a pineapple, whatever it is, that's enough to get PICA's approval. That said, we make recommendations to go higher. The Government Finance Officers Association recommends 17% and PICA isn't particularly, doesn't particularly care that it be definitely all in fund balance or all in the Budget Stabilization Reserve or all in a new federal grants reserve. It's about looking holistically that do we have about two months' worth of revenues or two months' worth of savings because if there's a problem and it's a little bit of a wobble, it can cover it. But really what that level buys us is time to make good, smart, strategic decisions if the scale of the problem is huge, like the loss of all federal funds. We're not going to be able to build up in the near term a $2.8 billion reserve.
But having that 17%, two months' worth of spending, buys us time to be thoughtful and make good decisions.
Okay. Thank you for that. I wanted to make sure I put that on the record. Knowing that -- and I think your testimony talked about this, around the spending. Okay. Could you talk about sort of some of the recommendations that the PICA Board is giving to the City specifically because you talked about having to have the positive fund balance no 9 matter what. But when spending outpaces your revenue collection at some point the buck is going to stop. And so, what has been the recommendation from PICA to the City?
So our clearest recommendation is to get to the point when you're doing a five-year plan, plan to get to structural balance where your revenues each year can more than cover your expenses. And so, that's what we would like to be seeing in the outyears of the plan. Philadelphia has been able to do it in certain years. But projects going forward, I think that it would be smart, sound, fiscal and budgetary practice to develop budgets that expect to have structural balance to them and not rely on fund balance because at some point those won't be there.
Thank you, Madam Leader. Marisa, what specific areas do you believe Council should be paying close attention to in terms of our City's fiscal health from the outside looking in?
So you know I think all of them obviously and I know that you are and we appreciate this hearing today. But I think it's sort of stepping through the basics. One, looking on the revenue side, making sure we understand where we're getting funding from and our expectations match up to reality. Luckily, we found that Philadelphia has a really good track record there but keeping the eye on the ball that the revenue projections are realistic. Once we get to the spending side it's thinking about things like all those fixed costs, what can we do. It's a lot of those you can't change in one year but making the progress on the Pension Fund, being thoughtful about debt issuance and balancing that with pay-as-you-go financing is really important to make sure that we are not locking ourselves into payments, pushing those forward on folks so that there's no flexibility. Really on the spending side it's about maintaining a level of flexibility so that we can make decisions for what the needs are. And then we're PICA. The key thing we care about is maintaining and planning for positive fund balances just so that there's a cushion so that if something unexpected happens, there's the flexibility to make different decisions and the time to make them. We've seen in the city the past year a number of organizations go away, BDT, University of the Arts, that seem not to have time to make different decisions. And that's really what having adequate reserves is about, is either being able to sort of bridge over a minor thing or being able to pivot and make decisions. And so, building flexibility into our financial plans I think is really key.
Can you highlight any particular revenue streams or expenditure categories that are showing concerning trends compared to our projections?
So obviously, as both the Finance Director and I raised today and everyone is thinking about, the federal funds is a significant concern as well as the tax revenue streams that are dependent on those. So coming from our meds and eds, we have always been a city almost insulated from certain economic changes and trends because of our concentration. The meds and eds, that their funding wasn't based on sort of the economy, day-to-day ups-and-downs of the stock market. But right now they really may be much more vulnerable. And I may not get this exactly right, but I believe around $100 million of the wage tax each year comes from federal government employees. And so, there's a real vulnerability for us that we haven't had in the past and that's something that we're looking at and concerned about. And then PICA just did a report looking at the precision of our revenue estimates over the past years. Some of them have been 13 really close on the nose, our wage 14 tax or real estate. But we do have 15 some other taxes that are 16 incredibly volatile that Rob and 17 Sabrina already spoke about today, 18 the Business Income and Receipts 19 Tax and the Realty Transfer Tax. 20 The amusement tax is also pretty volatile, but it tends to depend on how good the teams are and whether or not we get into the playoffs. So if you can control that, that'd be super helpful for the revenue projections.
Yeah. I'm looking for, what is it called, not a three-peat but a two-peat. Okay. Back-to- back. The Chair recognizes Councilmember Anthony Phillips.
Thank you, Council President. All about the two-peat. I just want to ask, you mentioned in your testimony that setting aside more reserves whether in the fund balance, Budget Stabilization Reserve or other reserve is not without drawbacks and you mentioned that it's important that we put more into the reserves. It would be very prudent. Do you have a dollar amount of how much it should be in the reserves every single year?
So as I said, PICA by law is simply looking for a positive fund balance. But we do recommend looking to things like the GFOA, which would right now be in the neighborhood of about $1 billion. So about twice what the City is projecting for its fund balance this year.
So you can't necessarily recommend anything that would make sense --
Well, we recommend aiming towards that GFOA level around 17%. But by law we're not going to hold up the City's financial plan because the state law says it should be positive. But we recommend looking to that 17%, which right now is about $1 billion and is in line with what other jurisdictions do. I know it may sound, you know, we've gotten used to having much thinner fund balances in Philadelphia but that's not normal.
So that's why, you know, I understand $1 billion is the goal, right, but we're not going to meet that goal. But I just was curious, like who would be responsible that would give us a sense of what can we do that would be just as grand?
So one of the things we'll be looking for when we look at the FY26-30 plan when it comes out next month is, is the City even hitting what its internal goal of 6% to 8% in each year of the plan. So that's another, you know, if you think that getting to the 17%, billion dollars, within the next five years is too much of a stretch, another sort of level that we'll be looking at is, is the City hitting that at least 6% to 8% target in each year of the plan.
Okay. And then also, have you looked at other cities that are doing well with their reserve balance or cities that have come out of a circumstance similar to what we're going through right now that we should potentially model?
Yeah. So there are a number of cities that, you know, no two cities are exactly alike. But we do keep an eye and PICA in the past benchmark against other cities. We probably will within the next year. But looking at cities like Las Vegas, you might think those are gamblers. They're not willing to have a lot of money set aside. No, they have over 20%. A number of cities legislate and say that there must be at least a 10% fund balance. Washington, D.C. has -- and obviously their structure is very different, but they have very significant reserves. And so, there are places that we can look to that the demographics are somewhat similar, conditions are always a little bit different, but it's something we can also get back to you with. It's just looking at where are other cities right now and how does Philadelphia stack up so that's something we can certainly look into.
Yeah, that would certainly be very helpful. Yeah, that would be beyond helpful. And I'm just really curious about how do we get the right dollar amount, right, because right now Rob is kind of like overseeing all of it, right. And do we need to make sure we get other people involved, right, to make sure that we're at the right dollar amount because we just want to get this all right. Thank you.
Thank you, Member Phillips. Councilmember Katherine Gilmore Richardson.
Thank you, Mr. President. Marisa, I wanted to just go back to the part where you mentioned the impact of the job loss in the federal government for people who work here in Philadelphia around the wage tax. And you said in total for all of our federal employees it's around $100 million in wage tax that comes to the City. And what is PICA's thinking around the impact that that could have on our budget?
I mean, there's so much uncertainty right now so knowing what the scale is going to be is hard to predict.
You don't know what you don't know right now.
And so, yeah. All of us wish we had a crystal ball and knew how this would shake out, as we talked to colleagues in other cities, turn to our professional organizations that look nationally. But there may be hard challenges ahead, but we don't know yet what those are going to be. And one of the nice things about being at PICA is we're concerned with the fiscal stability but obviously it is the elected leaders. We don't substitute our wisdom for the policy choices and decisions in those places, but we are happy to provide as much analysis and support as you guys navigate upcoming challenges as we can to you.
Sure. I would love to keep up with the federal trend. We actually had a constituent reach out to our office yesterday looking for assistance who was just let go from SSA. So I would love to continue to receive the outside PICA analysis regarding this issue in particular. Thank you.
Thank you very much, Majority Leader. Are there any other questions from members of the Committee? (No response.)
-- for your hard work and your dedication. Welcome back to City Council. And with that being said, if there are no other questions, comments or witnesses for this Committee, this concludes the hearing on Resolution No. 11 240886. And I want to sincerely thank everybody for taking time out of your schedule and being here at this hearing. Thank you very much. (Committee on Fiscal Stability and Intergovernmental Cooperation adjourned at 1:06 p.m.) - - C E R T I F I C A T I O N I, hereby certify that the proceedings and evidence noted are contained fully and accurately in the stenographic notes taken by me in the foregoing matter, and that this is a correct transcript of the same. __________________________________ TANEHA CARROLL