COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE COMMITTEE ON FINANCE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, October 24, 2001 10:15 a.m. - - - BILL 010492 - Creation of a Rainy Day Fund. BILL 010508 - Amending Section 19-1303(4) of Philadelphia Code, entitled "Authorization to Offer Exemption From Real-estate Taxes on New Construction of Residential Properties." BILL 010541 - Amending Chapter 19-2600 of Philadelphia Code, entitled "Business Privilege Taxes." (Full text of all ordinances attached hereto.) PRESENT: Councilwoman Jannie L. Blackwell, Chair Councilman David Cohen Councilman Frank DiCicco Councilman W. Wilson Goode, Jr. Councilman James F. Kenney Councilman Brian J. O'Neill Councilman Frank Rizzo Councilwoman Marian B. Tasco Council President Anna C. Verna - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 10/24/01 FINANCE COMMITTEE MEETING I N D E X WITNESS BILL 010492 Councilman James A. Kenney...................... City Controller Jonathon Saidel................. Charles Pizzi, Philadelphia Chamber of Commerce 49 Joseph Vignola, PICA............................ 63 Rob Dubow, Budget Director...................... 84 BILL 010508 Charles Pizzi, Philadelphia Chamber of Commerce 51 David Glancy, Board of Revision of Taxes........110 Diane Lucidi....................................115 Greater Philadelphia Association of Realtors Barbara Capozzi, S. Philadelphia Realtor........116 Nancy Kammerdiener, Revenue Commissioner........117 BILL 010504 Charles Pizzi, Philadelphia Chamber of Commerce 54 Rick Sauer, Executive Director..................128 Philadelphia Association of CDCs 3 10/24/01 FINANCE - BILL 010492
Good morning. Good morning. We'll begin our finance hearing with regard to three bills: Bill No. 010492, 010508 and 010541. For the purposes of a quorum, I have to my right Councilman James Kenney; to his right, Councilman W. Wilson Goode, Jr; I'm Jannie Blackwell, chair of the committee; and Councilman Frank DiCicco. So we do have a quorum for the record. Others will be here as well. We will ask the clerk this morning to read the titles of all bills because some individuals will be testifying on all three, so all three will be read into the records. Will the clerk please do that.
Bill No. 010492, an ordinance 18 amending Title of the Philadelphia Code entitled, 19 "Finance, Taxes and Collections," by creating a Rainy Day Fund to cushion the impact of unanticipated declines in the City revenues, providing for the circumstances under which City monies must be deposited into the Rainy Day Fund and the circumstances under which expenditures may be made from the Rainy Day Fund, and providing for the 4 10/24/01 FINANCE - BILL 010492 custody and management of the Rainy Day Fund, all under certain terms and conditions. Bill No. 010508, an ordinance amending Section 19-1303(4) of the Philadelphia Code, entitled "Authorization to Offer Exemption From Real-estate Taxes on New Construction of Residential Properties," by expanding the time to make an application for an exemption, under certain terms and conditions. Bill No. 010541, an ordinance amending Chapter 19-2600 of the Philadelphia Code, entitled "Business Privilege Taxes," by establishing a pilot program under which a credit against business privilege taxes will be given to certain businesses that contribute monies to community development corporations undertaking economic development activities within the City of Philadelphia, all under certain terms and conditions.
Thank you very much. We will ask our City Controller, Jonathon Saidel, to come to the witness table and to prepare to make his testimony after we hear an opening statement from Councilman James Kenney with regard 5 10/24/01 FINANCE - BILL 010492 to Bill No. 010492.
Thank you, Madam Chair. I'd like to take the opportunity to thank the majority leader for scheduling this hearing, and I want to thank you all for coming today. First, I would like to quickly explain how this bill would work if enacted, and then I would like to explain why I think this bill should be voted out of committee today or as soon as possible. If this bill passes, each November, the Finance Director would deposit into a segregated Rainy Day Fund 50 percent of the previous fiscal year's unanticipated revenues, as well as percent 16 of the General Fund balance from the end of that 17 fiscal year. This will continue every year that 18 there is a surplus or unanticipated revenues the 19 until fund exceeds 5 percent of the City's average 20 annual revenues. 21 Expenditures from the Rainy Day Fund would 22 only be allowed if the City is under severe economic 23 distress if PICA certifies that the City has had two 24 consecutive quarters of job loss or that revenues 25 received are down at least percent compared to the 6 1 10/24/01 FINANCE - BILL 010492 previous year. As the charter requires, the Administration and Council could then make an appropriation from the Rainy Day Fund only through the annual operating budget ordinance if also approved by two-thirds vote of the Council. Please note, this Rainy Day Fund would only receive deposits if there are unanticipated funds, and would never take funds away from any City services, any current operating budget. Money only goes into the fund after all City service needs in the budget are met. This bill is a culmination of a great deal of work on the part of my staff, PICA, the Controller's Office, and Council technical staff, and is the result of the recommendations made at a hearing held this past January. At that hearing, many officials urged the City to establish such a fund, including Pennsylvania Treasurer Barbara Hafer, Pennsylvania Budget Director Bob Bittenbender, and various bond rating agency officials. The City is experiencing a serious economic downturn currently. A decade ago, during the last recession, our finances were in such bad 7 10/24/01 FINANCE - BILL 010492 shape that we couldn't sell our bonds. If we had started properly saving back in the '70s and '80s, we could have, instead, prevented the ensuing service cuts, tax increases, and increased debt. If we start now -- and it's never too late -- the City can prevent the future fiscal problems of tomorrow while improving our bond rating and earning interest for more aggressive investment. Thank you for your time and for your consideration of this issue. On behalf of the chairman, I'd like to welcome our controller, Jonathon Saidel. Please identify yourself for the record.
Thank you. Thank you, Mr. Controller, for coming and we certainly welcome your testimony. Please begin.
Thank you, Madam Chair. I come before you today to offer testimony on Bill No. 010492, which would establish a Rainy Day Fund for the City of Philadelphia. I applaud Councilman Kenney and City Council as a whole for 8 10/24/01 FINANCE - BILL 010492 focusing on this important subject. As you know, I have long advocated for the establishment of a Rainy Day Fund in Philadelphia. It is gratifying to see City Council and so many other supporters pushing towards this worthy goal. The very notion that I come before you today to talk about setting aside surplus funds in the time of plenty speaks to how far we have come in the City in recent years. As you know, we are only a decade removed from the very dark fiscal days. Now we can use the opportunity afforded us by years of economic growth to make a structural change in our budgetary system so that we can avoid crisis in the future. If we do not fix the problems of today, we will never be able to achieve vision for a better tomorrow. While Philadelphia currently enjoys a positive fund balance, the product of years of plenty, we can already see that recession and decline will come as part of the normal fluctuations of the business cycle. The development and production of spring fades into the inevitable winter. Our budget must be prepared for these changes. We can create financial mechanisms to hold 9 10/24/01 FINANCE - BILL 010492 down spending when revenue exceeds expectations and to save money to fund expenditures during economic downturns. Many states, including the Commonwealth of Pennsylvania, employ Rainy Day Funds or provide reserves to relieve the need to raise taxes or cut spending in times of need and provide a way to cap expenditures in times of plenty. Cities such as San Antonio, Texas, and Baltimore, Maryland, maintain fund balances as a Rainy Day Fund to cushion against fiscal emergencies and recessions. Legally prohibited from carrying forward funds from one fiscal year to the next, New York City employs a budget stabilization account to pledge excess current revenues to meet unforeseen future expenses. I support Bill 010492 and the establishment of a Rainy Day Fund for Philadelphia. The bill would wisely set aside a portion of unanticipated revenues and unspent funds that could only be spent in times of economic decline. Such a device would achieve two desirable goals: First, the Rainy Day Fund would institutionalize the City's current fiscal practice which generates funding for contingencies by holding 10 10/24/01 FINANCE - BILL 010492 agency spending below approved budgetary levels. By formalizing this practice and involving City Council in the process to decide when and how to spend contingency funds, the Rainy Day Fund would add appropriate checks and balances to wise fiscal procedures. Additionally, a Rainy Day Fund would complement efforts to restructure the City's taxes in a way that would improve the City's overall competitiveness. In the very near future, I will release my tax structure analysis reports and recommend significant tax cuts and tax changes. The imposed discipline of a Rainy Day Fund would increase the likelihood that the City will be able to cut its overly burdensome taxes and then meet service demands without budgetary stress. Some may wonder whether it makes sense to talk about setting aside funds for a rainy day when many are worried about the effect that an economic downturn would have on our city and its budget. I answer that we should save whenever possible, we must address our problems today, or we may never be in a position to enjoy a bright tomorrow. A Rainy Day Fund would not take any money away from any City 11 10/24/01 FINANCE - BILL 010492 agency or program. The only way money can be deposited in the fund is if the City generates more money than the budget or if we end the year with a surplus. Simply put, we would only put money into a Rainy Day Fund after meeting our budgeted priorities.
I believe the City should establish a Rainy Day Fund within the Charter-mandated budgetary structure. By creating a Rainy Day Fund, Philadelphia can increase the likelihood that it will be able to sustain an acceptable level of government surpluses over the long run without recurrent need for personnel layoff, service cuts, or tax increases. Such actions would improve the City's long-term economic outlook and improve its image in the eyes of the bond-rating agencies, which could help reduce future borrowing costs. The creation of a permanent Rainy Day Fund would be an excellent addition to Philadelphia elected leadership's growing legacy as fiscally conservative managers. I thank you for your attention on this matter and I applaud your efforts to focus concerns on such an important issue. Thank you. 12 10/24/01 FINANCE - BILL 010492
Thank you very much. Mr. Controller, you mentioned that several cities have been successful in establishing a Rainy Day Fund. Do you know of cities that have had problems on the other hand and what it would take to -- what cause those problems?
I think the bill that is before you now has sufficient procedures. An example would be that -- which is in other cities that two-quarters of downturns and labor employment that there be a variety of ways in which you would ensure that money would not be taken out of the system when there is an economic downturn within their economies, both in San Antonio, Texas, and in Baltimore, Maryland. I think that we overall are the largest city to attempt to do a Rainy Day Fund. That are many states that have a Rainy Day Fund. We all know that the Commonwealth of Pennsylvania has a Rainy Day Fund; though I can only say as the controller of Philadelphia, I wish their definition of when it's raining would be expansive in order to help us here in Philadelphia with our public schools. 13 10/24/01 FINANCE - BILL 010492 But I think that this bill has sufficient parameters upon which a Rainy Day Fund would not be taking money and placing it so that it wouldn't affect our budgetary constraints based upon your passage of the budget in the beginning of the fiscal cycle.
We've also been told that one of the issues with regard to the bill 10 is that monies could only be accessed at certain times and, therefore, if we had some emergency that -- as we had in New York, that the -- we could not access these funds.
It was my understanding that if -- that based upon the language that I read -- again, I think that Councilman Kenney can speak to that -- is that there is language that if there is a catastrophe or a national emergency of some kind, God forbid, as we needed to do when a couple years ago, we had -- you appropriated an additional $15 million in emergency nature because of the tremendous snow that occurred that was not within the budgetary process at the beginning of the year, that Council would have the opportunity to revisit that and take money from the Rainy Day Fund. 14 10/24/01 FINANCE - BILL 010492 If you look at our current budgetary practice now, we do, through accounting mechanisms, effectively reduce the surplus based upon the contingency funds that are allowed. What the Rainy Day Fund bill would do is institutionalize that is really, in many cases, the practice that exists today when the contingency fund is set up at the end of the fiscal period, which reduces the surplus.
One final question before I certainly turn the mike over to my colleagues. With the percentages that have been imposed for the unanticipated revenues and the adjusted general funds, what is your position? Are these acceptable for right now, or could we start off with smaller numbers, with the intent to increase later on?
I have never been wedded to percentages, although if you look back on the history of the Rainy Day Fund had been in existence for the last number of years, we could probably have close to $100 million set aside in the Rainy Day Fund today. I am not wedded to percentages of any kind. I think what is important -- for me the primary focus would be the establishment of a Rainy 15 10/24/01 FINANCE - BILL 010492 Day Fund and move forward. I think that Council deserves a latitude that if the numbers in the next couple years are too high, you can certainly change that, and I would leave that to your negotiations with the executive branch as to what would be acceptable percentages. But I think as the bill stands now, you know, 50 percent of unanticipated revenue, since it doesn't affect the operating departments of the citizens of Philadelphia, that in the long run, it would not have an effect upon the services that are deliverable. So I don't find the numbers to be abusive. But, again, during the process, you know, if you find it in your wisdom to lower the numbers based upon your collective agreement, then that's something that I wouldn't stands against, but I think that the numbers today are appropriate numbers as we move forward.
Thank you very much. Councilman Kenney, bill sponsor, and then Councilman Cohen, I believe you had questions as well. 16 10/24/01 FINANCE - BILL 010492
Thank you very much, Madam Chair. Jonathon, from the indicators you've seen so far, what do you believe is the economic outlook for the near and long-term future of the City?
I think, Councilman, that if you look back on the last number of years during the Clinton administration, we were at the greatest economic upturn in the history of our nation; yet Philadelphia still had a loss of jobs and a loss of property value as well as a loss of population. We are a West Belt City: We are the last to feel economic upturn and the first to feel economic downturn. And I believe that we are moving forward towards the constriction of our national economy, and certainly none of us really know what the impact is from the act of war that occurred on September 11th and what effect it will have on our national economy. But I believe that the years of plenty are past and that we will begin a constriction of our economy in the next few years.
Could you elaborate a 17 10/24/01 FINANCE - BILL 010492 little bit on what some concerns people may have relative to viewing this bill because of their experience with Harrisburg in some type of draconian measure, you know, to limit the ability of government to serve the people. Do you believe, as I believe -- and could you expound on it a little bit -- that, in fact, putting this type of money aside during the course of our surplus and unanticipated revenue increases actually protects social services, actually protects basic City services? Because over a period of time, if we have the ability to put this money away and to be able to appropriate it through the Administration, with Council's approval, in a time of economic downturn does that not more than likely assure current or acceptable levels of service in times when, in the past, governments have had to cut back on social services, cut back on fire and police protection, cut back on recreation services? Would not this contingency fund -- say, there were $100 million sitting there today -- ensure current and adequate levels of services in an economic downturn?
Oh, absolutely. I mean, in many cases, use the Commonwealth of Pennsylvania's 18 10/24/01 FINANCE - BILL 010492 Rainy Day Fund as an example of the State's response to us for our additional needs in Philadelphia is that that money is segregated so that their budget during economic downturns does not suffer. Of course, we believe in Philadelphia, many of us, that the level of expenditures of the State for the benefit of the people of Philadelphia is not at the level that we would like it to be, so we believe it's raining in Philadelphia, although it may have clear skies in Harrisburg. You know, that's their position. I do believe that if we would have had a Rainy Day Fund in the '60s and '70s, the problems that we had in 1989 through 1992, where we went into deficit, which was a violation of the current law, would never have happened because we would have had a cushion and, therefore, not would have had to worry and go to the rating agencies almost every week and say that we would pay the bond payments before we meet payroll. We would never had that problem if we had put money away when this city was an engine that rolled and the suburban counties were agrarian in nature, which doesn't exist today. I do believe that if we put money aside in 19 10/24/01 FINANCE - BILL 010492 the Rainy Day Fund today, in the next few years, we may stabilize, but in the long run, there is always an economic downturn because that's the reason why people use the term "economic upturn." If not, everything would just remain the same. And that we need to discipline ourselves, just the way withholding is taken out of our pay to make sure we pay our taxes, and our pension payments are taken out of our pay. It is very difficult to discipline yourself so that you can reach a level of acceptance to put money aside for a downturn in the economy.
What do you believe the impact on the City's bond rating would be if we established and complied with the imposition of a Rainy Day Fund? What do you think the reaction from the rating agencies would be about Philadelphia's creditworthiness?
I think just the history of my relationship with the rating agencies from the time that I've been controller where we -- in the 1990s, we began to institutionalize fiscal constraints and an accounting process based upon State law and the creation of PICA that forced us to be conservative and realistic in our expended 20 10/24/01 FINANCE - BILL 010492 revenues and our expenditures, that ratings improved. I think with a Rainy Day Fund that it will improve even more because we'll show the rating agencies in New York City that we mean business in relationship to being realistic in our budgetary process and realistic in our savings so that there will not be a downturn in services when -- not just if, but when there is a recession. And every time our rating agencies give us an improved rate based upon the volume of bonds that we do, you know, we, over the life expectancy of a bond, save millions of dollars. So the Rainy Day Fund should also be looked at as an economic mechanism to save interest expenses, which, if you float a bond, it's a 25-year bond, your grandchildren end up paying for, and so it will save money them money in the future too.
Could you explain for me the historical significance and use of the contingency line item? What is it, who created it, and why is it there, in your opinion?
Well, it's a ... the contingency line item began with Mayor Rendell and 21 10/24/01 FINANCE - BILL 010492 his administration, which was effectively to set aside a line that the Rendell Administration believed money should be segregated for unknown contingencies and unforeseen contingencies in the future planning of the Five-Year Plan of the City of Philadelphia. It is effectively a unauthorized and -- an unauthorized Rainy Day Fund. Thank you for the question. (Laughter.)
It's a creative accounting and setting up unauthorized Rainy Day Fund. What your bill will do, if passed by the Commerce Committee, is effectively institutionalize and set up a procedure that the number is not based upon what the Finance Director feels or the Mayor feels is a number that they can live with, but set up percentages so that there is consistency as we move forward.
Thank you. Finally, one of the ancillary positive fallouts, I believe, of this bill is a tighter 22 10/24/01 FINANCE - BILL 010492 budgeting process. It's been my experience here that budgets are often not exactly the tightest documents in the world and there's a lot of wiggle room, so to speak, when it comes to the budgeting of what we anticipate revenues to be. And the past administrations, and perhaps this current administration, use that process to kind of underestimate what some of the revenues are or anticipated to be; and, therefore, when they come in above, it looks quite nice and it's a, you know, a much -- a pleasant surprise, so to speak. I've always found that budgets should be more of a tool of government, not simply a way to make the government look better at the end of the fiscal year. And do you believe that the establishment of this fund, especially with the provision of 50 percent of the unanticipated revenues, which would be certified, I guess, quarterly by PICA, would create a necessity for this administration and future administrations to budget much tighter?
You know, I believe it will, Councilman. The history of the budget in the City of Philadelphia from the 1950s onward till the 23 10/24/01 FINANCE - BILL 010492 crisis that occurred a number of years ago was that they were expenditure-driven, and in many cases, the revenue estimates were plugged into what we wanted the expenditures to be, which is not -- is not the way anyone who took first-year accounting would do fund accounting for the City of Philadelphia. But with the creation of the legislation that occurred in the early 1990s, our government was forced to do a Five-Year Plan and to set up constraints as to what the revenue projection would be based upon a percentage of the year before the money that we list for -- money that would be received from the State government had to be money either that we were told was in the preliminary budget to be passed by the current-year budget in Harrisburg or the number that we received from the year before. So conservative numbers have been in place. I'd always rather see governments have conservative revenue estimates rather than overly optimistic revenue estimates. There is in the last couple years, and certainly as we move forward at the end of this fiscal period, unanticipated revenue growth when -- and, to tell you the truth, many of the numbers are 24 10/24/01 FINANCE - BILL 010492 higher than I anticipated, which is fine, but that we may end up having unanticipated revenue decline the next year. But I think that the Rainy Day Fund, since it's using a percentage of funds not anticipated and, therefore, not part of your budgetary process, would have no effect upon the budgetary procedures that exist within our government today because we are attempting now to budget based upon the services and the definition of what those expenditures are, i think, in a much more conservative manner than ever done before.
As a sideline to that, we're going to hear testimony from the Administration's Chief of Staff that one of the major flaws they believe in the bill is it is structured in a way that would encourage administrations to inflate the revenue projections. What is your opinion on that position?
Well, I think if you inflate revenue projections in order to avoid a Rainy Day Fund, you effectively have a dishonest budget. And if you inflate revenue projections and as we move forward on a quarterly basis, we find that those 25 10/24/01 FINANCE - BILL 010492 revenue projections do not materialize, then they need to be adjusted before we get to the end of the fiscal period, which means that the budgets of the different operating departments and societal needs and the service we provide would then have to be constricted. So I do not believe that the response should be, by any administration, to artificially inflate revenue projections because of the fact that they don't want to put money in the Rainy Day Fund. And if they inflate the revenue projections and those are the numbers that come in, then that should have been the number that should have been used anyway and that there's a problem in the process of doing revenue projections.
Do you believe that PICA could play a role and the Controller's Office could play a role in any administration intentionally inflating revenue projections to avoid the Rainy Day Fund?
Absolutely. I think an intentional misleading based upon public documents that are presented for the future citizens of Philadelphia to understand the level upon which 10/24/01 FINANCE - BILL 010492 those services will be provided and the income stream that will provide those services, if they are artificially produced, I think it's against the foundation of a free and democratic society. And certainly I -- and I know PICA -- would be adamant on making sure that the system is in place, that the revenue projections are conservative in nature but also realistic in nature at the same time.
Well, as you review the bill, do you have an opinion on the conditions for withdrawal? Do you believe they're restrictive, that they're fair, that they're too lax? What is your opinion on withdrawal?
No, I think the restrictions are fair. I think that, you know, there is always a balancing approach to any of these types of bills. You have to have an opportunity, if there is an emergency as, God forbid, there was an emergency in New York, that we wouldn't have a Rainy Day Fund but utilize whatever we had for the people of our city, but I also think you don't need it to be broad enough where, effectively, your Rainy Day Fund is merely a passbook where people can just keep dipping into it. 27 10/24/01 FINANCE - BILL 010492 So I think your bill and the Commerce's bill is effectively balanced in its approach because, in this case, you have to be balanced because you don't really know what's going to happen in the future.
Thank you, Madam Chair. Mr. Controller, you know how highly I regard you and your office, and it's always been a pleasure to work with you, and I respect your opinions very much. Having now dispensed with the niceties, let me deal with the realities.
Excuse me, Councilman. I neglected to note that Councilman Cohen is here, Councilman Frank DiCicco, and Councilman Frank Rizzo. Thank you all.
It seems to me that the Rainy Day Fund is like one of these new contraptions 28 10/24/01 FINANCE - BILL 010492 like term limits that comes in somehow because people don't trust government officials, that somehow technocracy and fiscal conservatism are going to save the day from wild people who believe that government has a responsibility to make life better for people. It strikes me that the Rainy Day Fund is another device that, if it has any impact, will probably have the wrongful impact, as Rudy Giuliani learned in New York. He was the foremost advocate of term limits and then he found that he didn't like term limits at a certain point, and it stopped him. I think the Rainy Day Fund is kind of a gimmick and it's aimed at reducing the amount of money for fear that government people might, in a bad exercise of judgment, pass good legislation on behalf of people. And so I believe that that's where this Rainy Day Fund falls in. There will always be money for economic stimulus no matter what the circumstances are, but the Rainy Day Fund will always be used to take money away to make it unavailable. When we need to expand the health centers, when we need more money for schools, when we need more money for housing, the 29 10/24/01 FINANCE - BILL 010492 Rainy Day Fund is going to, you know, act like a very tight vise around the funding. I appreciate everything you said in your statement, but I really think that it's just a kind of gimmick, just like term limit, to try to take away the power of the people in making decisions as to who ought to represent them. I think this is aimed at constraining public officials from establishing that government exists by and for the people. What is your comment, sir? And one another thing maybe you can address. Did I note in your statement the phrase "fiscal conservatism"? In one of the statements -- I thought it was yours, I'm not sure, and I was very surprised.
I probably mean "realistic." I use "fiscal conservative" as "realistic," not any relationship to what goes on in Harrisburg or Washington.
Thank you. I'm glad to see you're here, Councilman Cohen. I thank you for the 30 10/24/01 FINANCE - BILL 010492 complements. Anytime you begin with a complement, I know that I'm going to be --
I think there was always an argument that we believe that the current level of support for the people of Philadelphia is inadequate, but I think that the Rainy Day Fund would only be operational if next year that we thought that there would be a $200 million increase in revenue stream and that Council and the Mayor believed that that $200 million needed to be spent on health centers, on roads, on potholes, on a transfer to the school system, that that would be incorporated within our current budget and, therefore, there would be no surplus, and there was no exaggerated or unusual blip in the revenue stream that went well beyond what we had anticipated based upon economic forecasts, then the Rainy Day Fund, as the bill indicates, and the bill sits forward, would have no impact upon the expenditures that I know that you for your life have been worried about to service the people of Philadelphia. But if the budget is set up properly, 31 10/24/01 FINANCE - BILL 010492 which it always must be, and you wanted to increase if we felt that there was revenue for it, additional expenditures that you felt were needed and Council felt were needed for service for the people of Philadelphia, the Rainy Day Fund would have no 7 impact. If there was a -- if all of the expenditures equalled all of the revenue for a particular year, there would be no surplus, there would be no money put in the Rainy Day Fund. If there was no unanticipated exaggeration and blip in the screen in revenue that comes in, which was not being used in the current budget, there would be no 15 Rainy Day Fund payment. Right now, if you look at your budgets carefully, you have a contingency number that's placed in there by the last two administrations. That effectively is an unauthorized Rainy Day Fund.
Well, isn't it true that in the life of government, like in the life of businesses, in addition to unanticipated revenues, there are always unanticipated deficits as well.
And that kind of over a 32 10/24/01 FINANCE - BILL 010492 period of time, they frequently tend to balance each other out. And whatever techniques you use, the fact is that surpluses that seem to be large and permanent disappear, as is currently the situation with the federal deficits. Isn't it likely that in Philadelphia -- we haven't seen any statements yet, but I expect that we have felt the terrible impacts from September 11th --
And I'm just suggesting that I think we're playing with the kind of toy that's got one aim and one aim only, and that is to limit in some fashion, even if it's an imperfect limit, the ability of legislators and executives -- the Mayor and the City Council -- to limit their ability to make the judgments that they were elected to make, how to spend the money available for the best purposes.
Could I just -- since 33 10/24/01 FINANCE - BILL 010492 this is my "toy," so to speak, I'd just like to comment that the intention of this bill -- well, you termed it as a "toy," so I wanted to make sure that -- it's certainly not -- I did not view this bill as a toy. I just wanted to --
Well, you said "toy," and I just wanted to make sure you understood my --
I understand. I just want the Controller to explain again for the record -- perhaps the Councilman didn't hear him -- that this has nothing to do with taking money away from -- limiting the budgetary ability of this administration or this Council to budget what they think is appropriate for levels of services in every area of government service throughout the City. Let me give you an example of what I think this is in common person's terms. I am not a gambler, and I don't go to the casino, but I know people who do go. And if you go to the casino on a trip with $100 in your pocket and you play the slot machine and all of a sudden, you hit three bars and you win $100, you take $75 of that 100 and you put 34 10/24/01 FINANCE - BILL 010492 it in your pocket to make sure you can eat and get a ride home when you finally go bust. So at least $75 out of that 100 is sitting in your pocket as a contingency in case you have an economic downturn by losing all of your money in the slot machine at the casino. All I'm saying is that this is not an effort to take away or limit the ability to budget. The Mayor sends a budget, we approve the budget, we change that budget; whatever that budget is, it is. But during the course of the year, as the fiscal quarters go forward, we find out that we have more money coming in than we thought we had, and instead of taking that money and throwing it totally into the General Fund, we take it and put it into a segregated account for safety purposes. What that does, as I say, as I understand the Controller's testimony, is it gives bond-rating agencies and other governmental entities some confidence that we have a cushion in the event that we have a downturn. This is in no effort a way to constrict the government or constrict the Administration or constrict the Council on any budgeting effort or in any levels of service to the 35 10/24/01 FINANCE - BILL 010492 citizens of the City; it's just money that we didn't think was coming in, all of a sudden for some reason came in, and we're going to take a portion of it, not all of it, and put it away for a rainy day.
Of course, that argument, I think, is a facetious argument.
We have a budget, we have a budget, and you never get the money for each specific item, you never get as much as you want. We want trees pruned in Philadelphia; the amount that's budgeted each year is a tiny fraction of what's needed. We have passed bills in Council to provide for the repaving of driveways in the back and retaining walls; what's been (indiscernible)so far is zero because it's said we don't have the money for it but we'll have the money for a rainy fund? To me, that's sheer nonsense. The purpose of this bill, it seems to me clearly, is to take away from the legislative body and from the executive the power that they were elected to carry out, and that is, if there's more money, maybe we can begin -- maybe we can begin to 36 10/24/01 FINANCE - BILL 010492 appropriate more sensible amounts of money for things that are desperately needed. Now, I asked you a question while Councilman Kenney interrupted, so I would like if you would go back to that question and reply.
Okay. As far as I remember it, the -- let me give you an example. If there are $3 billion worth of revenue that is anticipated coming in for a 12-month period and Council and the Mayor see fit to spend all 3 billion in the budgetary process, then there's no surplus, there's no money put away for a rainy day. If the $3 billion that's generated is equivalent to the revenue that comes in, then there's no unanticipated revenue growth; and, therefore, there's no 17 percentage of any money -- 'cause the money doesn't exist, no money is placed in a Rainy Day Fund. So if the budget is equal, in essence, there's no money put aside for a Rainy Day Fund. If the revenue estimates are equal to the money that comes in, then there's no Rainy Day Fund money put away. If there's a deficit, there's no money put away. We're not supposed to be a deficit anyway, but there's no money put away. 37 10/24/01 FINANCE - BILL 010492 I think that to me, the Rainy Day Fund is equivalent to withholding that is taken out of our pay. In the beginning, when income tax was set up, there was no withholding. The government thought that everyone would pay their taxes on April 15th. No one paid their taxes on April 15th 'cause they spent the money during the year -- certainly on the necessities of life. But now we withhold, the same way we withhold our pension contribution to the Pension Board, because none of us are disciplined enough to -- I know I'm not -- to not spend the money on my four children, and then April 14th, have to give them $10,000 to put in for my retirement. The way the system set up, if the budget is actual, realistic, it will not have any effect upon spending levels unless there's unanticipated revenue growth or there's a surplus that's created that was not intended.
Well, if the Rainy Day Fund ever had any impact, I think it might be if it were a momentary shower, but if it were really a rain storm, you'd find the Rainy Day Fund wouldn't be there, it wouldn't be very much money, it would be of little use, it would create a false sense of security. It would be a means by 38 10/24/01 FINANCE - BILL 010492 which, instead of government taking significant steps to deal with real live facts as to the need for taxation, of the need for expenditures, instead of that, the Rainy Day Fund would always be an excuse, we have a reserve. But what I would like to see, Mr. Controller, is an analysis. Take a five-year period before we ran into the fiscal problems you referred to before in the days of Mayor Goode. I would like to know, if this bill had been in effect for the five years prior to that time, what would have been the impact on dealing with the circumstances as they developed in Mayor Goode's administration? I've seen nothing good come from the Rainy Day Fund in Harrisburg. It hasn't been used for the good of the people; it's just been an idle fund most of the time or been used for special purposes of the governor for a particular slush fund of some kind or other. I have all kinds of questions.
I can only tell you that I would never equate the leadership in Philadelphia with the disciplining leadership that I've seen in Harrisburg for the last number of years. So I think 39 10/24/01 FINANCE - BILL 010492 that as long as we have effective people like yourself and the people that are in front of me and a budgetary process that is realistic, that the money that is set aside in the Rainy Day Fund has no 6 impact upon the services that you believe, based upon your approval of the budget, need to be done for the 12-year period that that budget covers. Bit I would not equate the problems that we have had in Harrisburg with a lack of leadership with the leadership of the members of City Council in this city for the last eight years.
Well, your answer's very tactful, and we thank you for it.
But would it be possible to get that kind of an analysis as I've suggested? Could we go back over all of the fiscal records that are available and tell us what would have happened during the days of the economic problems you referred to do if there had been a Rainy Day Fund in existence the prior five years, a Rainy Day Fund based on the premises --
I am not the sponsor of the bill, but I will certainly acquiesce and I will have 40 10/24/01 FINANCE - BILL 010492 my office look back on whatever period of time you want. I don't know if I have the numbers as to what the unanticipated revenue growth was for those periods, but I could certainly tell you if there was a surplus. Don't forget, our books were a little different in the old days as compared to the way they're structured now.
Wasn't there a major factor in the economic difficulties that existed during Mayor Goode's administration -- when Wall Street -- and when I say "Wall Street," I mean in general the combination of all of the stock brokerage houses, the rating agencies, and so forth -- decided that without Philadelphia ever having been in default, that Philadelphia bonds were risky, that instead of considering Philadelphia's situation from the viewpoint of the fact that it had never once defaulted, that one way or another, it had always met its obligations. Wall Street, as I defined, it arbitrarily decided that Philadelphia was a bad risk. Wasn't that a major component of why we were in difficulty during Mayor Goode's 41 10/24/01 FINANCE - BILL 010492 administration on funds?
No, I think -- it would take me a long time to answer that question properly. But based upon my experience with the rating agencies in the early 1990s, many of the problems that governments in the past before Wilson Goode, Mayor Goode, had not dealt with came to fruition during the real-estate tax dramatic decline in the late '80s and what were irresponsible budgets for the last 50 years; all of that came together. And the forecasting that we had of our cash payments in many cases did not show that we could meet our current obligations and would become insolvent. With the creation of PICA, the Rendell Administration took advantage, they bonded out the deficit, which was not an available mechanism by Mayor Goode at the time. If he would have had the same opportunities that the PICA legislation created years before, I don't believe we would have been in the crisis that we were at that point. But I don't think that the rating agencies and the dramatic decline in our rate was arbitrary because I think we contributed to the fact that we deserved the decline because we could not secure and 42 10/24/01 FINANCE - BILL 010492 guarantee that we would meet all of our obligations in a timely manner. And if that happens, then we would have been insolvent and we would have been down to junk bond status, and the State could have had an opportunity to take us over.
All right. I think I -- I won't follow up with that with you, but i will save the rest of that part of the question for Mr. Vignola. But it's always been my judgment that Mayor Goode was given an unhappy rating unjustifiably, that the actions of Wall Street at that time were in direct opposition to every standard that it had ever applied previously. I'll let Mr. Vignola deal with the rest of --
I can only tell you that that's not correct, but I can also tell you that Mayor Goode was unjustifiably criticized because of problems that he did not create that came to roost in his backyard during the latter part of his administration during his second term, which really were created by irresponsibility in government both on a city, state, and federal level for a long period of time, long before I even started in public 43 10/24/01 FINANCE - BILL 010492 schools.
Well, let me finish as I started. Sometimes it seems to me your office's audit is the only beacon of light we have on financial matters in the City.
And I thank you very much personally for that. Thank you, Madam Chair.
Certainly. Before you do, Councilman, let me note that Councilwoman Marian Tasco, Vice Chair, is here also. Thank you.
Just one follow-up, and I know your staff is going to do its best to --
I'm sorry. We did not mention the President earlier. Thank you Mr. Pizzi. But our president is here, Anna Verna. Thank you.
Thank you, Madam 44 10/24/01 FINANCE - BILL 010492 Chair. Just one follow-up relative to Councilman Cohen's request for the staff to try to cull through the information back in the '80s to determine what would have been in a Rainy Day Fund. You do have the information that what we would have in a Rainy Day Fund, if we had established one in 1990, and you had testified earlier that that amount would be about $100 million?
Would that $100 million be available, as we speak today, to help fund some of the problems facing the Philadelphia School District?
I believe that those funds would have been available based upon the downturn of the economy for whatever the leadership of Council and yourself included and all members of Council as well as the Mayor thought would --
And is it in fact true that we are currently in two consecutive quarters of job -- Councilman, I'm -- Councilman, I just want to make sure -- this is part of what your question was and I want to make sure that you hear the answer. 45 10/24/01 FINANCE - BILL 010492 The Controller said that while he is looking for information on the Goode Administration, if we had established a Rainy Day Fund in 1990, 1991, we'd approximately have $100 million in the Rainy Day Fund today as we speak, and that money would be available to help with things like paying for the Philadelphia School District. And are we not in a period of time where we've experienced two consecutive quarters of job loss?
So, therefore, it would have triggered, as we speak today, the availability of up to $100 million to help the School District of Philadelphia.
It would have been taken away from important City services in order to create fund.
No. See, that's the flaw of the argument here is that we -- the Administration gives us a budget and a Five-Year Plan. We pass that budget, we have the authority to 46 10/24/01 FINANCE - BILL 010492 change that budget to increase City services if we want to; we choose not to. And if during the course of that fiscal year, there's money available, then we put it away. We would have had $100 million to help the schools today if we had established this fund in 1990, which he's not listening to me, but that's okay. Thank you, Mr. Controller.
I have questions from Frank DiCicco and from Wilson Goode before you leave, Mr. Controller.
Mr. Controller, by the way of example, if individual Councilpeople started putting money into the Rainy Day Fund, how long do you think we could last without redistricting?
Right now City Councilmembers need a Rainy Day Fund for their paycheck. But it's not there and it will never be there when needed. 47 10/24/01 FINANCE - BILL 010492
Thank you, Madam Chair. Thank you for your comments regarding the Goode Administration. Aside that, it puts some things into context. I want to thank Councilman Cohen for his comments and actually, I guess, to a certain extent, show some support for this bill in the sense that had there been a Rainy Day Fund established during the '80s, which was the greatest period of economic growth in recent history, which Mr. Pizzi, under his leadership as Commerce Director can attest to, there would have been tons of money flowing in before we went into an economic recession.
It was a national economic recession in the late '80s which triggered the events of the early '90s.
And this bill is dealing with a prospect and a likelihood of a future economic recession. So we can put this in the context of national economy as opposed to political 48 10/24/01 FINANCE - BILL 010492 administrations. But in terms of economic factors, it is very true that with that period between 1983 and 1987 in particular on huge job growth in this City, that that would have contributed tons of money that would have helped us as we reached the point of economic recession. Thank you, Madam Chair.
Thank you very much. Are there any other questions for Mr. Saidel? (No response.)
Mr. Pizzi, we're sorry to hold you. Don't blame us, blame Jonathan. (Witness comes forward.)
Thank you. Please identify yourself for the record.
Thank you, Madam Chair. My name is Charlie Pizzi, from the Greater Philadelphia Chamber of Commerce, and I'm here to testify on 49 10/24/01 FINANCE - BILL 010492 Bills 010492, 010508, and 010541. The sponsors of the 1 respectively are Councilman Kenney, Councilman DiCicco, and Councilman Goode. The Chamber supports Bill 010492, creating a Rainy Day Fund, under certain terms and conditions, to cushion the impact of unanticipated declines in City revenues, as was previously mentioned. The PICA Board and State oversight board charged with overseeing City finances also has recommended the implementation of a Rainy Day Fund. The Chamber concurs that this is a valid and proper public function to set aside a portion of revenues in order to minimize future revenue shortfalls and deficits, provide greater continuity and create predictability in funding of vital government services and minimize the need to increase taxes to balance the budget during periods of economic distress. Indeed, we have been most fortune in recent years to enjoy a healthy fiscal stability, but we are all painfully aware that this is changing. The economy has suffered a stunning blow, and it may well take months before we see signs of recovery. Frankly, currently, they're calling for a 50 10/24/01 FINANCE - BILL 010492 recovery at part of the third quarter. A formal plan now could greatly reduce the need for the cumbersome task of layoffs and budget cuts down the road; or even worse, the decision of whether to raise taxes or reduce services to offset revenue loss. It is my understanding that during the City Council Legislative Oversight Committee hearing in January of this year, all witnesses, including those from the Administration, favored the creation of this fund. This bill formalizes the process that the City has had in place for years and sends a strong message to Wall Street and bonding agencies and can only have a positive impact on our sagging economy. This, action, however should not be used in place of tax cuts and other necessary measures to attract and retain jobs and residents to the City. While a worthwhile tool, it is just that; it should not be viewed as cure to our economic challenges. Thank you for this opportunity to speak to you on behalf of this ordinance.
Thank you. Are there any questions with regard to 51 10/24/01 FINANCE - BILL 010508 this bill? (No questions.)
All right, there Pizzi, if you would like, you can give testimony on all bills so that we don't hold you.
Thank you, Madam Chair. If there are any questions on this further, I'd be happy to respond in writing.
Bill No. 010508, which expands the time frame during which applicants may apply for tax abatement on new residential construction. You may recall that the Chamber supported the original bill, Bill 226, creating a tax abatement program as an incentive for people to stay or move into the City. During my testimony before this legislative body last week, one of my major concerns I addressed was the lack of new housing in the City, the fact that we are losing our competitive edge to the suburbs. We need more incentives like this to lure people back into the City, back into our neighborhoods. Although the Chamber supports the legislative intent, we are requesting that an 52 10/24/01 FINANCE - BILL 010508 amendment on the effective date of this bill be entertained in order to make it effective coterminously with the date that the Governor actually signed the enabling legislation, extending the abatement period from three to ten years, or December 18, 2000. We ask for this amendment in the spirit of fairness and at the request of the Greater Philadelphia Association of Realtors, who have done a great deal of work on these bills and who have a vested interest in this matter I will tell you aside, when I was Commerce Director, we came into a lot of problems where people would miss the application process because they had to do it at the time that they applied for building permit and, therefore, according to law, weren't capable of applying. I would also ask that as we move forward after this bill sunsets, that we re-look at the time period which we consider. We were originally at three, we're now at ten; we may want to find ourselves a place in the middle going forward. So that is the conclusion of my support for that bill. Thank you.
Thank you. 53 10/24/01 FINANCE - BILL 010508 Councilman DiCicco?
Thank you, Madam Chair. Thank you, Mr. Pizzi. I will be offering an amendment this morning to address both of those issues. The thing that always concerned me, as it did you and other members of the community, was the process by which someone applies, and I think we're going to be able to address that in the amendment, where it will be the date of the CO, and at least that the buyer will be able to take full advantage of it in the event that a developer either does not take out the proper forms or misses a deadline, what have you. So we'll address those two issues. Mr. Glancy's here to answer any questions later, but we're trying to figure out what is the best date. We have a date in March of 2000 -- was it 2000?
All right, so we will work out a date before the end of this session this morning and we will finalize that amendment, but those two issues will be dealt with today. 54 10/24/01 FINANCE - BILL 010504 So thank you for testimony.
Oh, thank you. And I think this also helps the neighborhood initiative as well program.
Finally, I would like to testify, Madam Chairman if it's okay --
-- testify on Councilman Goode's bill and that's Bill 010541, creating a pilot program under which a credit against business privilege taxes will be given to businesses that contribute $100,000 per year in cash in order to qualify -- to a qualifying community development corporation, or as we all know 'em, CDCs. Not only does the Chamber support business privilege tax credit, but we also view this bill as an economic mechanism that could greatly enhance the Mayor's Neighborhood Transformation Initiative by leveraging private-sector investment in the 55 10/24/01 FINANCE - BILL 010504 redevelopment of economically disadvantaged neighborhoods. If the pilot program is successful, and I hope it is, I would encourage the doubling or tripling of the number of eligible businesses in the future. We have seen success that can be achieved by using tax credit to stimulate neighborhood-based economic-development solutions. The history of our Philadelphia Plan, which leveraged business support for CDCs through credits against the State's corporate net income tax, proved to be a potent spark for development in the neighborhoods. We have firsthand experience with this, so that is why we applaud the efforts of this bill. And recognizing that it would be a pilot bill, we can take and choose from it the things that work and the things that don't. But this is a great way for businesses to access direct investment into the neighborhoods in which they reside. We started out wanting to have three to five companies participate in the State's program and we finished up with 12. So right now, the Philadelphia Plan's in 12 neighborhoods and was all modeled after the Allegheny West Program, which is a very successful program that has done more than 4 to 56 10/24/01 FINANCE - BILL 010504 500 units in new housing since its establishment. So we applaud the efforts of this and we look forward to analyzing the results of this pilot program.
Thank you. One question -- and we thank you also, Denise Gorin (ph), for being here. How do you ensure in this bill that the little small neighborhood CDCs that want to help don't get swallowed up by the certainly large ones who have membership fees, etc., who don't really the need the kind of support that we can give? I mean, the intent of the bill, I'm sure, from its sponsor is to try to help neighborhoods and small residential and commercial strips to get some support.
I think the key, Madam Chair, is to ensure that they're accountable. Any organization, large or small, needs to be accountable once they receive these funds. If they demonstrate that accountability through quarterly accounting of how they're using the money, that would be helpful. I think the way we have worked it from the 57 10/24/01 FINANCE - BILL 010504 State's perspective is the companies sit on the boards of the local CDCs and help the local CDC put in the necessary accounting practices so that there is accountability. The companies do not -- they work with the CDC to determine the projects but do not -- are in support of what the neighborhood wants as opposed to -- it doesn't work where the companies want to tell the CDC what to do. But there needs to be a partnership, and that helps those small CDCs especially.
Thank you. Are there any other questions for Mr. Pizzi? Councilman DiCicco?
Thank you. My question is actually to the sponsor of the bill, Councilman Goode. I support the bill -- I don't know how I missed not signing onto the bill, but maybe later I'll make sure my name is attached to it. I just had a concern as to why we would be limiting it to -- I know that it's a pilot program, but why would we limit it only to ten businesses, why wouldn't we look to do it for any business? 58 10/24/01 FINANCE - BILL 010504
Only because of revenue, only because of revenue implications. And we're starting off as a pilot program. I'm pretty sure it's going to be successful. I think the Philadelphia Plan model is probably the premier model for community development in Philadelphia. As part of this bill also, the Revenue Department is supposed to analyze the program on an annual basis, give a report to the Mayor and Council, and we can change this program as it goes along to better it and/or to expand it.
To that point, what the State has done, it started the same way. It started with a small number of businesses and then it allocated a certain amount of revenue that could then be designated and split up accordingly to the number of businesses that you wanted to do it for.
As the bill's currently constructed, it's on a first come/first served basis. There's an agreement with the Revenue Department, which is a multi-year agreement. So the Revenue Department will devise an agreement that 59 10/24/01 FINANCE - BILL 010504 will be a ten-year agreement with the business saying that they will give essentially what amounts to a million dollars over ten years.
Madam Chair, in conclusion, I just want to say that these three pieces of legislation really send a strong signal that the City is willing to work and make this city competitive. And each one of these bills -- one for housing, one for financial accountability and one for economic development stimulus -- sends the right message, and this Council should be proud of the work that is shown within these three bills.
Thank you, Mr. Pizzi. The Chair notes that Councilman O'Neill is here for our committee hearing. Councilman Kenney, do you have a question?
Thank you, Madam Chair. I just wanted Mr. Pizzi's opinion on some of the testimony you've heard earlier, specifically Jonathon Saidel's testimony that if we had 60 10/24/01 FINANCE - BILL 010504 established a Rainy Day Fund in Philadelphia in '91-'92, we'd have approximately $100 million sitting in reserve in the Rainy Day Fund. In this particular period of time, we have experienced two consecutive quarters of job loss, and we are sitting there, looking at a school system that is terribly ailing for money. Would this not, in your opinion, be a perfect time to use $100 million to help with our fiscal situation at the School District, which is probably the main reason, besides taxes maybe being second, the main reason why we've lost a number of residents in the City over the last 10, years 15 that we've lost?
There's no question about it. It really bring fiscal accountability, it gives it discipline, it puts discipline within the fiscal process, and we would have had that money and we're going to have to find the money.
Yeah, as we're rattling around, looking for 60 or $75 million to meet whatever responsibilities Harrisburg believes we have, whether they are valid or not, but the point is that we have to meet them at some point in 61 10/24/01 FINANCE - BILL 010504 time. Wouldn't it be wonderful to have $100 million sitting there for the School District of Philadelphia, without having it affect any long-term service levels or budgeting priorities or other kinds of services we need to deliver to the citizenry. I think this example is the perfect example as to why this is a prudent thing to do, and I think should have done it in the past, but I believe it's better late than never.
That is true. And in all respect to Councilman Cohen, this is a new initiative by municipal and state governments to use, but it's a new practice, and we should use all of the new practices that strengthen the economic viability of our city.
Thank you very much. Any other questions for Mr. Pizzi? (No further questions.)
Thank you very much, Mr. Pizzi, and Miss Gorin. Joe Vignola, PICA, our former colleague. 62 10/24/01 FINANCE - BILL 010504 (Witness comes forward.)
Welcome, good morning. Please identify yourself for the record and begin your testimony. Next will be our chief of staff. Just so she has a sense of timing, next will be the Chief of Staff. Thank you.
-- Councilwoman Blackwell and members of the City's Finance Committee. My name is Joseph C. Vignola, and I am the Executive Director of the Pennsylvania Intergovernmental Cooperation Authority, known as PICA. I would like to digress briefly from my testimony to introduce someone, and by way of introduction, I have to make an explanation. For ten years of PICA's existence, we are blessed by having as my deputy Peter Golato. Peter Golato, a longtime accountant, who worked well with the City of Philadelphia, both with the Council and with various administrations, passed away on September 19th. And I, on behalf of the PICA Board, would like to inform you of that fact because you've 63 10/24/01 FINANCE - BILL 010492 seen Peter here from time to time. But I'm also pleased to announce that the Board accepted my recommendation of Mr. Maury Munson, who you've seen here from time to time when he was Deputy Budget Director for the City of Philadelphia. He was chosen to be the Deputy Executive Director. Mr. Munson is now my deputy executive director at PICA. So I thank you for that brief indulgence, Madam Chair. Madam Chair, I am pleased this morning to testify regarding the adoption of a Rainy Day Fund for the City of Philadelphia. Much of my testimony this morning is a summary of previous testimony presented before the Legislative Oversight Committee this past January and mirrors PICA White Paper No. 18 9, "Philadelphia's Fiscal Challenge: Finding a Way to Save," copies of which I have distributed to the Sergeant-at-arms. Preliminary figures for Fiscal Year 2001 show that the City is ending with a positive fund balance of over $226 million, a figure which is likely to rise. Despite this ninth consecutive year of positive fund balances, PICA continues to stress 64 10/24/01 FINANCE - BILL 010492 the City's need to proactively prepare for unidentifiable -- excuse me, for identifiable and unknown fiscal threats that may impede continued fiscal stability and prosperity. The Administration has already been sending warning signs about shrinking revenues in the first quarter of the current fiscal year and new efficiencies, which would result in possible service cuts. Rainy Day Funds are created to serve as an alternative to raising taxes, cutting services, or increasing debt, practices that most municipalities, and in particular Philadelphia resorted to in the past when faced with economic recessions. Forty-four of the 50 states and many large municipalities have either created a Rainy Day Fund or some type of stabilization reserve. The central concerns that I believe that City Council needs to consider are: Can the City create a Rainy Day Fund and what parameters should be adopted for contributing monies and utilizing monies of this Rainy Day Fund? The most often-cited obstacle to the creation of a Rainy Day Fund in Philadelphia is the Home Rule Charter, which has been interpreted to 65 10/24/01 FINANCE - BILL 010492 require a balanced budget. PICA staff strongly recommends that the City reinvestigate the legal potential for creating a Rainy Day Fund as a component of a balanced budget. The Five-Year Plan, mandated by the PICA Act, may well be the catalyst for the creation of such a fund. 5 million through the end of Fiscal Year 2002. " This process presumes that a short-term emergency fund is legal. However, since this contingency fund can be used for any purpose, regardless of an emergency status, it does not rise to a level of a Rainy Day Fund that is designed with sharper restraints. If it is feasible for the City to plan to save money in the Five-Year Plan, then it is within the City's means to create a savings plan with the same intent and restrictions as a Rainy Day Fund. The City, in conjunction with this Council, could develop legislation to guarantee that funds are 66 10/24/01 FINANCE - BILL 010492 carried over from year to year.
At the same time, it is incumbent on the City and this Council to establish parameters determining the annual percentage of General Fund dollars to be allocated to the fund, the purpose for which the money can be spent, and the maximum amount of money that can accumulate in the fund. With many diverse interests pushing and pulling on the City's funding capabilities, contributing to a Rainy Day Fund may be sidetracked if year-to-year appropriations must be made through City Council. Unanticipated revenues are like free money. The City's Five-Year Plan is in balance without accounting for these funds. Setting aside a significant portion of these dollars, such as 50 percent indicated in this bill, is an ideal way to build a Rainy Day Fund without impacting on the existing priorities of the Administration. Most municipalities decide to set a maximum limit on the amounts of dollars in a Rainy Day Fund so that that level in a Rainy Day Fund are justifiable over such decisions as reducing taxes or directing dollars towards operating expenses. The 5 percent indicated in this legislation is 67 10/24/01 FINANCE - BILL 010492 considered a standard practice among Rainy Day Funds. The most critical set of factors concerns withdrawals. Exacting limitations should be placed on withdrawals to assure the use only in a time of emergencies, economic downturns, or revenue shortfalls. As defined in the proposed legislation the City would currently qualify for withdrawing funds from the Rainy Day Fund, as the first two-quarters of calendar year 2001 had job losses according to the Bureau of Labor Statistics. This fact raises the interesting question of should we be funding a Rainy Day Fund in a recessionary period? My answer to that is yes, if the resources are available. The mechanism outlined in this legislation provides for funding only if there are excess monies. Using the preliminary 2001 numbers, the City would take half of unanticipated revenues, nearly $47 million, and one-quarter of the remaining fund balance, just over $33 million, and have an $80 million Rainy Day Fund, while maintaining a positive fund balance of $146 million. Parenthetically, Madam Chair and members 68 10/24/01 FINANCE - BILL 010492 of the committee, this $80 million is over 50 percent of the amount that would be allowed to be included in a Rainy Day Fund, given the percent 5 cap. So if the current fiscal year continues with weaker revenues and ends the year with a small fund balance, then little or no dollars go into the Rainy Day Fund. Contributions to the fund correlate to the City's fiscal realities. Philadelphia can prepare for our future fiscal uncertainties by creating a Rainy Day Fund. Other municipalities under the same charter restraints as Philadelphia have found ways to put funds aside for the seeming inevitable downturn in the economy. The question for Philadelphia is not, Can this be done? but does the City want to take the strides to get it done in a timely manner? With that, I conclude my testimony and invite any questions you may have.
Thank you, Madam 69 10/24/01 FINANCE - BILL 010492 Chair. Mr. Vignola, your testimony in support of the bill, do you believe that the establishment of the fund through the mechanism of this ordinance is appropriate and legal?
Mr. Vignola, it is my understanding that having a Rainy Day Fund Can positively affect our city's bond rating. Can you tell me whether PICA has taken a position on this issue?
Madam Chair, last January, when I testified before the Legislative Oversight Committee, before my testimony, I believe there were three representatives from various bond-rating agencies, and they all strongly urged the establishment of a Rainy Day Fund and said it was one major factor in considering the stability or the upgrading of the City's bond rating. I believe that given the economic circumstances that we find ourselves in this fiscal quarter that, yes, it would definitely have a positive effect on what the City bond rating will 70 10/24/01 FINANCE - BILL 010492 be.
So in other words, you feel that the parameters of this -- also, can you tell us whether the parameters of this bill, in your opinion, can be changed to even improve a bond rating even more than anticipated here?
Madam Chair, by way of parameters, you mean, do you want to put more money in the Rainy Day Fund? I mean, I don't -- I don't understand what you mean by "changing." Like instead of 50 percent, make it 60 percent instead of percent? 14
Just changing the 15 numbers, how that would affect the bond rating. 16
Up or down. I think that 17 the philosophy of having a Rainy Day Fund 18 contributes substantially to what rating agencies 19 think would think of the City of Philadelphia's 20 credit rating when it goes to the market to sell any 21 of its long- or short-term debt. 22 So yes, I do. And no matter what those 23 parameters are. 24
This question 25 deals with the time frame for emergency 71 10/24/01 FINANCE - BILL 010492 expenditures. If requests from this fund can be done only with PICA certifying it, what is the worst-case scenario in getting the money? Let's say for the School District bailout or a labor dispute, is PICA in a position to slow the City down if it needs to act or react immediately? Where's your input there?
The answer to that is no, the thrust is the two quarters of job loss in the City. And as I previously testified to, so far for calendar year 2001, we've had those two successive calendar quarters of job loss. The other criteria is a change, you know, in the revenues, which is monitored monthly, and the City reports to PICA in its quarterly manager's report. The PICA Board meets regularly, on a monthly basis, and also has the ability to meet on an emergency basis. So the time frame to react would not be a delay on PICA's part. We could be prepared to meet the certification requirements of the legislation.
Thank you very much. Are there other questions for Mr. Vignola? 72 10/24/01 FINANCE - BILL 010492 Councilman Cohen?
Mr. Vignola, the bond rating agencies, they like it when cities set up Rainy Day Fund?
That was their testimony before the Legislative Oversight Committee in January, yes. From the conversations I've had with bond raters, yes, they do.
Bond-rating agencies like it when cities develop economic stimulus funds, right?
They like it when cities invest in businesses or make tax abatements, right?
I -- I don't know about that. I never had the discussion with bond-rating agencies about that.
I read about what they do, but I don't know if they, you know -- the bond rating agencies would like it if the City spent no 25 money for anything, just have taxes. 73 10/24/01 FINANCE - BILL 010492
Tell me when you've ever seen a bond-rating agency issue a good report when a city provides more money for the health needs of its people.
Oh, they did it to Philadelphia. They increased our rating in '94 from junk bond status to creditworthy status because we started providing more services to the citizens of Philadelphia than were provided, you know, in the first years of the 1990s.
Good. Do you have any documentation of that in your office that you could submit to me? I would like to see it.
Well, I will forward you the newspaper articles that I have in regard to, you know, Philadelphia regains its bonds-rating status, and I'll photocopy copies of the budget that show we were increasing expenditures in the City at the same time.
Well, I would like very much to see any documentation that you have in which a bond-rating agency, whether it's Fitch's or Standard & Poor or Moody's or -- there are four of them, I missed one of them -- whenever they have 74 10/24/01 FINANCE - BILL 010492 exhorted cities to spend more on behalf of city neighborhoods.
No, well, you didn't -- you didn't -- that was not the original question, Councilman. The original question was, did you ever see bond-rating agencies increase a city's ratings when they were spending more on social services? And I said all we have to do is look to Philadelphia in 1994 when the bond-rating agencies changed our bond rating from what was the equivalent of a junk bond status to a creditworthy status, and --
Well, I don't think they did it for the reasons you're stating.
But what the reality is, we were spending more on City service, we were putting more police officers on the street and --
Well, I understand they would approve of that, they would approve of anything that fits within the substance known as "fiscal conservatism," which means nothing for the ordinary people but everything for business people.
Well, that flew in the face of what we all did here in City Council in 1992, '93, '94, and '95, when we put more police officers 75 10/24/01 FINANCE - BILL 010492 on the street, we provided for child welfare support and more health-care support, you know, for our citizens at the time of which, you know, people said Philadelphia wasn't going to survive. And as a member of this Council back then --
We knew Philadelphia was going to survive. Philadelphia had a perfect record of not a single delinquency ever with respect to any bond payments due, but Wall Street closed its doors on us.
There were many savings-and-loan associations in the '70s and '80s who had that same perfect record, who were taken over by the federal government. So, you know, the past is no predictor of the future. So, Councilman --
Well, some things are predictors. For example, one can predict that when you talk in terms of fiscal conservatism, you mean take away rights, don't give rights, don't give 76 10/24/01 FINANCE - BILL 010492 services to the people, or do it in a very limited fashion, concentrate on economic development, cut taxes, particularly business taxes. (Applause.)
I respectfully disagree that that is fiscal conservatism. You can be a fiscal conservative and still provide for the much-needed services -- police, fire, L&I, libraries and health care -- of the citizens of any city, in particular Philadelphia. And I was pleased to be a part of this Council that did that very thing.
Don't forget -- (Indiscernible, parties talking over each other.)
-- some of its members continually to put it in that position.
They always deny it but 77 10/24/01 FINANCE - BILL 010492 they always do it.
-- during the worst time of my fiscal history -- (Indiscernible, parties talking over each other.)
Give me your comments. You heard me say, because I think you were in the room, to Controller Saidel that I believe this is just kind of an economic toy we're dealing with. It's a fashion thing but that its main purpose is to put limits on the current executive and legislative bodies on their spending activities.
I strongly disagree with the word "toy." It is not a toy; it is reflecting the fiscal realities of the government at all levels -- at federal, state, and local level. And the way this bill is crafted, it is not taking away from any 78 10/24/01 FINANCE - BILL 010492 current revenues.