Welcome to Monday Morning Quarterback, a deep-dive into prominent issues facing Philadelphia and the Commonwealth. As always, this newsletter is a work in progress and your feedback is appreciated, particularly as we work to find our groove.
For the next few weeks, MMQB will be dedicated to the City Budget in anticipation of Mayor Kenneyâs expected budget address on April 15th. This week, weâll dive into the sources of City revenue and the pandemicâs impact on City coffers.
Please note, there will be no Thursday City Hall Roll Call this week, as City Council is adjourned until Thursday, April 8th.
đłïž City Council Recap: March 25, 2021
Last weekâs City Council session was marked by a parade of friends and colleagues testifying in support of Councilmember Parkerâs resolution honoring the life of Dr. Emma C. Chappell, who recently passed away. The vast majority of legislative introductions were ceremonial resolutions, with one exception from Councilmember Brooks. She introduced a proposed ordinance that would expand domestic violence protections to those suffering from âcoercive control.â These protections would apply in the employment discrimination, employment leave and housing discrimination areas of the law.
City Council also voted to authorize hearings on the Cityâs plan for the $1B+ in federal stimulus money it will receive as part of the American Rescue Act, as it faces a pandemic-induced budget deficit.
đžÂ Budget Breakdown đș Part I: Revenue, Easy Come, Easy Go
It is a spring ritual in municipal government - the steady parade of department heads marching into City Hallâs gilded Council chamber. Carrying thick binders of financial documents containing the Mayorâs proposed budget, these Administration officials will be questioned about every aspect of their departments, from staffing levels, to overtime costs to ongoing project updates. The budget is Councilâs annual chance to kick the tires on the Cityâs dozens of operating departments.
On April 15th, Mayor Jim Kenney will unveil his proposed Fiscal Year 2022 Budget at City Councilâs weekly stated meeting, which will formally begin the public budget process. This yearâs budget proposal was delayed by a month to allow the Administration to fully understand the impact of the American Rescue Act on city coffers. Prior to the federal relief, City finance officials were projecting a $450 million budget deficit for the upcoming fiscal year, due to the pandemic.
Unlike the federal government, the City cannot run a budget deficit. Every year, the City is required to pass a balanced budget, one where the amount of money the city takes in through taxes and fees (revenue) equals the amount of money the city spends on debt, personnel and city services (obligations). Crafting a balanced budget is a mix of financial acumen and wishful thinking, especially when it comes to revenue side of the equation.
The amount of revenue the City collects each year is partly in its control and partly left to the fates. While the Mayor and City Council set the annual rates for the panopoly of city taxes, it is the temperature of the local and national economy which will dictate whether those tax rates will produce enough revenue to cover the costs of running the city.
Understanding City Revenue Sources
Unlike many other major cities, the majority of Philadelphiaâs tax revenue comes from wages, rather than a traditional property tax. The largest source of revenue for the City is by far the Wage, Earnings and Net Profits Tax, which is paid by individuals who live and/or work in Philadelphia.
The second largest source of revenue for the City is the Real Estate Tax, followed by the Business Income and Receipts Tax (BIRT), a tax on business income and earnings.
These three taxes make up a around 80% of the cityâs tax revenue, with an olio of other taxes such as sales, amusement and parking tax comprising the remaining percentage.12
The pandemic exposed a number of vulnerabilities that Philadelphia has in comparison to its peer cities. The first is our reliance on wage taxes as our primary source of revenue. The second is our service-based economy which relies heavily on tourism and hospitality offerings. While many office worker were able to continue to work remotely - the bars, restaurants, hotels and museums that employ thousands of service and hospitality industry workers could not provide the same opportunity for their workers. This one-two punch was reflected in the Cityâs plummeting tax revenue numbers.
Covid-19âs Impact on Revenues
In a Year-To-Date Comparison from last year to this year, the City collected almost $200 million less in revenue. Every single tax collection, but for the BIRT, was down an average of 11.7%, with the hardest hit being the taxes related to the entertainment (amusement tax -96.8%) and parking industry (-58.2%).
While the big question during last yearâs budget was âHow far will revenues fall?â the most important question for this yearâs budget is âHow quickly will revenues bounce back?â Philadelphia typically has fallen into recession faster and harder than our peer cities and has taken much longer to climb out. Will it be different with Covid?
Our Eds and Meds industry is well-poised for a quick comeback, with most colleges and universities planning full on-campus reopenings next fall. The tourism and hospitality industry is likely to see a less complete and immediate resurgence. The pent up demand for restaurants, bars and hotels for residents and tourists is likely to explode once restrictions are lifted. However, the Cityâs huge convention industry may take some time to rebound to pre-pandemic levels.
The good news is that the federal stimulus has taken away the unpredictability of a short term recovery. Unfortunately, the long term impacts of the pandemic on the Philadelphia economy - particularly those related to the âfuture of workâ remain to be seen. For a city that relies so heavily on a non-resident wage tax to fund city services, it will be critical to ensure that commuters return to their Philadelphia offices, eat in our restaurants, park in our garages and shop in our stores.
The Center City District has a positive outlook on this element of Philadelphiaâs recovery, noting:
Recovering confidence and comfort in public space will take time. Social distancing will probably linger. However, the decoupling of work from office does not portend permanent suburbanization. When people can work from home, why were so many on cell phones and tablets in parks, coffee shops and cafes, where they could see and be seen by other people? Why were highly mobile workers clustering in coworking places? Why were so many workplaces adding social spaces? Exactly how many people are in businesses in which they need no other facts, no other perspectives and no other opinions other than their own? 3
Next Week, Obligations
Weâve covered the important factors related to the revenue side of the city budget. Next week, weâll cover obligations, the other side of the equation. Weâll discuss how Covid has exposed and exacerbated the structural problems that riddle the Cityâs finances and why a bigger budget doesnât necessarily mean more city services.
This Weekâs Poll - Revenue Reform:
Starting with Mayor Ed Rendell in the 1990s, the City has been making gradual cuts to its wage and business taxes in hopes of making the city competitive in attracting and retaining jobs.
What do you think about the Cityâs long term strategy of cutting wage and business taxes?
Last Weekâs Poll Results:
Should the Board of Education be elected by voters or appointed?
đâ Question of the week: Why do we refer to this yearâs (2021) City budget by next yearâs date (2022)?
In order to understand why the budget City Council will pass in 2021 is called the Fiscal Year 2022 budget, we have to first understand the Cityâs fiscal year.
A fiscal year is a 12-month period that a business, individual or government uses to report its finances. Individuals and many small businesses report their finances on a calendar year basis (Jan. 1 - Dec. 31). The federal government uses an Oct. 1 - Sept. 30 fiscal calendar.
Fiscal years often result in a budget that spans two calendar years. For instance, City Council will adopt a budget that starts on July 1, 2021 and ends on June 30, 2022.
We refer to this yearâs budget by next yearâs date because the latter year reflects the full completion of the budget, revenues collected and obligations expended.
Thatâs why the City budget passed in 2021 is known as the FY2022 Budget.
Philadelphia Tax Revenue sources include: Wage, Earnings & Net Profit; Business Income and Receipts; Real Estate; Realty Transfer; City Sales; Parking; Amusement; Sugar-Sweetened Beverage; Outdoor Advertising; Smokeless Tobacco and other miscellaneous taxes.