The Idiot’s Guide to Why a $115 Million Deficit Isn’t Really a $115 Million Deficit

We found out at a City Council hearing Tuesday that the city closed out fiscal year 2010 $115 million in the red. And yet, council members and the administration seemed to be treating this as good news. What’s the deal? Let’s unpack.

Q: Isn’t $115 million a lot of money?

A: It is, but a big chunk of that money is owed to the city by the state.

Q: The state owes the city money?

A: Yes. A lot of the money the city spends on social services gets reimbursed by the state. Those checks are coming in late because the state budget was delayed — but when they do, a lot of that deficit will be paid back.

Q: Will there be any left?

A: Yes. The city had planned to end the last fiscal year with a $51.6 million deficit, which is about what will happen.

Q: That's better than $115 million, but how could the city plan to end the year with negative money? Isn’t that against the law?

A: The city's required to submit balanced budgets every year to the Pennsylvania Intergovernmental Cooperation Authority, the state agency that reviews Philadelphia's finances. But because of big drop-offs in tax revenues thanks to the recession, the city's adjusted those plans mid-year, and ended
every fiscal year since 2008 in the red. Fiscal year 2009 closed with a $137 million deficit, for instance.

Q: What about all those mid-year cuts? Weren’t they supposed to get the city back in the black?

A: They weren't enough to balance the budgets of the fiscal years in which they were announced, so the city carried the losses into subsequent years.

Q: What happens to the deficits?

A: They have to be made up by more cuts or increases in revenue — like the sales and property tax hikes we've seen — in subsequent years. The city is currently planning on ending this fiscal year in the black.

Q: But it planned to do that the last few years and didn't manage it. What makes this time different?

A: The good news is that the city's tax revenues have stabilized. Though Philly’s not taking in nearly as much as it did before the recession — the business privilege tax, for example, took in $70 million less last fiscal year — the steep drop-off has stopped. So, if everything goes according to plan, the city will be able to avoid major cuts, tax hikes or deficits.

Q: Will everything go according to plan?

A: Couldn’t tell you. On the revenue side, the national economy might slow again, causing another drop-off in tax collections. And on the expense side, the city's still in negotiations with two of the four municipal unions about new contracts. Labor costs make up about 60 percent of the budget, so any new contracts could punch big holes in the plan. Moreover, the city is projecting that the three unions with unsettled contracts — which represent firefighters and blue and white collar workers — won't see any raises. And you can imagine how likely that is.

Q: What about the recent firefighter contract award?

A: Firefighters, like police officers, engage in a binding arbitration process for new contracts. The arbitration panel recently awarded the firefighters union a contract that the administration says would increase costs by $100 million over the next five years, blowing a hole in this year's budget and accompanying five-year plan. The city's appealing the arbitration decision in court, and we'll have to wait until the appeal process is over to figure out the fiscal impact of the contract.

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