Plunging stocks, decreasing revenue and fixed costs could knock the city for a loop.

Jan. 27, 2008
Tom Ferrick Jr.
For the Inquirer

Even before the stock market took a dive, there were storm clouds over the Philadelphia economy.

The sales tax was the harbinger, as it often is. It is the first tax whose yield dips when consumers get jittery.

The city gets one percentage point out of the 7-percent state sales tax imposed within city limits.

It's a deal that dates back to 1990, when the state had to step in to rescue Philadelphia government from a financial meltdown.

That was the crisis that led to creation of the Pennsylvania Interstate Cooperation Authority (PICA), which was given the job, among other things, of monitoring the city's fiscal condition.

Uri Monson, acting head of PICA, said projections were that sales tax revenue would rise 2.5 percent in the final half of 2007.

Instead, revenue from the tax fell 1 percent.

So far, the slippage is slight. The tax was projected to bring in $138 million. It looks as if it may bring in $130 million to $134 million this year. It's not the end of the world.

But the city's budget stays balanced only if the projections turn out to be right on target. If they begin to wobble . . . well, it's not good.

Soon, there was another dark cloud.

The real estate transfer tax has been one of the city's stellar performers in recent years. The city gets 3 percent (and the state 1 percent) on the price of every house sold.

Because of the booming real estate market in the city, revenue from the tax has gone higher and higher since the late 1990s.

As Monson recalled, the city got $70 million from the transfer tax eight years ago. Last year, it got $217 million.

Some slippage was expected - but not as much as in recent months. In November and December of last year, projections had the transfer tax bringing in $18 million to $20 million a month. Actual revenues were just over $12 million each month.

If this keeps up, instead of the tax yielding $205 million for the city this year, the yield may be closer to $165 million. Now we are talking real money.

You might want to fetch an umbrella because I am not done.

To summarize the city's fiscal history in the last eight years in 25 words: Even though the city's expenses have exceeded the rate of inflation, the budget has stayed balanced because tax revenue growth has exceeded inflation as well.

So, what happens if tax revenues fall? Or inflation rises? Or the country enters a recession and unemployment rises, consumer spending declines, and business profits tank?

It's stormy weather all the time.

One answer is to cut city spending to meet funds available. Slash here. Trim there. Voilà! All is well.

Alas, it's not that easy. Robert O'Donnell, a former Philadelphia legislator, was speaker of the state House when the PICA was created. In fact, he was PICA's creator, so he knows whereof he speaks. [Editor's note: Listen to Part 1 and Part 2 of Ferrick's interviews with O'Donnell.]

O'Donnell also is one of the candidates to become PICA executive director to replace Rob Dubow, who joined the Nutter administration as finance director.

O'Donnell points to city "structural costs" that can't easily be cut in an economic downturn.

Another way to say that is "fixed costs." The list includes debt payments, and city employee pension and health benefits.

"Commitments have been made on pensions, on health care, that are not sustainable," O'Donnell said. ". . . It is an arithmetic fact that they are not sustainable."

A study released last week by the Pew Trusts on Philadelphia's pension and benefit costs made much the same point. The report called it "the quiet crisis."

Well, the crisis may become a whole lot louder in an economic downturn.

For instance, the city will pay about $455 million this year into the pension fund for city employees.

But that payment is based on the pension fund's performing well with its own investments, earning the equivalent of 9 percent a year.

Suppose the stock market goes down and stays down. The rate of return on investments will sink. If it sinks, the city will have to pay even more into the pension fund to meet its legal obligation to keep the fund solvent.

And so it goes.

Philadelphia is an old Eastern city. It can't grow itself out of an economic downturn. If it gets knocked for a loop by a recession, it will be slow in getting up.

There's not much you and me and that fellow behind the tree can do about the direction of the national economy, except maybe pray.

I suggest we pray.

And please leave room in the pew for Mayor Nutter and his cabinet.

Contact Tom Ferrick at tferrick@phillynews.com.