The state board that oversees Philadelphia's finances unanimously approved the city's five-year plan Tuesday.

While raising concerns about low fund balances and future labor contracts,  Pennsylvania Intergovernmental Cooperation Authority (PICA)  board members followed the authority staff's recommendation that the five-year plan be approved.

"The City's revenue projections have consistently been outperformed by actual collections in recent years," PICA staff wrote in its 43-page report. "PICA feels confident that the City and its consultant are effectively monitoring tax performance in a way that will allow adjustment to changes in economic growth."

The Kenney administration is projecting $4.41 billion in total general fund revenues for fiscal 2018, which began July 1. The city expects to spend $4.44 billion and use leftover funds from the prior year to close the gap and end with a $75.5 million fund balance.

PICA staff said in the report that while the projections indicate a positive fund balance the next five years, there are some factors that could negatively impact the fund. Among those factors, according to PICA staff:

  • The possibility of labor costs exceeding the $200 million the administration set aside.
  • Rising pension costs.
  • Increase in employee health-care costs.
  • Business income and receipts tax (BIRT) volatility.

PICA board member Michael A. Karp said there is good chance another recession will hit within the next five years that could impact the five-year plan. He chided the city for not doing more to save.

"These are the good years. We are in the peak of good economic times, before the recession comes, and yet there's no savings," Karp said. "We have a break-even budget, which hopes that nothing will go wrong."

Karp, who voted to approve the plan, said that the current fund balance estimate — $75 million for fiscal year 2018 — is not nearly enough to cover one week of city spending.

City Finance Director Rob Dubow said that this is the first plan that has two sets of reserves — $200 million for labor costs and an additional $270 million for potential state and federal budget cuts.

"We're better covered than we've been in previous plans," Dubow said.

PICA warned that the $200 million reserve for labor costs might not be enough to cover the three major contracts that the city is negotiating. Contracts with the city's white-collar labor union, AFSCME District Council 47; Philadelphia Fraternal Order of Police; and the Firefighters' and Paramedics' Union Local 22 all expired June 30.

PICA estimated that if all unions receive the same salary increases as AFSCME District Council 33, which settled a new contract last year that included an additional 2 percent wage increase in years four and five of the plan, the city would be on the hook for $354 million or more.

The new sweetened-beverage tax also received some criticism. PICA staff said there is financial risk associated with the $92 million revenue estimate for the beverage tax.

"In particular, there is uncertainty related to the size of the tax base, the impact of the tax on consumption, and the rate of enforcement," the staff wrote, noting that in the first six months of the tax, the city lowered its initial projection of $46 million to $39.7 million. City officials said the slow start was due to the transition implementing the tax and "seasonality," meaning that people consume more soda during the summer months and during the November and December holiday season.

During Tuesday's meeting, Dubow said the city still expects to make the $92 million mark.

The School District's $395 million teacher contract also came up during PICA's budget discussions. There is no clear plan to fund the contract. PICA pointed out that the two potential remedies for funding the school contract are either through the state legislature or the city.

"We're going to push for a solution that makes sense for the city, for the state, and for the School District," Dubow said. He didn't say what that solution might be.

Tuesday was also PICA's annual meeting, in which the board selects its officers.

Kevin Vaughan remains chairman of the board. Alan Kessler was appointed vice chair and Karp was appointed secretary and treasurer. The other two board members are former Lt. Gov. James F. Cawley and Tina Byles Williams, who was the Philadelphia Pension Board's chief investment officer from 1990 to 1994. She later founded Fiduciary Investment Solutions.