Monday, December 29, 2014

Why is the city likely facing more cuts after approving a budget plan just months ago?

More budget cuts could hit the city any day now. That’s because the city has brought in less money in wage and sales taxes in the last couple months than leaders projected. The city’s current budget is based on the expectation that, conversely, revenue will actually grow during this fiscal year. “If these trends continue throughout the year,” Mayor Nutter wrote in a letter to City Controller Alan Butkovitz last month, “the fiscal 2012 budget could be over $60 million short.” The mayor has asked that department heads prepare plans for 2 percent cuts, in case the city’s revenues continue to lag — though he doesn’t plan on touching police, fire or prison budgets. How did we end up here just a few months after the city approved a budget plan? Could the gap grow deeper than $60 million? And what can we expect to lose from the anticipated cuts? We called up the city's budget director Rebecca Rhynhart, who made the following key points about the city’s latest expected budget cuts: The city is likely bringing in less tax revenue than expected, Rhynhart said, because more people are out of work. From May to August, the unemployment rate in Philadelphia grew from 10.2 to 11.6 percent. Compare that to January through April, when the rate dropped from 10.7 percent to 9.3 percent. “Across the country, the recovery is not going along as anticipated,” she said. “Wage tax and sales tax are the two of the most economically sensitive revenues.” In other words, when fewer people have jobs, wage tax revenues go down — as do sales tax revenues, since people are spending less. According to Nutter's letter, wage tax revenues were growing by 3 percent throughout the last year — but in July and August, they were more than $5 million below expectations. Sales tax revenues were also down during those months, compared to the same time last year. Pensions could also be to blame for the anticipated cuts. In the letter to Butkovitz, Nutter also warned that earnings from the pension fund have shrunk, due to the slowed economy. Rhynhart said that “when pension funds returns don’t come in as anticipated, the city basically has to increase its contributions to offset losses in the financial markets.” According to Nutter’s letter, this could cost the city “tens of millions” over the next five years. But right now, it’s too early to tell if that will actually happen. Rhynhart also said that “the city is taking steps to deal with the pension issue.” To find out more on Philly’s pension problem — aka the upcoming “real-life disaster movie” — read Catherine Lucey’s article. It’s too early to tell what, if anything — city services, jobs, libraries, etc. — will be cut. Rhynhart said that will take a few months to figure out. “We need to see if the current trends are going to continue at this level. But we can’t wait for months and months to go by to take some action.” That’s why the city is already asking department heads to plan for 2 pecent cuts, she said, though they might not materialize. The city doesn’t expect that the budget cuts will grow any larger than about 2 percent. During the city’s budget crisis in 2008 and 2009, things were bad. And then they got even worse. In 2008, the city said it had budget gap of $1 billion. Then it became a $2.4 billion problem. Could the budget gap grow larger than expected this year, too? Rhynhart said the city is not anticipating that cuts will be more than 2 percent. In fact, she said they could end up being much lower — or even nonexistent — if revenues rebound. But, she noted, “We will continue to monitor it and act as needed.”

Why is the city likely facing more cuts after approving a budget plan just months ago?

Rebecca Rhynhart, the city´s budget director.
Rebecca Rhynhart, the city's budget director. Courtesy of the City of Philadelphia

More budget cuts could hit the city any day now.

That’s because the city has brought in less money in wage and sales taxes in the last couple months than leaders projected. The city’s current budget is based on the expectation that, conversely, revenue will actually grow during this fiscal year.

“If these trends continue throughout the year,” Mayor Nutter wrote in a letter to City Controller Alan Butkovitz last month, “the fiscal 2012 budget could be over $60 million short.”

The mayor has asked that department heads prepare plans for 2 percent cuts, in case the city’s revenues continue to lag — though he doesn’t plan on touching police, fire or prison budgets.

How did we end up here just a few months after the city approved a budget plan? Could the gap grow deeper than $60 million? And what can we expect to lose from the anticipated cuts? We called up the city's budget director Rebecca Rhynhart, who made the following key points about the city’s latest expected budget cuts:

The city is likely bringing in less tax revenue than expected, Rhynhart said, because more people are out of work.

From May to August, the unemployment rate in Philadelphia grew from 10.2 to 11.6 percent. Compare that to January through April, when the rate dropped from 10.7 percent to 9.3 percent.

“Across the country, the recovery is not going along as anticipated,” she said. “Wage tax and sales tax are the two of the most economically sensitive revenues.”

In other words, when fewer people have jobs, wage tax revenues go down — as do sales tax revenues, since people are spending less.

According to Nutter's letter, wage tax revenues were growing by 3 percent throughout the last year — but in July and August, they were more than $5 million below expectations. Sales tax revenues were also down during those months, compared to the same time last year.

Pensions could also be to blame for the anticipated cuts.

In the letter to Butkovitz, Nutter also warned that earnings from the pension fund have shrunk, due to the slowed economy.

Rhynhart said that “when pension funds returns don’t come in as anticipated, the city basically has to increase its contributions to offset losses in the financial markets.”

According to Nutter’s letter, this could cost the city “tens of millions” over the next five years. But right now, it’s too early to tell if that will actually happen.

Rhynhart also said that “the city is taking steps to deal with the pension issue.” To find out more on Philly’s pension problem — aka the upcoming “real-life disaster movie” — read Catherine Lucey’s article.

It’s too early to tell what, if anything — city services, jobs, libraries, etc. — will be cut.


Rhynhart said that will take a few months to figure out.

“We need to see if the current trends are going to continue at this level. But we can’t wait for months and months to go by to take some action.”

That’s why the city is already asking department heads to plan for 2 pecent cuts, she said, though they might not materialize.

The city doesn’t expect that the budget cuts will grow any larger than about 2 percent.

During the city’s budget crisis in 2008 and 2009, things were bad. And then they got even worse. In 2008, the city said it had budget gap of $1 billion. Then it became a $2.4 billion problem.

Could the budget gap grow larger than expected this year, too?

Rhynhart said the city is not anticipating that cuts will be more than 2 percent. In fact, she said they could end up being much lower — or even nonexistent — if revenues rebound.

But, she noted, “We will continue to monitor it and act as needed.”

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Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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