Philly’s budget hole grows to $749M as officials scramble to approve city’s new spending plan

By Michael D’Onofrio

PHILADELPHIA — The city’s budget hole just got a whole lot larger.

Two weeks before officials must finish a spending plan, the city now faces a $749 million budget hole — $100 million more than the revised spending plan Mayor Jim Kenney put out after the novel coronavirus pandemic cratered the economy.

The updated estimates erased the city’s projected $87 million fund balance, or surplus, for the next fiscal year, creating a deficit in Kenney’s $4.9 billion proposed budget, which does not increase property taxes.

City officials must pass a balanced budget by July 1.

During a video conference call with journalists on Monday, city officials sidestepped questions about reinstating a property tax increase or further reductions in the spending plan to fill the budget hole.

“I don’t think we’re at the point yet where we would want to speculate on that,” said Finance Director Robert Dubow about whether the city was considering raising property taxes.

Dubow doubled down on the administration’s previous proposals to hike the Wage Tax for non-residents and parking tax, which he said would present further reductions. He said the administration will have ongoing discussions with City Council members to pass a budget.

“We really just identified the problem,” Dubow said, adding, “the next step is to identify how to solve it.”

Marisa Waxman, the city’s budget director, said nearly all the revenue losses stemmed from the coronavirus pandemic’s impact on the economy.

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The Kenney administration was now probing the current fiscal year’s budget for underspending and for further reductions, Waxman said.

Administration officials maintained the Philadelphia Police Department would not receive a $19 million budget increase that Kenney previously proposed. The mayor scrapped the funding boost last week due to pressure from City Council following more than two weeks of protest over the police killing of George Floyd in Minneapolis, and police brutality and racism across the country.

James Engler, Kenney’s chief of staff, said the weakened revenue projections prevented the city providing services and investing in new programs.

Engler called for more financial assistance from the federal government to ensure services were maintained.

“The level of service that we can provide is directly related to the revenue we receive,” Engler said. “And with it being less, we will unfortunately provide less service than we would otherwise want to.”

The city’s financial outlook was already grim when Kenney revised his original $5.2 billion budget to $4.9 billion on May 1 in the wake of the coronavirus pandemic.

After proposing a property tax hike last month to fill the budget hole, Kenney nixed the plan when state funding was increased for the city. The mayor’s proposal cut deeply into most departments’ budgets, and included approximately 400 layoffs and a hiring freeze.

Administration officials could not immediately provide how many more layoffs will result from the new projections.

Sales tax, realty transfer tax projections drop sharply

The new $100 million budget shortfall was due to downward revenue projections for the city’s sales tax and Realty Transfer Tax in the current fiscal year, which will cut into the city’s fund balance and reduce next year’s estimates, Waxman said.

The city’s sales tax for the current fiscal year, which ends June 30, was expected to haul in $32 million less than originally projected ($195 million), while revenues for the Realty Transfer Tax dropped $25 million ($319.5 million).

Waxman said the revenue reductions for the city’s sales and Realty Transfer Tax taxes in the current fiscal year put the city in a “worse starting place for an opening fund balance to start FY21.”

More risks remain

Philadelphia still faces financial risks.

Although the city has entered the “yellow phase” of reopening under the coronavirus pandemic, city tax revenues remain uncertain and city officials were just understanding its effect.

A potential second wave of coronavirus infections could negatively impact city finances and services too, Waxman said.

Questions remain over collection of the city’s Business Income and Receipts Tax, was delayed to mid July. “It still remains to be seen what happens there,” Waxman said.

Costs associated with protests over the police killing of Floyd also adds uncertainty to city finances, Waxman said.

While the city has received federal funding to respond to the pandemic, Waxman said those funds could not be used to replace revenues. If the federal government revises those limites, Waxman said it could be a “positive upside” — but she wasn’t betting on it.

“You can’t build budgets on hope,” she said, “so we had to go with the real fiscal reality.”

Michael D’Onofrio is a reporter for the Philadelphia Tribune, where this story first appeared.