PICA approves city financial plan, with reservations

The board that oversees Philadelphia's finances approved the latest version of the city's five-year plan Tuesday, while cautioning that the city should tighten its belt instead of slowing down wage-tax cuts.

The Pennsylvania Intergovernmental Cooperation Authority (PICA) approved the amended plan unanimously. The fiscal road map, initially approved in July, had to be readjusted to reflect a $133 million contract settlement with the city's largest union, AFSCME District Council 33, and a recent $97.5 million Fraternal Order of Police arbitration award. It also includes other labor obligations for a total of $293.3 million in additional costs over the next five years.

With the fund balances already painfully low in the original five-year plan, City Finance Director Rob Dubow had to work some magic: a snip here, an increase there, and a potential Hail Mary pass in assuming a $32 million reduction in Fire Department overtime.

But even that wasn't enough.

"We couldn't get all the way where we wanted to with expenditures, so we had to include some revenue enhancements," Dubow said after the PICA board meeting.

Those "enhancements" include an increase in the projected wage, earnings, and net profits tax, which the Nutter administration has been working to reduce each year from its level of 4.22 percent for city residents (3.72 percent for nonresidents) when he took office in 2008.

The current tax rate is 3.92 percent for city residents and 3.49 percent for nonresidents. By 2019, residents were supposed to be paying 3.75 percent and nonresidents, 3.34 percent. But that number has been bumped back up to 3.80 percent for city residents and 3.38 percent for nonresidents.

"If you are ever going to turn the city around, I think the consensus is clearly you have to chop away at the wage tax," PICA board member Gregory S. Rost said via conference call at the meeting.

Rost said he would have rather had a lower fund balance but kept a steadier stream of wage-tax cuts as a "symbolic message" of staying on track with the reductions.

Dubow said the administration was concerned about low fund balances because they could affect the city's credit rating. Philadelphia's fund balance is expected to be $132 million at the end of fiscal year 2015, which ends June 30. But it is expected to drop to $40.5 million in fiscal year 2017 before bouncing back to $83.9 million at the end of 2019.

"I could've lived with a lower fund balance just for the symbolic value of . . . the wage cuts," Rost said.

Lawrence Tabas, who was named board chair Tuesday, agreed with Rost and said the city needed to work on reducing the wage tax. He said he would like to see it go down to 3 percent by December 2015.

"If we face an increase in state income tax next year, those two taxes alone are going to have people think twice about the city of Philadelphia, especially when you add the extra sales tax," Tabas said. "Our young [families] are starting to evaluate whether they can stay in the city, and the middle class are being squeezed as well."

PICA, which was created in 1991 by state law, is charged with reviewing the city's five-year plans. State funding to the city is dependent on PICA's approval.

Tabas, appointed to the board by Gov. Corbett after former chairman Sam Katz stepped down in February, also expressed disappointment that the city didn't cut enough on the expenditure side. A 5 percent reduction would have been appropriate, he said.

He also noted that the city still faced a pension-funding crisis, even with the new contracts.

"The fund balance is critical, but if we don't start to reduce the pension-fund obligation crisis, we are going to face a real fiscal issue down the road," Tabas said.