2003 Mid-Year Economic And Financial Report this year of opportunity with regard to tax reform, I present my 2003 Mid-Year Economic and Financial Report, the latest installment of

2003 Mid-Year Economic And Financial Report

Office of the City ControllerCity of Philadelphia

Jonathan A. SaidelCity Controller

C I T Y O F P H I L A D E L P H I A OFFICE OF THE CONTROLLER JONATHAN A. SAIDEL 12TH Floor, Municipal Services Bldg. CITY CONTROLLER 1401 John F. Kennedy Boulevard Philadelphia, Pennsylvania 19102 – 1679 (215) 686-6680 FAX (215) 686-3832

January 2003 To the People of the City of Philadelphia And the Commonwealth of Pennsylvania Dear Friends: If 2002 was the year of the birth of a tax-reform movement in Philadelphia, 2003 could be the year that tax relief becomes a reality for the city’s firms and families. With the work of a Charter-enabled Tax Reform Commission underway, and a new gubernatorial administration and General Assembly in Harrisburg looking to address statewide tax issues, we now have a historic opportunity to change the city’s overly burdensome and confusing tax structure. Two esteemed jurists offer us sage counsel on the issue of taxation. While Oliver Wendell Holmes, Jr. reminded us that “taxes are what we pay for civilized society," John Marshall warned us that “the power to tax is the power to destroy.” In the work that led up to the publication of my office’s November 2001 Tax Structure Analysis Report, four points became very clear that amplify the notion that taxes do destroy even though they are a necessary evil. First, Philadelphia taxes are too high compared to national and regional competitors. Second, Philadelphia is overly reliant on taxes on wages and business income where national and regional competitors tend to rely more on taxes on property and sales. Third, Philadelphia’s tax structure is overly confusing for those who try to comply with our tax laws. Finally, those who are faced with paying city taxes do not believe that the city offers enough in terms of city services and other amenities to compensate for its heavy tax burden. Of course, given the fact that taxes generate nearly $2 billion to fund city services in a budget that is just more than $3 billion, it is not at all easy to reduce our reliance on those tax dollars. Essentially, tax reform in Philadelphia then becomes a debate on how to change what we tax and reduce how much we tax while maintaining and improving service-delivery efforts. This leaves us few choices. We must pursue some combination of the following strategies: expand non-tax revenue collections or generate new revenues to offset the cost of tax reduction, become more efficient and more effective in the delivery of city services to reduce the cost of government, decide to eliminate or reduce certain governmental expenditures to fund tax reductions, and rely on tax reductions to improve the residential and business climate in Philadelphia to grow the tax base.

In this year of opportunity with regard to tax reform, I present my 2003 Mid-Year Economic and Financial Report, the latest installment of the Controller’s annual analysis of the city’s economic and financial condition. This edition of the Mid-Year Report presents an update to our Preferred Place Index that indicates that after years of positive movement, the city might have taken a step backward in the past year; considers Philadelphia’s economic health and the ability of the city budget to withstand additional tax cuts; and discusses what the city’s growing costs and debt burden will mean for the future of tax reform. This past November, Mayor Street made a significant mid-year appearance before city council where he stated his commitment to reduce the cost of city government in order to fund continuing tax reductions as well as expansion of mayoral initiatives. He called for the city to rightsize the government by dramatically reducing the city’s workforce and even vowed to find savings in the Police Department to generate funding for programs. My office has published numerous audits and policy reports that uncover ways to do just that, and I stand ready to help implement changes that can save millions of dollars by making government more efficient and effective. Will we be able to mitigate city taxes’ power to destroy while maintaining our civilized society? I certainly believe we can and offer informational products such as this report and my ongoing leadership to ensure that we do so. I am confident that — together with the mayor, city council, city officials, and citizens — we can take on the challenge of tax reform so that Philadelphia can truly become a preferred place to live, work, and visit.

OFFICE OF THE CITY CONTROLLER 2003 MID-YEAR ECONOMIC AND FINANCIAL REPORT

Jonathan A. Saidel — City Controller Brett H. Mandel — Director, Financial and Policy Analysis Anthony Di Martino — Assistant City Controller Bruno Moser — Assistant City Controller Matthew Bailey — Assistant City Controller Edward Fang — University of Pennsylvania Andrew Davenport — University of Pennsylvania January 2003

CONTENTS

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TABLE OF CONTENTS

REPORT IN BRIEF.......................................................................................................................... 1

1. THE ECONOMIC STATE OF THE CITY ......................................................................................... 5 Introduction ...................................................................................................................... 6 The U.S. Economy: Uncertainty Rules................................................................................. 6 Philadelphia’s Economy: Mild Cause For Optimism ............................................................... 9 Risks And Opportunities For The City’s Economic Outlook.................................................... 11

2. CITY REVENUES — TRENDS AND FORECASTS .......................................................................... 16 Introduction .................................................................................................................... 17 Tax Revenues.................................................................................................................. 18 Non-Tax Revenues........................................................................................................... 23

3. FUND BALANCE AND CITY EXPENDITURES — TRENDS AND FORECASTS .................................... 26 Introduction .................................................................................................................... 27 General Fund Obligations And Fund Balance....................................................................... 27 The Debt Threat Expands ................................................................................................. 42

4. THE CITY CONTROLLER’S PREFERRED PLACE INDEX................................................................. 47 How Is Philadelphia Doing?............................................................................................... 48 Preferred Place Index Findings — Decline After Years Of Improvement................................. 50 The Glass Was Half-Full — Is It Now Empty?...................................................................... 51

CONCLUSIONS AND RECOMMENDATIONS..................................................................................... 53 Make The Tax Reform Commission A Catalyst For Change................................................... 53 Implement The Recommendations Of The Controller’s Tax Structure Analysis Report............. 53 Work With The New Governor And General Assembly To Make Statewide Tax Reform Work For Pennsylvania — And Philadelphia ................................................. 54 Reduce City Expenditures To Enable Significant Tax Reform ................................................ 54 Heed The Warning Of The Preferred Place Index ................................................................ 55 Implement New Budgetary Tools To Encourage Enhanced Governmental Efficiency And Effectiveness .............................................................................................................. 55

APPENDIX A — PREFERRED PLACE INDEX METHODOLOGY AND INDICATORS ................................. 56 Methodology ................................................................................................................... 56 Economic Indicators......................................................................................................... 56 Quality of Life and Social Indicators................................................................................... 58 Governmental Effectiveness & Efficiency ............................................................................ 61 Raw Data ........................................................................................................................ 62

REPORT IN BRIEF

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REPORT IN BRIEF In this, a year with a sharpened focus on the city’s tax structure, the Controller’s Office once again turns its attention to Philadelphia’s economic and financial condition. As in past years, the annual Mid-Year Economic and Financial Report presents a view of the economic state of the city, comments on city revenue and expenditure trends, and analyzes important issues facing the city. This edition updates the Controller’s groundbreaking Preferred Place Index and concentrates much of its analysis on the need for tax reform and the ongoing effort to reduce the burden of city taxes on Philadelphia’s firms and families. Economic State Of The City The best description of the current state of economic affairs in the U.S. might be “uncertainty rules.” The Federal Reserve Bank’s 35 professional forecasters downgraded their economic predictions for the last quarter of 2002 by 50 percent. They are only cautiously optimistic about growth picking up by summer 2003. Throughout economic papers, magazines, and articles one finds more talk — and fear — of a double-dip recession than of a dramatic recovery. While many indicators report positive trends, it comes as no surprise to most casual economic observers that national unemployment is still on the rise: 6.0 percent in December 2002, up from 5.8 percent from a year ago. This past holiday season was more brief than usual, with only four weeks separating Thanksgiving and Christmas, which limited holiday hiring as well as consumer spending. Raising widespread concerns is the fact that the federal government transformed a $236 billion surplus in the year 2000 into a $159 billion deficit today. The values of many pension funds have plummeted due to declining stock values. Thus, the predicted growth for the Gross Domestic Product (GDP) has been decreased to 1.0 percent for 2002 and 3.2 percent for 2003 — only slightly outpacing inflation, which did not grow much over the year due to low interest rates and reduced prices. Experts forecast the growth rates to accelerate throughout 2003 from an annual rate of 2.6 percent in the first quarter to 4.2 percent in the fourth quarter. Revenue Trends Cognizant of the delayed economic recovery and the idiosyncrasies of the structure of Philadelphia’s economy, the Controller's Office projects moderate revenue growth. While recession has definitely curtailed city revenue growth, tax and non-tax revenue collections have been strong enough that the city finished the month of December up more than $3 million over the previous year’s collections from the same period. The Controller's Office projects that the city will collect $3.0 billion in revenue in FY 2003 and $3.1 billion in FY 2004. The largest component is generated by the Wage, Earnings, and Net Profits Tax (35.6 percent in FY 2002 — not including the portion collected for the Pennsylvania Intergovernmental Cooperation Authority). The second largest source of revenue is the Real Property Tax (13.0 percent in FY 2002) followed by the Business Privilege Tax (10.3 percent in FY 2002). The city also collects revenue from other taxes, other governmental entities, other funds of the city, and local non-tax sources such as fines and fees. Most important, the city’s dependence on its three largest taxes is problematic. The Wage, Earnings, and Net Profits Tax continues to be the biggest impediment to conducting business in the city, as it increases the relative cost of operation compared to the suburbs. While the second-largest tax, the Real Property Tax, is relatively unobtrusive in Philadelphia, by focusing on the value of the structure

REPORT IN BRIEF

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instead of location it does little to discourage speculatively keeping buildings vacant or dilapidated but instead targets users and occupiers of well kept properties. Owners of buildings in poor condition pay low taxes, encouraging them to keep buildings rundown (which then increases the cost to the city when forced to deal with abandoned property). Alternatively, levying higher taxes on underutilized property by weighting real estate taxes toward accurately assessed land value could encourage owners to redevelop vacant or abandoned sites. This would expand supply and bring lower costs to everyone conducting business in the city. Finally, although the city has lowered and will continue to lower the gross receipts portion of the Business Privilege Tax (BPT), taxing businesses even when they are not profitable discourages new business starts. The Net Income portion of the BPT has never been lowered and drives many emerging businesses out of the city as soon their operations become profitable. The cumulative effects of these taxes impede the city's blight-elimination and business-development efforts. Expenditure Trends And Fund Balance Summary For the first time in nine years, the city General Fund fund balance has shown a marked decrease. The city ended FY 2002 with an operating deficit of approximately $114.3 million. This is the first time that the city spent more than it raised in nearly a decade. The operating deficit can be attributed to increased spending that outpaced revenue growth. As a result, the Street administration ended FY 2002 with a fund balance of $139 million. For FY 2003, the Controller’s Office projects the city will incur an operating deficit of $73.2 million. However, because of the prior year’s fund balance surplus, we predict that the city will end the year with a budget surplus of approximately $97.8 million. Philadelphia continues to expand its debt burden, borrowing money to meet current needs. The city currently has over $3.8 billion in total long-term obligations. While Philadelphia is constrained by the calculated debt limit, as we have noted in prior reports, the city has circumvented this limit by using quasi-governmental agencies to borrow funds on its behalf. The city’s debt-service-to-revenue ratio is on the rise and the city now spends 14.2 cents of every revenue dollar on debt and other long-term obligations. Essentially, this burden is the city’s mortgage, the bill the city must pay before paying any of the city’s annual obligations. If, after paying this increasing debt burden, it is unable to meet its annual obligations from annual revenues, the city may have to increase taxes or reduce services to make ends meet. The City Controller’s Preferred Place Index Last year, the Controller’s Office introduced the Preferred Place Index as a new tool for understanding the state of the city. The Preferred Place Index provides one more tool for measuring the Philadelphia’s progress. This index — which includes data on economic, social, and governmental trends — offers a basis for comparing a broad range of statistics on the city from year to year. In addition to providing a regular update on the progress of the city generally, the Controller’s Office believes that the Preferred Place Index provides a starting point for tracking the city government’s performance. It is troubling to note that the index, which last year had climbed to its highest level, dropped significantly. In just one year, the index has fallen below its 2000 level, giving back all of the gains made since that year and more. Furthermore, for the first time in the years examined by the index, Philadelphia had more falling indicators than rising ones. Thirteen of the 25 indicators decreased and only nine increased. Even in the one other year when the index declined (1997 to 1998), more indicators increased than decreased. Previously, the city’s improvement had been driven by strong performance across the indicators.

REPORT IN BRIEF

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When the Controller’s Office debuted the Index in this report last year, the discussion was cautiously optimistic. Now, city officials and the citizenry must ask whether the city’s progress has been reversed. To move the city forward, the mayor has sought to make changes to the policies of yesterday. The Neighborhood Transformation Initiative and the Safe Streets program seek to fundamentally change service delivery in city neighborhoods. The school system is undergoing widespread reform through city and state efforts. The administration is leaving tax cuts in place and has announced plans to significantly reduce the size of the city workforce. All of these actions demonstrate concern about the city’s progress as well as efforts to provide better city services at a lower cost. Recommendations For The Future Make The Tax Reform Commission A Catalyst For Change — The Tax Reform Commission created pursuant to the charter change adopted by the city electorate in November 2002 is currently examining the city’s tax structure and preparing to make final recommendations in November 2003. With the proper support, the Commission can create the proper consensus regarding how to approach tax reform. The city should provide the Commission with all available resources to do its job and act swiftly on its recommendations upon their release. Implement The Recommendations Of The Controller’s Tax Structure Analysis Report — More than a year in the making, the Controller's November 2001 Tax Structure Analysis Report reviewed the role that city taxes play in driving residents and employers from Philadelphia, analyzed theoretical and empirical perspectives on taxation, and evaluated city taxes and tax rates in comparison with rival cities and surrounding jurisdictions. As a product, the report proposed the elements of a new tax structure for Philadelphia designed to attract and retain jobs and residents. The Tax Reform Commission should use the analysis and recommendations of the City Controller’s Tax Structure Analysis Report to form the foundation of its own recommendations for a new tax structure for Philadelphia that will fund the city's needs, be fair to taxpayers, and further the city's goals of economic development and neighborhood transformation. Work With The New Governor And General Assembly To Make Statewide Tax Reform Work For Pennsylvania And Philadelphia — With localities across the Commonwealth seeking relief from high property-tax bills as well as alternate sources of revenues to fund educational and other governmental services, there is a clear imperative to address taxation issues. The case of Philadelphia complicates tax issues. Because Philadelphia is less reliant on taxes on real estate and more reliant on taxes on wages — and because the Commonwealth currently allows Philadelphia to tax non-resident wages while prohibiting suburban jurisdictions from taxing those workers’ wages — statewide tax reform must treat the case of Philadelphia with special attention. City government should work closely with state officials to see that the interests of the city and its taxpayers are well represented as part of discussions surrounding statewide tax reform. Similarly, Philadelphia’s Tax Reform Commission should pay careful attention to current and proposed state tax laws as it considers potential reforms to the city’s tax structure. Reduce City Expenditures To Enable Significant Tax Reform — While locally generated tax and non-tax revenues have exceeded expectations in recent years — and continue to exceed current expectations — expanded city spending could threaten to limit the city’s ability to reform its onerous tax structure. Mayor Street has pledged to do more with less and dramatically reduce the cost of government so the city can afford both tax cuts and service expansion. The city should work to achieve a rightsized workforce and a government the citizenry can afford, and it can rely on the City Controller’s Office to aid its efforts.

REPORT IN BRIEF

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Heed The Warning Of The Preferred Place Index — In the 2002 Mid-Year Economic and Financial Report, the City Controller’s Office debuted the Preferred Place Index, a comprehensive matrix to gauge the progress of the city in becoming a preferred place to live, work, and visit. Last year, the Preferred Place Index showed that the city had made slow but steady progress toward improvement, this year, the data show that the city has taken a step back. For the first time in the years examined by the index, Philadelphia had more falling indicators than rising ones. The downturn in the Preferred Place Index could be a one-year blip on the screen if the city can take the necessary steps to improve quality of life while reducing the high cost of city taxes. If the city fails to take those necessary steps to improve services while decreasing the cost of government, the downturn could be the beginning of a disturbing trend that Philadelphia must avoid if it is to truly be a preferred place. Implement New Budgetary Tools To Encourage Enhanced Governmental Efficiency And Effectiveness — Is the public adequately involved in decisions surrounding how to raise and spend tax dollars? Do public officials have the right information before them to help guide decisions on how to use resources? Is Philadelphia government as efficient and effective as it can be? Although public attention is rarely focused on the budgeting efforts of governments, the budget process plays a central role in fostering effective governmental operations. In the months ahead, the Controller’s Office will complete a project that will identify additional reforms that can improve the budget system — ways to encourage high performance and excellent service while reducing the cost of government and making the budget more useful to public managers, elected officials, and the citizenry. The Controller’s Office will identify the best examples of efficient, accountable, and accessible government throughout the United States and the world and design reforms to establish a government that responds to performance-based incentives rather than less outcome-oriented incentives.

2003 Mid-Year Economic and Financial Report Office of the City Controller

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1. The Economic State Of The City

Economic Snapshot The best description of the current state of economic affairs in the U.S. might be “uncertainty rules.” The Federal Reserve Bank’s 35 professional forecasters downgraded their economic predictions for the last quarter of 2002 by 50 percent. They are only cautiously optimistic about growth picking up by summer 2003. Throughout economic papers, magazines, and articles one finds more talk — and fear — of a double-dip recession than of a dramatic recovery. While many indicators report positive trends, it comes as no surprise to most casual economic observers that national unemployment is still on the rise: 6.0 percent in December 2002, up from 5.8 percent from a year ago. This past holiday season was more brief than usual, with only four weeks separating Thanksgiving and Christmas, which limited holiday hiring as well as consumer spending. Raising widespread concerns is the fact that the federal government transformed a $236 billion surplus in the year 2000 into a $159 billion deficit today. The values of many pension funds have plummeted due to declining stock values. Thus, the predicted growth for the Gross Domestic Product (GDP) has been decreased to 1.0 percent for 2002 and 3.2 percent for 2003 — only slightly outpacing inflation, which did not grow much over the year due to low interest rates and reduced prices. Experts forecast the growth rates to accelerate throughout 2003 from an annual rate of 2.6 percent in the first quarter to 4.2 percent in the fourth quarter.

U.S. GDP Growth Rate Is Growing, But Still Below Recent Levels

0%

2%

4%

6%

Growth Rate 4.0% 2.7% 3.6% 4.4% 4.3% 4.1% 3.8% 1.7% 1.0% 3.2%

1994 1995 1996 1997 1998 1999 2000 2001 2002* 2003*

*ForecastSource: Federal Reserve Bank, Philadelphia


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Introduction Because Philadelphia’s economic condition is directly tied to the strength of the national economy, signs of a persisting recession or lackluster economic growth at the national level should mean trouble for the city. But while the nation is still feeling the effects of the recent recession, Philadelphia seems to have avoided the worst effects of the economic downturn. Because Philadelphia did not grow substantially during the economic boom, and because the city’s most important industries tend to be less likely to decline during recession, the downturn has not devastated the city as it has other jurisdictions. Both unemployment numbers and tax collections suggest the most devastating implications of the slump are bypassing the City of Brotherly Love. The U.S. Economy: Uncertainty Rules Because Philadelphia’s economic wellbeing is dependent on national and global economic performance, it is useful to start an examination of local conditions by analyzing larger trends. After years of growth, the unprecedented economic expansion of the last decade finally ended. Even with the Federal Reserve Bank’s attempt to invigorate the economy by keeping interest rates at record low levels (never matched for the last four decades), the economy is still only stumbling along. The stock market ended its third consecutive year with an overall loss. With a war looming and a flood of corporate and accounting scandals, it is not surprising to find consumer confidence at extremely low levels. In addition, retailers have been attempting to stimulate consumer demand with sales and zero interest offers without end. Though these efforts are helping to get rid of excess stock, they are also cutting deep into profit margins and future growth. The best description of the current state of economic affairs in the U.S. might be “uncertainty rules.” The Federal Reserve Bank’s 35 professional forecasters downgraded their economic predictions for the last quarter of 2002 by 50 percent. They are only cautiously optimistic about growth picking up by summer 2003. Throughout economic papers, magazines, and articles one finds more talk — and fear — of a double-dip recession than of a dramatic recovery. While many indicators report positive trends, it comes as no surprise to most casual economic observers that national unemployment is still on the rise: 6.0 percent in December 2002, up from 5.8 percent from a year ago. In November 2000, national unemployment was at 4.0 percent. This past holiday season was more brief than usual, with only four weeks separating Thanksgiving and Christmas, limiting holiday hiring as well as consumer spending. As a reflection of these facts, the New York-based Conference Board reports that the Consumer Confidence Index lost 4.6 percentage points in December, after rebounding slightly in November but being in constant decline for the previous five months. The Index now stands at 80.3 (1985=100). That number was at 94.6 a year ago and at 131.6 in December 2000. Raising widespread concerns is the fact that the federal government transformed a $236 billion surplus in the year 2000 into a $159 billion deficit today. The values of many pension funds have plummeted due to declining stock values. Anthony M. Santomero, the Federal Reserve Bank’s local President, sums the current conditions up as follows: “subpar growth and a lack of traction in the recovery.” Thus, the predicted growth for the Gross Domestic Product (GDP) has been decreased to 1.0 percent for 2002 and 3.2 percent for 2003 — only slightly outpacing inflation, which did not grow much over the year due to low interest rates and reduced prices. (See Figure 1.1.) One percentage point of the GDP growth is currently being attributed to the historically unprecedented refinancing boom. About 40 percent of all outstanding mortgage debt has been refinanced in the past two years, freeing-up much of otherwise constrained equity. In the process many consumers have opted to take additional cash out and repay credit card debt and perform home improvements.


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Figure 1.1 — U.S. GDP Growth Rate Is Growing, But Still Below Recent Levels

0%

1%

2%

3%

4%

5%

Growth Rate 4.0% 2.7% 3.6% 4.4% 4.3% 4.1% 3.8% 1.7% 1.0% 3.2%

1994 1995 1996 1997 1998 1999 2000 2001 2002* 2003*

*ForecastSource: Federal Reserve Bank, Philadelphia

National and regional experts forecast the growth rates to accelerate throughout 2003 from an annual rate of 2.6 percent in the first quarter to 4.2 percent in the fourth quarter. (See Figure 1.2.)

Figure 1.2 — Real GDP Growth Rate Is Predicted To Show Positive Trends In 2003

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2003Q1 2003Q2 2003Q3 2003Q4

Source: Federal Reserve Bank

One positive sign echoing this somewhat optimistic projection comes from the Institute for Supply Management. In its recently released December Non-Manufacturing ISM Report on Business, the organization reports that its survey of purchasing managers indicated that business activity increased for the 11th consecutive month, which is interpreted by many economists as a harbinger of good things to come. Inflation has been under control this past year, adding up to a mere 2.2 percent for the year 2002. (See Figure 1.3.)


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Figure 1.3 — The Consumer Price Index (Inflation) Remained Low Throughout The Year

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: BLS

Regional and state unemployment rates were little changed in November, but remained generally higher than a year ago. The national jobless rate rose to 6.0 percent. Non-farm employment decreased in 26 states. The Midwest had the lowest unemployment rate in November, at 5.2 percent, followed closely by the South, at 5.3 percent. The West continued to report the highest rate, at 6.1 percent. Over the year, the Northeast registered the largest unemployment rate change (+0.5 percentage point). The largest employment decreases were in Illinois (-67,100), Missouri (-47,400), Georgia (-44,600), and Massachusetts (-42,100). (See Figure 1.4.)

Figure 1.4 — The National Unemployment Rate Is Still Increasing Despite Other Positive Economic Indicators

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: BLS

Among the 274 metropolitan areas for which November non-farm payroll data were available, the largest over-the-year employment decreases were posted in Chicago, Ill. (-55,700), New York, N.Y. (-42,500), Seattle-Bellevue-Everett, Wash. (-35,300), and Atlanta, Ga. (-30,000). Looking into the future, forecasters predict that the unemployment rate will drop to 5.6 percent by the end of 2003. Inflation is expected to maintain its relatively low level of 2.2 percent for the upcoming year, depending on how a possible war and a growing budget deficit will be financed. This year, the impact of the dollar on employment and the national economy deserves a bit more attention. The dollar has lost about 15 percent versus the world’s leading currencies over the course of the past year. Imports are thus more expensive while exports are less expensive. But, high labor costs


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may hamper the competitiveness of American products on the world’s markets, thus it is not clear that demand for American-made products will increase in foreign markets than on home soil. The fall of the dollar also raises some concerns about inflationary tendencies. One market that could see relief is the battered travel industry. A cheap dollar will lure more foreign tourists to the US, surely a welcome influx of business and capital. On the other hand, a weak dollar makes American stocks much less attractive, and a resulting flight of US investments could send the dollar on a downward spiral. (See Table 1.1.)

Table 1.1 Exchange Rate Forecasts By Major Brokerage Houses

December 20, 2000

Rate December 23, 2001

Rate December 18, 2002

Rate Dollar per Euro 0.89 0.89 1.02 Dollar per Pound Sterling 1.12 1.44 1.60 Dollar per 100 Yen 0.69 0.77 0.83 Source: FinancialTimes.com, xe.com

Philadelphia’s Economy: Mild Cause For Optimism Perversely, Philadelphia’s onerous tax system may have saved it from experiencing a dramatic downturn during this recession compared to other major cities or metropolitan areas. Unfortunately, it is this very same tax structure that is responsible for the dire conditions in which Philadelphia finds itself. High labor costs (due in part to the Wage Tax) and high business costs (due in part to the Business Privilege Tax, fees, and regulations) prevented Philadelphia from sharing in the growth that other areas enjoyed during the recent national expansion. Therefore, Philadelphia has not been affected as much by the downturn, which hurt other areas. (See Figure 1.5.)

Figure 1.5 — Unlike Philadelphia, Areas That Enjoyed Recent Dramatic Expansion Are Now

Experiencing Increased Unemployment

0.0

2.0

4.0

6.0

8.0

2000 2001 2002

Per

cen

tage

Raleigh-Durham PMSA Austin, TX PMSASF City Phila PMSANYC City Phila CityLinear (Raleigh-Durham PMSA) Linear (Phila City)

Source: BLS

In fact, no Philadelphia industry sector except for Local Government and Services has had any significant growth over the last decade. Much of the growth in Services is attributable to shifts in employment that have resulted from changes in other industries — for example, when a manufacturer outsources its accounting functions by laying off internal accountants and then hires an outside firm to perform the same work. (See Table 1.2.)


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Table 1.2

Change In Philadelphia Employment By Sector (in thousands)

Year Manufacturing Transportation Trade Finance Services Local

Government 1993 66.8 37.7 116.8 57.7 266.4 67.8 1994 64.1 37.1 114.1 58.0 271.6 67.8 1995 61.4 33.4 114.0 55.5 273.0 68.3 1996 60.2 32.9 112.6 53.4 276.9 69.5 1997 58.7 33.6 110.3 53.0 282.2 69.6 1998 57.8 34.2 113.5 52.3 289.3 69.5 1999 57.3 35.8 118.4 50.6 293.2 70.2 2000 55.8 36.3 120.7 51.1 298.8 71.7 2001 52.5 35.8 118.1 50.3 300.3 70.9 2002 50.8 33.5 119.3 50.1 304.1 72.7

10-yr Avg. 58.5 35.0 115.8 53.2 285.6 69.8 Source: BLS (2002 numbers reflect November 2002 data) According to a new report released by Wharton School Professor Robert P. Inman, a member of the Mayor's Council of Economic Advisors, serious cuts in tax rates are crucial to the future well being of Philadelphia. The study points out that Philadelphia’s families and businesses are the most heavily taxed in the five-county area — and get the least service per tax dollar paid. Making the point that “the tax base is a city’s wealth,” the study encourages reductions in the Gross Receipts portion of the Business Privilege Tax, Wage Tax, and Real Estate Tax. Inman applauds the city’s recent efforts to reduce the local burden and increase fiscal competitiveness. He writes: “The city’s current strategy of reducing its tax rates will enhance the city’s tax base and reduce the rate of job erosion in the city.” Inman then cautions that “these tax rate cuts must be part of an annually balanced city budget.” One bright spot in Philadelphia’s economic state is the commercial real estate market. The local market has been one of the more active investment markets in the country this year, taking advantage of ten-year tax abatements and New York City’s downturn. Philadelphia ranked third by dollar volume of sales, generating much needed extra revenue for the city through the city’s tax on real estate transfers. Vacancy rates have been fairly stable and rents for first class office space fell about 5.0 percent during this year. Locally, forecasters believe that Philadelphia will follow national trends, but point out that in the past, Philadelphia lagged the recovery for several years before picking-up the economic boost. Because Philadelphia is in a tri-state area, much of its development also depends on the policies that the neighboring states embrace. The Leading Economic Indexes for the three states as computed by the Federal Reserve Bank of Philadelphia suggest modest growth for Pennsylvania and New Jersey. The Index is a forecast of the nine-month change in the state’s current economic activity. A positive number signals growth over the next nine months. (See Table 1.3.)


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Table 1.3

The Leading Economic Indices For Pennsylvania, New Jersey, And Delaware November Reading (preliminary) October Reading (revised)

Pennsylvania 0.5 0.9 New Jersey 2.5 2.2 Delaware (1.3) (1.4) Three State Average 0.6 0.6 Source: Federal Reserve Bank, Philadelphia

Risks And Opportunities For The City’s Economic Outlook Below are major risks and opportunities that could alter the city’s economic outlook.

Need For Tax Structure Reform In this time of economic uncertainty, the need for streamlining the city’s tax structure is self-evident. Companies as well as citizens are seeking ways to save money. Avoiding taxation by simply crossing the city’s borders and entering a low-tax jurisdiction is a simple way to do it. As surrounding counties and municipalities increase taxes all around Philadelphia, local efforts to reduce taxes could make Philadelphia a much more attractive location for firms and families. With the creation of the Tax Reform Commission, the city will have a chance to develop consensus on how to reduce its tax burden while being fair to its citizens and employers as well as conscious of the need to maintain fiscal stability.

Statewide Momentum For Tax Reform And Tax Reduction

With a new governor in Harrisburg and a General Assembly focused on statewide tax reform, it is possible that the Commonwealth of Pennsylvania will finally address its lingering tax problems. As the state’s largest city and economic engine, Philadelphia has always been treated differently in matters of taxation, which complicates tax-reform efforts. Thus, statewide tax reform may be very beneficial or very harmful to Philadelphia depending on how it resolves issues particular to taxation in Philadelphia and its suburbs. Similarly, with Harrisburg projecting state budget deficits in the future, it is unclear how tax reform will reduce tax burdens.

Property Tax Crisis This past summer, over 200,000 homeowners across Philadelphia received notice that their Real Estate Taxes would increase — many by more than 100 percent — because of a change in the market value of their homes. These large increases are due in part to increased property values, but also to the fact that city-determined property values have lagged behind true property values for many decades. Critics including neighborhood residents, elected officials, advocacy groups, and even some within the real estate assessment bureaucracy contend that the current system for valuing real estate is systemically flawed at best and unfair and discriminatory at worst. Given the broad-based understanding of the need for change, residents should be optimistic that something will be done to address these problems. The city now has the opportunity to transform the current assessment system into a top-of-the-line, fair, efficient, transparent, and certain assessment process. Such a change could restore much-needed confidence in a system that sorely needs it.


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Threats To The Tax Reform Effort Many warn that risks on the horizon could hamper efforts to reduce the city’s tax burden. The mayor has cited a number of obligations that will need to be addressed to maintain a balanced budget. To fund increased spending on the Neighborhood Transformation Initiative, Operation Safe Streets, and new labor contracts for police and fire employees, the city will have to curtail governmental spending. Additional spending to address pension fund losses, expand the Convention Center, and fund labor contracts for other municipal employees could loom in the future. Perennial worries such as the Philadelphia Gas Works and the School District of Philadelphia may be less imperative, but could always resurface needing fiscal assistance. If the city cannot find a way to reduce costs, such expenditures will threaten the city’s ability to address its onerous tax structure.

Some Positive Signs There are positive signs regarding the economic state of the city that bode well for Philadelphia’s future. After luring a major employer and its 700 jobs from the suburbs, announcing significant retail development in South Philadelphia and Northeast Philadelphia, and anticipating major market-rate housing development in South Philadelphia and Brewerytown, the city should see positive economic results that go beyond the arrival of Ikea furniture. The opening of a new international terminal at Philadelphia International Airport as well as the designation of the Port of Philadelphia as a Strategic Military Port could further the city’s expansion efforts.

The Controller’s Office Tax Structure Analysis Report Historic Change And Lasting Impact

In November 2001, the Controller’s Office released its Tax Structure Analysis Report, which helped frame a debate about how the city’s oppressive and confusing tax structure can be altered so that Philadelphia can reverse trends and retain and attract residents and employers. This landmark report inspired broad-based support for tax reform and helped form the foundation of what became a campaign by civic groups, business organizations, and media outlets to reduce taxes. To move the call for change forward, the voters of Philadelphia approved a change to the city’s charter to create a Tax Reform Commission that will recommend changes to the city’s tax structure. As the Tax Reform Commission deliberates, and as the citizenry and interested civic and business groups monitor its proceedings, we present this review of the Tax Structure Analysis Report, its conclusions, and the actions taken pursuant to its recommendations. Philadelphia Needs Tax Reform Despite moving from fiscal crisis to regular budgetary surpluses and even with small-scale tax reductions and some job expansion, Philadelphia lags behind the nation, the Greater Philadelphia region, and competitor cities in terms of economic growth. More important, Philadelphia’s population and job loss continued throughout the national economic expansion during the 1990s.


13

Total Population In Philadelphia Has Declined In Recent Decades

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1950 1960 1970 1980 1990 2000

Year

Pop

ula

tion

Source: United States Census Bureau

Total Employment In Philadelphia Has Declined In Recent Decades

-

200,000

400,000

600,000

800,000

1,000,000

1970 1980 1990 2000

Year

Jobs

Source: Bureau of Labor Statistics

The Need To Reduce Taxes Is Clear It should be no surprise to Philadelphia taxpayers that the Controller’s Office concluded that Philadelphia taxes are too high, that city taxes are overly complex and confusing, and that the city’s tax structure blunts the city’s advantages and frustrates economic development efforts.

$-

$2

$3

$5

$6

$8

NYC LA CHI

HOU SD PHO SA DAL DET

PHILA

Other and Unspecified

Utility

Business Income

Personal Income

General Sales

Property

Source: NYC IBO, 2000

Philadelphia's Local Tax Effort Ranked Higher Than All Other Large U.S. Cities Except New York

0.0%

5.0%

10.0%

15.0%

20.0%

Phila

. PA

Buck

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Ches

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Mon

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A

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NJ

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J

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Residential Tax Burden Commuter Tax BurdenSource: PEL, 2001

Philadelphia Residents Face A Higher Percentage Tax Burden Than Residents Of Suburban Jurisdictions

We Can Cut Taxes And Grow Our Economy The need to reduce taxes is abundantly clear. Tax cuts can work to improve economic conditions in the city without compromising budgetary priorities. Philadelphia’s experience in recent years provides compelling evidence that a tax cut does not necessarily threaten revenues. Despite positive growth in the U.S. economy since 1992 and positive growth in the regional economy since 1993, it was not until after the city reduced taxes that it experienced job growth. Even with a cumulative 8.0 percent decrease in the Wage Tax rate, total Wage Tax collections actually increased by 18.8 percent between fiscal year 1995 and fiscal year 2001.

After Recent Tax Cuts, Philadelphia Experienced Job Growth And Increased City Tax Revenues

(Wage Tax Numbers In Thousands)

$1,060,127

$1,188,565

$927,554

600,000

800,000

1,000,000

1,200,000

1990 1992 1994 1996 1998 2000Fiscal Year

Jobs

4.00%

4.50%

5.00%

5.50%

Wag

e Ta

x R

ate

Wage Tax Collections Jobs Wage Tax Rate

(Jo

b N

umbe

rs A

re F

or C

alen

dar

Year

)

Source: Bureau of Labor Statistics, City Department of Revenue


14

Major Recommendations For Change To create the Tax Structure Analysis Report, the Controller’s Office reviewed the role the local tax structure played in driving residents and employers from Philadelphia. Staff directed roundtable discussions with groups comprising representatives from the various sectors of the city economy and the City Controller conducted a listening tour where he heard perspectives from citizens throughout Philadelphia. The office studied theoretical perspectives on taxation, evaluated the city’s taxes in comparison with rival cities and surrounding jurisdictions, and modeled the revenue implications of alternative tax rates and structures. The Controller’s Office proposed the following major recommendations to create a new tax structure designed to attract and retain jobs and residents.

Recommendation Rationale Response Reduce the Wage Tax

Other competitor jurisdictions do not tax wages. This, the most hated of all Philadelphia taxes, does more to chase residents and businesses from the city than any other.

Mayor Street signed into law an ordinance to enact annual cuts to gradually reduce the city Wage Tax rate to 4.3500% for residents and 3.7823% for non-residents in FY 2007. The reductions would be greater if Wage Tax receipts grow at least 3.5% in a given calendar year — if receipts grow by 3.5% each year, the Wage Tax rate would be reduced to 3.9800% for residents and 3.4607% for non-residents in FY 2007.

Reduce the Gross Receipts portion of the BPT

Businesses find this a particularly galling tax because they must pay it on gross receipts whether they make a profit or not.

In the FY 2003-2007 Five-Year Plan, Mayor Street announced plans to enact annual cuts to gradually reduce the Gross Receipts portion of the BPT to 0.163% in FY 2007.

Reduce the Net Income portion of the BPT

Other competitor jurisdictions do not tax business profits. By taxing profits, Philadelphia encourages profitable businesses to move out.

No formal action to date.

Eliminate the city Net Profits Tax

Eliminating this tax would both simplify the tax system and reduce taxes for non-corporate businesses operating in Philadelphia who currently have a higher tax burden than their corporate competitors.


Implement Land-Value Taxation

Changing the way the city taxes property by shifting taxes from buildings to land values could discourage speculation and encourage development.

City Council hearings on a resolution to consider this recommendation will be held in the winter of 2003. A team from Drexel University is analyzing information for the Controller’s Office to help verify how such a shift would affect city taxpayers.

Shift Wage Tax burden to the Real Estate Tax base

Taxing wages less and property more would bring Philadelphia more in line with competitor jurisdictions and improve the city’s competitiveness.


Eliminate need for businesses to double-pay BPT in the second year of operations

A technical change in the way the tax is administered would carry no cost, but would eliminate the confounding aspect of our tax structure that makes new companies double-pay business taxes in their second year.

After the passage of state enabling legislation, Mayor Street signed into law an ordinance to eliminate the need for businesses to double-pay BPT in the second year of operations.

Adopt single-factor apportionment based on sales to determine liability for the Net Income portion of the BPT

Basing tax liability on the percentage of sales in the city alone instead of on the percentage of sales, personnel, and property in the city would dramatically reduce taxes for firms with few local sales. Such firms now leave the city in large numbers.

Legislation to implement this recommendation is currently pending before City Council.

Implement a Philadelphia New Jobs Tax Deduction

By giving tax breaks to businesses that expand employment, the city can encourage companies to create new jobs in Philadelphia.

Mayor Street signed into law an ordinance to create a Job Creation Tax Credit to provide firms a $1,000 per job tax credit against the firm’s BPT liability if they add 25 jobs or increase employment by 20% within five years.


15

The Cost Of Doing Nothing Is Continued Decline There may be a cost to reducing taxes, but there is certainly a cost to not reducing taxes. Without significant change to the city’s tax structure, Philadelphia will continue to lag economically behind competitor cities and surrounding jurisdictions. Population decline will continue. By reducing the overall cost of living and doing business in Philadelphia, and improving a tax structure that impedes smart growth, the city’s elected and appointed leadership can make an important stride toward making Philadelphia a preferred place to live, work, and visit.


16

2. City Revenues — Trends and Forecasts City Revenues Snapshot

Cognizant of the delayed economic recovery and the idiosyncrasies of the structure of Philadelphia’s economy, the Controller's Office projects moderate revenue growth. While recession has definitely curtailed city revenue growth, tax and non-tax revenue collections have been strong enough that the city finished the month of December up more than $3 million over the previous year’s collections from the same period.

City Of Philadelphia Revenues (in millions of dollars)

FY 2000 Actual

FY 2001 Actual

FY 2002 Unaudited

FY 2003 Controller Estimate


Total Tax Revenues 1,856.6 1,977.7 1,945.4 1,943.4 1,978.1Locally Generated Non-Tax Revenue 195.0 204.5 209.1 208.1 200.8Revenue From Other Governments 678.0 748.8 687.7 868.7 938.2Revenue From Other Funds 26.0 24.0 24.6 24.9 25.1Total Revenues 2,755.5 2,955.1 2,866.9 3,045.0 3,142.2Percentage Change 4.8 7.2 (3.0) 6.2 3.2Totals may not add due to rounding.


17

Introduction The Controller's Office projects that the city will collect $3.0 billion in revenue in FY 2003 and $3.1 billion in FY 2004. The largest component is generated by the Wage, Earnings, and Net Profits Tax (35.6 percent in FY 2002 — not including the portion collected for the Pennsylvania Intergovernmental Cooperation Authority). The second largest source of revenue is the Real Property Tax (13.0 percent in FY 2002) followed by the Business Privilege Tax (10.3 percent in FY 2002). The city also collects revenue from other taxes, other governmental entities, other funds of the city, and local non-tax sources such as fines and fees. Cognizant of the delayed economic recovery and the idiosyncrasies of the structure of Philadelphia’s economy, the Controller's Office projects moderate revenue growth. While recession has definitely curtailed city revenue growth, tax and non-tax revenue collections have been strong enough that the city finished the month of December up more than $3 million over the previous year’s collections from the same period. (See Table 2.1.)

Table 2.1 City Of Philadelphia Revenues

(in millions of dollars)

FY 2000 Actual

FY 2001 Actual

FY 2002 Unaudited



Total Tax Revenues 1,856.6 1,977.7 1,945.4 1,943.4 1,978.1Locally Generated Non-Tax Revenue 195.0 204.5 209.1 208.1 200.8Revenue From Other Governments 678.0 748.8 687.7 868.7 938.2Revenue From Other Funds 26.0 24.0 24.6 24.9 25.1Total Revenues 2,755.5 2,955.1 2,866.9 3,045.0 3,142.2Percentage Change 4.8 7.2 (3.0) 6.2 3.2Totals may not add due to rounding. In considering revenues, the city’s dependence on its three largest taxes is problematic. The Wage, Earnings, and Net Profits Tax continues to be the biggest impediment to conducting business in the city, as it increases the relative cost of operation compared to the suburbs. While the second-largest tax, the Real Property Tax, is relatively unobtrusive in Philadelphia, by focusing on the value of the structure instead of location it does little to discourage speculatively keeping buildings vacant or dilapidated but targets users and occupiers of well kept properties. Owners of buildings in poor condition pay low taxes, encouraging them to keep buildings rundown (which then increases the cost to the city when forced to deal with abandoned property). Alternatively, levying higher taxes on underutilized property by weighting real estate taxes toward accurately assessed land value could encourage owners to redevelop vacant or abandoned sites. This would expand supply and bring lower costs to everyone conducting business in the city. Finally, although the city has lowered and will continue to lower the gross receipts portion of the Business Privilege Tax (BPT), taxing businesses even when they are not profitable discourages new business starts. The Net Income portion of the BPT has never been lowered and drives many emerging businesses out of the city as soon their operations become profitable. The cumulative effects of these taxes impede the city's blight-elimination and business-development efforts.


18

Tax Revenues In the spring of 2002, city council passed legislation to continue to cut the Wage Tax. While the bill calls for expedited cuts if the annual growth rate exceeds 3.5 percent, Wage Tax revenues grew only by 0.2 over the span of this past calendar year. Thus the resident rate for FY 2004 will be 4.4625 percent and the non-resident rate will be 3.8801. As Wage, Earnings, and Net Profits Tax collections are based on Philadelphia employment, wages, and the applied tax rate, they are extremely sensitive to local economic conditions. Despite the national economic turmoil and a loss of jobs, total revenue collections for the first six months of FY 2003 are still above last year’s collections for the same time frame. (See Table 2.2.)

Table 2.2 Wage, Earnings & Net Profits Tax Historical Collections

(in millions of dollars) FY 1999

Actual FY 2000 Actual

FY 2001 Actual

FY 2002 Unaudited

Total Collections 949.8 985.7 1,059.0 1,019.3Percent Growth From Prior Year 4.5 3.8 7.4 (3.7)Note: The slump in FY 2002 revenue is due to the changes in accounting rules pursuant to GASB 33. These revenues do not include the portion of the tax collected for the Pennsylvania Intergovernmental Cooperation Authority. Wage Tax collections should remain fairly stable, due to the fact that over 40 percent of all contributions come from government and government-related services, healthcare, and education. These sectors are generally less likely to decline during times of economic downturns. (See Table 2.3.)

Table 2.3 Top Ten Industry Classifications By Wage Tax Remittance

(Calendar Year 2001)

Description

Total Wage Tax Collections

Percentage of Total

Collections Cumulative

Total Cumulative Percentage

Health Services $183,232,093 14.4 $183,232,093 14.4City Government/School District $121,567,057 9.6 $304,799,150 24.0Transportation and Public Utilities $82,500,763 6.5 $387,299,913 30.5Federal Government/U.S. Post Office $71,637,067 5.6 $458,936,980 36.1College And Universities $66,988,786 5.3 $525,925,766 41.4Retail Trade $61,319,678 4.8 $587,245,444 46.3Attorneys/Legal Services $54,681,134 4.3 $641,926,578 50.6Insurance $49,367,079 3.9 $691,293,657 54.5Construction $40,945,549 3.2 $732,239,206 57.7Wholesale Trade $38,643,142 3.0 $770,882,348 60.7Other $498,674,574 39.3 $1,269,556,922 100Source: Revenue Department


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Based on the Federal Reserve Bank’s and local economists’ projections of renewed growth by mid-2003, the Controller’s Office expects tax collections to increase in the latter part of FY 2003. Considering recent revenue-collection figures, federal and state government economic climate projections, and anticipated tax cuts, we project that the city will generate a total of $1,020.4 million in FY 2003 and $1,035.7 million in FY 2004 in Wage, Earnings, and Net Profits Tax collections (See Table 2.4.)

Table 2.4 Wage, Earnings, And Net Profits Projections


FY 2002 Unaudited



Total Collections 1,019.3 1,020.4 1,035.7Percent Growth From Prior Year (3.7) 0.1 1.5Note: These revenues do not include the portion of the tax collected for the Pennsylvania Intergovernmental Cooperation Authority. Cutting the Wage Tax is important, both economically and psychologically. In a new report by Wharton School professor Robert P. Inman (released during the summer of 2002), it was confirmed — once again — that “the residents and businesses within the City of Philadelphia are the most heavily taxed of all residents and firms within the five county metropolitan area.” But not only do Philadelphians lose a bigger share of their income to the tax man, according to Inman they also get less for the dollar in terms of services. Inman states that “increasing city tax rates will drive tax base and jobs from Philadelphia.” He elaborates that the “tax base is a city’s wealth – its fiscal nest egg – from which all current and future tax revenues will flow.” Inman calculates that a single percentage point increase in the Wage Tax could chase as many as 24,000 jobs from the city.

Real Estate Tax Real Estate Taxes are the city's second largest source of revenue, accounting for 13.0 percent of total FY 2002 revenue collections (up from 12.6 percent in FY 2001). A combination of the desirability of land and structures, the city's Real Property Tax rate, and the sensitivity of the city's assessment apparatus and collection efforts influences the size of potential Real Estate Tax collections. With a historically steady tax rate and an extremely conservative market valuation, Real Estate Tax collections generally did not vary dramatically from year to year. There are a number of changes that will affect the Real Estate Tax base and Real Estate Tax collections. First, to increase funding for city schools, the city shifted some Real Estate Tax millage from the city to the school district. This will not affect taxpayers, but it will reduce city collections by about $27 million — an amount that will increase in the future as the base expands. Second, the city reassessed a large number of residential properties this year and hit taxpayers with dramatic increases. Over one-half of the more than 225,000 properties that received increases were increased by more than 10.0 percent and more than 27,000 were increased by more than 30 percent. This move could significantly increase the Real Estate Tax base, but because a large number of appeals have been filed in an attempt to mitigate these abnormally large increases, the effect on the city’s budget could be somewhat muted. This year’s reassessment round basically ignored taxable vacant land: of the 28,305 vacant sites in the city, less than 1.0 percent saw their value increased while 1,090 parcels saw their value decreased. If the Board of Revision of Taxes (BRT) would reassess residential vacant land as it has reassessed other residential properties, total assessments and total collections could be expected to increase.


20

Uncertainty as to whether the current system for Real Estate Tax assessment will remain in place in the face of mounting criticism that the current methodology for valuing real estate is systemically flawed clouds the future of Real Estate Tax collections. Finally, given the political climate, it remains to be seen whether the BRT will continue to aggressively equalize property values in the coming years. Thus, future growth may be expected to be modest. (See Table 2.5.)

Table 2.5 Taxable Real Estate Tax Base Grows in FY 2003 and FY2004


FY 2002 Unaudited

FY 2003 BRT Anticipated


Taxable Market Value 31,745.6 33,145.6 33,974.2Percent Growth From Prior Year 4.3 4.4 2.5 The allocation of Real Estate Tax revenues between the city and school district has been slightly shifted in the past year. While the total tax rate remains 8.264 percent, the new city tax is 3.474 percent, down from 3.745 percent, which will represent an up-front $27 million “loss” to city revenues. Collection efforts should remain at previous year’s levels for both the current as well as for the previous year’s. Thus, we anticipate the first-year collection rate to remain at 91 percent. While the number of appeals may be higher than normal this year due to the dramatic increase in residential assessments, we do not anticipate significant adjustments to the proposed 2003 tax base. The Controller’s Office estimates steady growth in Real Estate Tax collections throughout the next few years. As the Board of Revision of Taxes’ equalization process takes into account the sales of the last three years, any current slump would see a considerable time lag. As the last few years yielded extremely high prices in real estate sales, the positive impact on tax revenues should become evident in future years. Moreover, low interest rates will continuing inflating real estate values, as the prospect of interest savings gets capitalized into the actual sales prices of homes and sites. Despite the increase in assessments, the millage shift and the fact that the city will receive no further proceeds from the city’s June 1997 sale of delinquent Real Estate Tax liens after FY 2002 (when they were almost $8 million) will result in a decrease in tax collections for FY 2003. The Controller's Office forecasts Real Property Tax revenues to decrease in FY 2003 and then to increase at a slightly slower pace than the market value of real estate would dictate. Given the shift of tax revenue to the school district, the loss of tax lien revenue, and the likelihood that the city will not aggressively reassess properties in a mayoral election year, we project a 4.5-percent decrease in FY 2003 and a 2.5-percent increase in FY 2004. (See Table 2.6.)

Table 2.6 Real Estate Tax Revenue Collections


FY 2002

Unaudited



Total Collections 373.6 356.8 365.7Percent Growth From Prior Year 2.6 (4.5) 2.5Note: FY 2003 collections are decreased due to the shift of tax revenues to the school district and the loss of revenues from the tax lien sale. Without this artificial drop in revenues, the growth rate could be expected to be about 4.2 percent for FY 2003.


21

Business Privilege Tax The Business Privilege Tax (BPT) comprises two components, the gross receipts portion and a net income portion. Like the Wage, Earnings, and Net Profits Tax, it is derivative of and acts as an indicator of the local economy, specifically business sales activity. The rates have been the basis of much discussion in city council and among the mayor’s advisors. In his budget address a year ago, the mayor proposed an increase in the pace of cuts to the gross receipts portion of the BPT. The current Five-Year Plan anticipates cutting this rate from 0.23 percent in FY 2003 to 0.1625 percent in FY 2007. As the economic downturn has taken its toll and many businesses have suffered, Business Privilege Tax revenue has taken a hit in real terms. (See Table 2.7.)

Table 2.7 Recent Business Privilege Tax Historical Collections

(in millions of dollars) FY 1999

Actual FY 2000 Actual

FY 2001 Actual

FY 2002 Unaudited

Total Collections 254.5 290.1 314.0 295.8Percent Growth From Prior Year 7.2 14.0 8.2 (5.8)Note: The slump in FY 2002 revenue is due in part to changes in accounting rules pursuant to GASB 33. Two new bills recently passed by city council could negatively affect future BPT collections. The Community Development Corporation Tax Credit offers credits against BPT liability for firms that make contributions towards Community Development Corporations. The cost of this program is limited to a total of $1.5 million per year. The Job Creation Tax Credit offers a credit of $1,000 per new job for city firms that expand their number of employees under certain conditions. Total credits are limited to 1.0 percent of the previous year’s BPT collections (approximately $3 million today). The BPT may be the most difficult city tax to predict since payments are due only once per year. Thus, forecasters have little indication as to projections based on month-to-month collections. In addition, 60 percent of BPT collections are derived from the income component, which fluctuates depending on corporate profits and the use of net losses that businesses are allowed to carry forward into a succeeding year to offset tax liabilities. Combined with rate cuts, we expect flat growth rates for the next two years. Revenues are estimated to be $294.3 million for FY 2003 and FY 2004. (See Table 2.8.)

Table 2.8 Business Privilege Tax Projections


FY 2001 Actual

FY 2002 Unaudited



Total Collections 314.0 295.8 294.3 294.3Percent Growth From Prior Year 8.2 (5.8) (0.5) 0.0

Sales Tax Sales Tax revenue in Philadelphia is collected from a 1.0-percent surcharge on sales added to the 6.0 percent state Sales Tax. While clothing and food are exempted, the tax responds to overall activity in the retail and entertainment sectors. With retailers reporting a lackluster holiday season despite unprecedented discounts, it is unlikely that Sales Tax collections will reach FY 2002 levels. Even though economic indicators keep suggesting consumer confidence will return to the marketplace, we project a lackluster growth of 0.9 percent for FY 2003 and only 0.7 percent growth for FY 2004. (See Table 2.9.)


22

Table 2.9 Sales Tax Collections (in millions of dollars)

FY 2002

Unaudited

First Half FY 2003

Preliminary



Total Collections 108.1 52.8 109.1 109.9Percent Growth From Prior Year (2.9) - 0.9 0.7

Real Estate Transfer Tax Every time a property is purchased in Philadelphia, the city collects a 3.0-percent tax on the value of the real estate sold. This tax is in addition to the 1.0-percent tax levied by the state. During active real estate markets, Transfer Tax collections increase in proportion to the number of transactions and the selling prices of properties. Ten-year tax abatements and low interest rates will help to maintain and yield high collections as these policy benefits get capitalized instantly into sales prices. The city’s general historical underassessment of properties also pushes prices upward. Furthermore, the city has enjoyed a variety of high-end real estate deals in FY 2003, jolting revenues to previously unseen levels. While most of these high-end deals represent sales that will not likely recur, a recently announced deal — an $80 million purchase of 3535 Market Street — indicates that there is no shortage of interest in major city properties. As the outlook on real estate investments remains optimistic, we feel strongly that revenues will maintain high levels in FY 2003 and 2004. (See Table 2.10.)

Table 2.10

Real Property Transfer Tax Collections (in millions of dollars)

FY 2002

Unaudited FY 2003 Controller

Estimate FY 2004 Controller

Estimate Total Collections 96.7 108.3 114.3Percent Growth From Prior Year 25.6 12.0 5.5

Other Taxes

The city’s other taxes (including most notably the Amusement and Parking Taxes) represent less than 3.0 percent of total tax collections each year. For the first time in years, the city’s four major professional sports franchises are all poised to make significant playoff runs and attract the large number of fans associated with winning teams. Additionally, higher ticket prices and the excitement of a new Eagles Stadium and a new Phillies ballpark should expand Amusement and Parking Tax revenues. The Controller’s Office, therefore, anticipates growth in this additional revenue stream. (See Table 2.11.)

Table 2.11

Other City Tax Collections (in millions of dollars)

FY 2002

Unaudited FY 2003 Controller

Estimate FY 2004 Controller

Estimate Total Collections 51.9 54.5 58.2Percent Growth From Prior Year (0.4) 5.0 6.8


23

Non-Tax Revenues Revenues from Other Governments

The largest component of revenues from other governments is the federal and state support for Department of Human Services (DHS) programs. Federal welfare reform drastically altered the structure of non-city funding for DHS services in Philadelphia. Statewide block grants replaced specific earmarks, and uncertainty about the fiscal stability of these programs developed. So far, however, funding has remained relatively stable. While uncertainty about the future has grown, a diligent effort toward filing for reimbursements has enabled the city to maintain its yearly contribution while increasing spending. There are three main streams of funding for DHS from other governments: Act 148, Title IV-E and Temporary Assistance for Needy Families. Act 148 governs the Commonwealth of Pennsylvania’s funding for services for dependent and delinquent children. Title IV-E of the Social Security Act governs the federal government’s contributions for foster care, adoption assistance and transitional independent living programs. Temporary Assistance for Needy Families (TANF) replaced the federal government’s Aid to Families with Dependent Children (AFDC) and provides funding to DHS for services provided to eligible children. State and federal funding for DHS programs accounted for $365.6 million in FY 2002 city general fund revenue. Several factors will influence how much the city collects in FY 2003 and FY 2004. First, we do not expect significant growth in caseloads for FY 2003 and FY 2004. Second, different expenses are reimbursable at different rates. Consequently, the type of services provided, not just the cost of the service, influences the amount of revenue collected from other governments. Additionally, the state has the opportunity to move money from one account to the other, depending on the other counties’ needs. As expenses increase, reimbursement levels can increase, but only if expenses increase in reimbursable categories. Finally, the actual cost of services increases yearly, and we expect it to increase by ten to 15 percent in FY 2003 and FY 2004. Combining these factors, the Controller's Office projects a 37.1-percent increase in DHS reimbursement revenue in FY 2003 and a 10.1-percent increase in FY 2004. (See Table 2.12.)

Table 2.12 DHS Revenue Projections

(Excluding Local Non-Tax Revenues) (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited


FY 2004 ControllerEstimate

State Funding (Act 148 Including Title IV-B funds*): 158.7 164.8 207.9 221.0Federal Funding (TANF): 137.8 49.5 131.1 155.6Federal Funding (Title IV-E): 141.1 151.3 162.1 175.1Other Revenue 0.2 0.1 - -Total 437.8 365.6 501.1 551.7Percent Growth From Prior Year 20.3 (16.5) 37.1 10.1Totals may not add due to rounding. *Title IV-B funds cease to be distributed in 2003. Note: The slump in FY 2002 revenue is due to the changes in accounting rules pursuant to GASB 33.


24

Due to changes in accounting rules, the city may no longer count money that is received more than 60 days after the end of that fiscal year toward revenue in that fiscal year,. (See further discussions of the implications of GASB 33 in the City Controller’s 2002 Mid-Year Economic and Financial Report.) For example, in FY 2002, approximately $60 million in Revenues from Other Governments arrived too late to be included in FY 2002 collections. While this amount has arrived and will now be included in FY 2003 totals, it is likely that some revenues anticipated in FY 2003 will arrive in a similar fashion and will be counted toward FY 2004 totals. Considering the peculiarities of GASB 33 along with the increases in DHS revenues and PICA transfers, the Controller's Office expects revenues from other governments to increase by 26.3 percent in FY 2003 and increase by 8.0 percent in FY 2004. (See Table 2.13.)

Table 2.13 Revenues From Other Governments Projections


FY 2001 Actual

FY 2002 Unaudited



Total Collections 748.8 687.7 868.7 938.2Percent Growth From Prior Year 10.4 (8.2) 26.3 8.0

Local Non-Tax Revenues Local non-tax revenues include the fines and fees charged by city departments as well as city revenue from Veterans Stadium and the Philadelphia Parking Authority. While the Parking Authority may have enjoyed an increase in responsibility and personnel — as well as the possibility of an increase in parking fines — the Controller's Office does not expect that the revenue from the Parking Authority will increase significantly in the future. The Philadelphia Eagles did not pay the city the amount they owed in luxury box income in FY 2002 (estimated at $4 million). While the Controller’s Office continues to urge the administration to make efforts to collect this money, we do not expect the team to pay that amount in FY 2003. Veterans Stadium revenue will cease after the end of the Phillies 2003 season. However, the Department of License and Inspection is expected to aggressively issue tickets for code violations as part of the administration’s Neighborhood Transformation Initiative. Additionally, programs such as Life Stop could yield extra revenue. All told, the Controller's Office projects local non-tax revenues to decrease by 0.5 percent in FY 2003 and by 3.5 percent in FY 2004. (See Table 2.14.)

Table 2.14 Local Non-Tax Revenue Projections


FY 2001 Actual

FY 2002 Unaudited



Total Collections 204.5 209.1 208.1 200.8Percent Growth From Prior Year 4.9 2.2 (0.5) (3.5)


25

Revenues From Other City Funds The city’s general fund receives revenue from other city funds each year representing less than 1.0 percent of total city revenues. We do not expect this revenue stream to vary significantly in future years. (See Table 2.15.)

Table 2.15 Revenues From Other City Funds Projections


FY 2002

Unaudited



Total Collections 24.6 24.9 25.1Percent Growth From Prior Year 2.5 1.2 0.8


26

3. Fund Balance And City Expenditures — Trends and Forecasts

Fund Balance And City Expenditures Snapshot For the first time in nine years, the city General Fund fund balance has shown a marked decrease. The city ended FY 2002 with an operating deficit of approximately $114.3 million. This is the first time that the city spent more than it raised in nearly a decade. The operating deficit can be attributed to increased spending that outpaced revenue growth. As a result, the city ended FY 2002 with a fund balance of $139 million. For FY 2003, the Controller’s Office projects the city will incur an operating deficit of $73.2 million. However, because of the prior year’s fund balance surplus, we predict that the city will end the year with a budget surplus of approximately $97.8 million.

General Fund Fund Balance

FY 2001–FY 2004 Estimated (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Revenues 2,955.1 2,866.9 3,045.0 3,142.2Obligations 2,881.5 2,981.1 3,118.2 3,232.7Operating Surplus/(Deficit) 73.6 (114.2) (73.2) (90.5)Prior Year Fund Balance 295.1 230.0 139.0 97.8Prior Year Adjustments (138.7) 23.2 32.0 32.0Fund Balance 230.0 139.0 97.8 39.3

Philadelphia continues to expand its debt burden, borrowing money to meet current needs. The city currently has over $3.8 billion in total long-term obligations. While the city is constrained by the calculated debt limit, it has circumvented this limit by using quasi-governmental agencies to borrow funds on its behalf. As the figure below shows, the city’s debt-service-to-revenue ratio is on the rise and the city now spends 14.2 cents of every revenue dollar on debt and other long-term obligations.

An Increasing Debt-Service-To-Revenue Ratio Threatens The City's Future Fiscal Health

10.011.012.013.014.015.016.017.018.019.020.0

1997 1998 1999 2000 2001 2002 2003* 2004*

Fiscal Years

Per

cen

tage

*ProjectedSource: City Controller's Office


27

Introduction For the first time in nine years, the city General Fund fund balance has shown a marked decrease. Last year’s drop in fund balance was attributed to a change in accounting principle promulgated by the Governmental Accounting Standards Board (GASB). As a result of the implementation of GASB 33 and its new revenue-recognition criteria, the city was not able to recognize revenues in the same manner as in past years. Had accounting rules not changed, the fund balance would have grown to over $310 million. The current-year drop, an actual decrease, is due to increased spending that outpaced revenue growth. In May 2002, the Street administration instituted the Safe Streets program as an attempt to rid the streets of open-air drug markets. The Controller’s Office estimates that this initiative has cost the city an additional $3-4 million per month, on average, in police overtime. In addition, the city is now required to contribute an additional $45 million per year to the School District. This added burden is being funded through a shift in the real estate tax formula as well as an additional $20 million payment to the District. The Controller’s Office projects obligations to increase by approximately 4.6 percent in FY 2003 and 3.7 percent in FY 2004. Employee salaries and benefits that comprise nearly 60 percent of total general fund obligations drive these increases. The most recent completed arbitration award granted police officers 3.0-percent and 3.5-percent across-the-board salary increases effective July 1, 2002 and July 1, 2003 respectively. Also included in the award was a 37-percent increase in health care costs in the first year and an additional 10-percent increase in the second year of the contract. These increases were granted even when the area CPI index for health care increased just 5.0-percent from October 2001 to October 2002. The fire fighters arbitration has yet to be completed but historically this contract mirrors the award granted police. Fiscal year 2003 brought the start of debt service payments on the new stadia, the maintenance and operation payment due to the Philadelphia Eagles as part of the lease negotiation, as well as debt service for the Neighborhood Transformation Initiative bonds. The administration hopes that all of these obligations will stimulate growth and development in the city to offset some of the debt service payments associated with these initiatives. However, should the development not materialize or the city’s revenue stream not maintain its current growth rate, the city could face a worrisome future. General Fund Obligations And Fund Balance The city ended FY 2002 with an operating deficit of approximately $114.3 million compared to a budgeted operating deficit in the council-approved FY 2003–FY 2007 Five-Year Plan of $70.3 million.1 This is the first time that the city spent more than it raised in nearly a decade. The operating deficit can be attributed to increased spending for programs such as Safe Streets as well as the required school district subsidy that outpaced revenue growth. As a result, the Street administration ended FY 2002 with a fund balance of $139 million. For FY 2003, the Controller’s Office projects the city will incur an operating deficit of 73.2 million. However, because of the prior year’s fund balance surplus, we predict that the city will end the year with a budget surplus of approximately $97.8 million. For FY 2004, the Controller’s Office estimates that the city will end the year with an operating deficit of $90.5 million but, because of the prior year fund balance projection and the estimated prior year adjustments, the city will continue to have a fund balance surplus. We estimate the FY 2004 continued surplus to be $39.3 million. (See Table 3.1.) 1 An operating surplus/deficit is based on the results of operations for the fiscal period, whereas a fund balance surplus or deficit is a cumulative total that includes the results of operations, commitments canceled, and prior-year activities. As a result, there may be an operating deficit in a given year but because the fund balance amount is cumulative, the year-end fund balance may be positive.


28

Table 3.1

General Fund Fund Balance

FY 2001–FY 2004 Estimated (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Revenues 2,955.1 2,866.9 3,045.0 3,142.2Obligations 2,881.5 2,981.1 3,118.2 3,232.7Operating Surplus/(Deficit) 73.6 (114.2) (73.2) (90.5)Prior Year Fund Balance 295.1 230.0 139.0 97.8Prior Year Adjustments (138.7) 23.2 32.0 32.0Fund Balance 230.0 139.0 97.8 39.3 In the FY 2003–FY 2007 Five-Year Plan, the Street administration asserted that although the city’s fund balances have been substantial over the past few years. It is important to recognize that they have represented a significantly smaller percentage of total expenditures than those of other American cities. This statement is misleading because the National League of Cities’ figure is based on cities of varying sizes. When comparing Philadelphia to cities with populations higher than 300,000 people it was clear that Philadelphia’s fund balance was disproportionately high. Similarly, when observing cities with large fund balances, it must be noted that most of the cities with large fund balances also had rainy day funds or restrictions on how that fund balance could be spent. Reconsidering the National League of Cities data, it is clear that Philadelphia’s unreserved fund balance is much larger than those of other major American cities. (See Figure 3.1.)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

30 Cities — By National Ranking Largest To Smallest

Fun

d B

alan

ce(0

00s)

Philadelphia

Source: National League of Cities

Figure 3.1 — According To The National League Of Cities:Philadelphia's FY 2000 Unreserved Fund Balance Was Highest

Among Cities With Populations >300,000


29

What Happened To The City’s Growing Fund Balance? After years of expanding, the city’s fund balance dropped significantly in FY 2002 as the city incurred an operating deficit for the first time in nearly a decade. The reduction in the fund balance is not because the city is not bringing in enough tax dollars, but rather because spending has increased considerably. When revenues do not match obligations, the only way the short fall can be made up is by spending down the fund balance. This is basically what happened during FY 2002. Even though collections of locally generated tax revenues and locally generated non-tax revenues exceeded budgeted amounts, the city’s fund balance decreased since spending increased and because changes in accounting rules forced the city to account for less revenue received in FY 2002 than previously allowed. FY 2002 total obligations increased by 3.5 percent or approximately $100 million over FY 2001. These increases were driven by the increased school district contributions ($45 million), increased police overtime ($14 million), and increased security in the Center City triplex group of City Hall, the Municipal Services Building, and the Criminal Justice Center ($7 million). The Controller’s Office projects FY 2003 total obligations to increase by approximately 4.6 percent or $137.1 million more than in FY 2002. While revenue growth continues to be minimal, FY 2003 will see the beginning of debt service payments for new stadia and NTI bonds as well as the continuation of the Safe Streets program and payments to the School District.

The city’s fund balance decreased by almost $100 million from FY 2001 to FY 2002. While tax revenues and non-tax revenues increased, revenue collections from other governments decreased in FY 2002. The driving force behind this decrease was GASB 33 and the new revenue recognition rules required by the implementation of this new accounting legislation. GASB 33 requires the city to record only revenues that will be received within 60 days of the end of the fiscal year. In past years, the city was able to record revenues when billed. For FY 2002, as a result of this change, actual Revenue from Other Governments recorded were $76 million less than budgeted — in part because approximately $60 million was received by the city beyond the 60-day recognition date. (See Figure 3.2.)

Figure 3.2 — In FY 2002, The City's Fund Balance Decreased In Real Terms For The First Time

In Nearly A Decade

$0$50

$100$150$200$250$300$350

1994 1995 1996 1997 1998 1999 2000 2001 2002Fiscal Year

Mill

ion

s

Fund Balance GASB 33 AdjustmentSource: City Controller's Office


30

Of course, the administration has great latitude in determining what the ending general fund results will be based on transfers to other funds and component units, along with the timing of the recognition of revenues and expenditures. Similarly, new initiatives — currently unknown to the Controller’s Office — could increase spending, increase revenues, or create savings. Therefore, our fund balance projections may be accurate based on our current understanding of spending priorities, but could be dramatically different than the resulting total based upon the administration’s policy and spending decisions. (See Table 3.2.)

Table 3.2 General Fund

FY 2001–FY 2004 Obligation Summary (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Payroll 1,173.3 1,188.3 1,245.5 1,263.5 Fringe Benefits 483.3 485.8 534.5 594.5 Purchase of Services 871.8 920.5 1,011.1 1,035.6 Materials and Supplies 84.0 80.0 75.9 73.4 Contributions and Indemnities 82.4 123.8 92.5 90.9 Debt Service 88.2 101.8 98.4 113.3 Payments to Other Funds 25.6 50.7 28.0 29.5 Advances 72.9 30.3 32.3 32.0 Total General Fund Obligations 2,881.5 2,981.1 3,118.2 3,232.7Percentage Increase 6.3 3.5 4.6 3.7

Class 100 — Personal Services and Fringe Benefits

The Controller’s Office projects general fund payroll obligations of $1.25 billion for FY 2003. Our estimate takes into consideration all proposed hiring of police, fire, and correctional officers as well as non-uniformed employees such as social workers and youth detention counselors. Also considered were all step increases and longevity payments built into the city’s pay plan. Included in our estimate is the 3.0-percent across-the-board pay increase for non-uniformed employees effective December 15, 2002 and the 3.0-percent across-the-board increase for police officers effective July 1, 2002. Currently, the Fire Department arbitration has not been completed. However, historically the Fire Department uniformed personnel have received salary increases similar to that awarded to the Police Department. As such we have adjusted our estimate accordingly. Our FY 2004 estimate takes into consideration a 3.0-percent across-the-board increase due to non-uniformed employees on July 1, 2003 and a 3.5-percent across-the-board pay increase for police uniformed personnel effective July 1, 2003. We again assume that the Fire Department arbitration award will mirror the award given to the police. (See Table 3.3.)

Table 3.3 General Fund Obligations

Class 100 — Personal Services (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Personal Service 1,173.3 1,188.3 1,245.5 1,263.5 Percentage Change 9.5 1.2 4.8 1.4Total General Fund Obligations 2,881.5 2,981.1 3,118.2 3,232.7


31

It remains crucial for the Street administration to address the cost and size of government. In October 1999, the city introduced a retirement incentive — The Deferred Retirement Incentive: “DROP.” This incentive program allows employees effectively to retire but remain on the payroll a maximum of four years from the date of enrollment. To date, there are over 3,100 employees enrolled in the DROP with an estimated 800 due to leave the payroll on September 30, 2003. In November 2001, the Street administration instituted a hiring freeze of all personnel other than uniformed employees (including correctional officers and case-load social workers) as a means of addressing the ever increasing and burdensome cost of payroll and fringe benefits. As of December 1, 2002 there are 354 fewer employees on the payroll than a year ago. Even with the reduced workforce, the level and quality of city services, according to the latest Mayor’s Report on City Services, continue to improve — a clear indication that more can be done with less. In May 2002, the Street administration introduced the Safe Streets program designed to rid the city of open-air drug sales. While this program has been touted as successful, it has not come without significant costs. Prior to the introduction of this program, police overtime averaged about $3 million per month. Since Safe Streets, police overtime has averaged over $6.5 million per month. In fact, in recent transfer ordinances, city council introduced two bills authorizing transfers of over $58 million to the police department to fund the Safe Streets initiative in FY 2002 and FY 2003, as well as the 3.0-percent increase granted the rank and file in the last arbitration award. As of the latest payroll data available, the city has spent over $35.6 million in overtime for police — an average of $7.13 million per month — for the first five months of FY 2003. Should this continue, the city would incur police overtime costs of $85.5 million for FY 2003. This represents an estimated $50 million above what was originally budgeted for police overtime. Addressing The Size Of The City Workforce Can — And Does — Reduce Costs

Because salaries and fringe benefits combined comprise almost 60 percent of the city’s annual general fund obligations, any effort to right size the government must consider the size of the city workforce. In November 2001, the Street Administration instituted a hiring freeze for all but uniformed personnel including correctional officers and case-load social workers to address burgeoning payroll costs. As a result, the number of general fund employees has decreased for the first time in more than a decade.(See Figure 3.3.) While many equate the reduction of the work force with cuts in city services, this has not been the case. According to the latest Mayor’s Report On City Services, Philadelphians affirmed that they were more satisfied than ever with the performance of city government this year when 66 percent —the highest rating in the six-year history of the survey — reported satisfaction with city services. Similarly, input, output, and outcome numbers continued to improve despite the reduction in the size of the city’s workforce. For example, the number of EMS responses increased by 2.5 percent from 183,687 in FY 2001 to 188,200 in FY 2002; 91.5 percent of citizens surveyed reported their trash picked up on time in FY 2002 compared to 90.3 percent of survey respondents in FY 2001; and in Fairmount Park they were able to maintain over 150 additional ball fields in FY 2002.


32

Fringe Benefits The FY 2002 annual average health care cost is based on the increase from October 2001 to October 2002 rather than the year-end increase, which as of this time, is not available. As the graph below illustrates, the medical care index shows a decrease in annual percentage change in CPI from last year to this year. It is not that the cost decreased, but rather the percentage of increase has diminished. As a result, the cost of health care continues to become more expensive. (See Figure 3.4.) Medical prices increased approximately 2.2 percent over the last five months, and were 5.0-percent higher than October 2001— the eighth period in a row where the increase was 5.0 percent or higher. Health care costs for city employees, both unionized and non-represented classes, remain one of the city’s most expensive fringe benefits. These expenditures have increased from $136.9 million in FY 1993 to $187.5 million in FY 2002, an increase of 37.0 percent.

Figure 3.3 — The Number Of General Fund Employees Shows A Decrease For The First Time in Ten Years

21,50022,00022,50023,00023,50024,00024,50025,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Dec-02

Fiscal Year

Empl

oyee

s

Source: City Controller's Office

In October 1999, as a way to begin the streamlining process, the city introduced a retirement incentive — Deferred Retirement Option Plan: “DROP.” This program allows employees to effectively retire but remain on the payroll for a maximum of four years from the date of their enrollment. Employees who choose this option stay in the city’s employment at their current salary, maintain their benefits, and receive any negotiated salary increases. They also receive a pension check. The amount of this check is calculated based on salary and time of service. Employees do not collect their pension check while participating in the DROP. Rather, their pension payment is deposited into an escrow account that is guaranteed to earn at least 4.5-percent interest annually. Employees may leave city employment at any time prior to the end of the four-year window without any penalty. Currently, there are 3,168 employees enrolled in the “DROP” with approximately 800 employees who must leave the payroll by October 1, 2003. The administration plans to replace all of these employees on a one-for-two ratio, except for uniformed personnel who will be replaced one-for-one. If the administration can achieve this replacement rate, the city could save an estimated $22 million per year in future personnel costs.


33

Figure 3.4 — While Health Care Costs Continue To Rise, The Annual Percentage Change In CPI For Medical Care Decreased In 2002

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Fiscal Year

Per

cen

tage

Ch

ange


The non-uniformed employee unions were granted a 7.0-percent annual increase in health care payments throughout the life of the current labor contract. The police uniformed employees received a new contract award on July 25, 2002 retroactive to July 1, 2002. This arbitration award for police uniformed employees granted them health care cost increases of 37 percent in the first year and additional 10.0-percent in the second year. It is highly unlikely given the continued skyrocketing cost of health care in the Philadelphia area that the city will be able to reduce future medical costs. Currently, the Fire Department arbitration award has yet to be settled. The Controller’s Office anticipates that health care cost increases will be similar to those granted the police. For FY 2003, taking into consideration the negotiated increases, we estimate health care costs to be $215.9 million. Any increase in health care costs resulting from the new arbitration award for fire uniformed employees will not fully impact the general fund until January 2003. However, given the rather large increase granted the police, the Controller’s Office projects health care costs for FY 2004 to be $229.4 million. Pensions The city is required by its Home Rule Charter to maintain an actuarially sound pension and retirement system (the “Municipal Retirement System”) covering all officers and employees of the city. The Municipal Retirement System was established by an ordinance of the city adopted in 1956, as amended and supplemented (the “Retirement System Ordinance”).2 Pennsylvania’s Pension Plan Act provides, among other things, for mandatory actuarial funding standards for all municipal pension systems in Pennsylvania and for minimum annual contributions by Pennsylvania municipalities — including the city — to their pension funds. In accordance with the Pension Plan Act, the city makes an annual payment to the Municipal Retirement System, including amounts required to be contributed in order to amortize the unfunded accrued actuarial liability in installments and over periods determined in accordance with the Pension Plan Act. In January 1999, The Philadelphia Authority for Industrial Development (PAID) issued approximately $1.3 billion in pension-obligation bonds. In connection with the issuance of these bonds, the city and PAID entered into a service agreement whereby PAID agreed to deliver the net proceeds of the bonds to the city for deposit in the Municipal Retirement System for the purpose of funding a portion of the unfunded accrued actuarial liability. According to the service agreement, the city must pay the debt service on these bonds. The Controller’s Office projects pension contributions to be $215.1 million in FY 2003. Because of the downtown in the national economy and its related effect on the stock market, the pension fund has not met its required return ratio of approximately 9.0 percent. In fact, in recent years the fund 2 Official Statement Pension Funding Bonds Series 1999A and 1999C.


34

has had a negative return similar to many other pension funds throughout the country. As a result, the city has had to contribute more to the pension fund in order to make up this shortfall. The Controller’s Office projects pension fund costs to be approximately $260.1 million in FY 2004. (See Table 3.4.) We should note here that should the pension fund experience a rate of return greater than the projected 9.0 percent then this payment will be less. Conversely, should the pension fund experience return rates that are less than proscribed, this payment will increase.


Class 100 — Fringe Benefits (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Flex Cash Payments 1.0 1.0 1.0 1.0Workers’ Comp./IOD Medical Claims 31.0 30.3 30.2 29.7FICA, Medicare 57.8 57.4 59.2 61.0Pension 194.2 196.6 215.1 260.1Medical Health and Welfare 186.7 187.5 215.9 229.4Group Life 6.8 6.9 7.0 7.2Group Legal 4.2 4.2 4.2 4.2Unemployment Compensation 1.4 1.8 1.8 1.8Tools 0.1 0.1 0.1 0.1Total Fringe Benefit Obligations 483.2 485.8 534.5 594.5Percentage Change (2.2) 0.5 9.9 11.4

Class 200 — Purchase of Services

Neighborhood Transformation Initiative The cornerstone of the Neighborhood Transformation Initiative (NTI) is approximately $295 million in tax-exempt government purpose bonds, tax-exempt private activity bonds, and taxable bonds. The Redevelopment Authority (RDA) on behalf of the city will issue these bonds leveraging $20 million in debt service payments annually.3 In fiscal year 2002, the RDA issued $146.5 million in NTI Bonds. These bonds were issued to finance a portion of the initiative undertaken by the Authority and the city to revitalize, renew, and redevelop blighted areas of the city. The bonds are obligations of the RDA. The city entered into a service agreement with RDA, agreeing to make yearly payments equal to the debt service on the bonds. The RDA assigned its interest in the service agreement to the parties providing the financing and in accordance with GASB Interpretation No. 2, RDA treats this as conduit debt and therefore does not include these transactions on its financial statements. Currently, the annual debt service on these bonds is approximately $10.8 million. However, the Street administration plans to complete the sale of the remaining bonds late in FY 2003 which will increase the debt service costs to $20 million annually. Space Rentals Through lease negotiations and space consolidations, the city has cut the cost of space rental from $27.3 million in FY 1994 to $14.2 million in FY 2002 — a decrease of almost 50 percent. We project that these costs will continue to decline in FY 2003 and FY 2004. 3 City of Philadelphia FY 2003–2007 Five-Year Financial Plan.


35

While the city cut space-rental payments to private landlords, costs associated with renting space from authorities have increased drastically. As part of lease and service agreements with authorities or quasi-governmental agencies, the city makes a rental payment for much of the office space now occupied by city employees equal to the annual debt-service on the bonds related to these buildings and marketed by these entities. The majority of these payments are made to the Philadelphia Municipal Authority (PMA) or PAID. Lease payments related to buildings or new construction used for office space increased from $5.6 million in FY 1989 to over $28.7 million in FY 2002, an increase of over 400 percent. Thus, while the city has decreased space-rental costs, it has increased the lease payments to quasi-governmental agencies in the process — total costs for city office space have actually increased in recent years. Department of Human Services The mission of the Department of Human Services (DHS) is to protect abused and neglected children and provide care and supervision to youth involved with the delinquent court system. Prevention programs are designed to empower families to raise children in a nurturing environment. Services are provided to ensure that vulnerable children and troubled youth are protected from further harm and that they receive care and support necessary to enable them to mature into responsible adults.4 The Children and Youth Division’s (CYD) family-preservation programs have proven effective in preventing the placement of children outside of their own homes, in expediting childrens’ return home when placement is no longer necessary, and in keeping children from re-entering the system. The department now has 15 family-preservation and reunification programs at various locations in the city. The department has been able to reduce the growth rate in the number of children requiring DHS-funded placement services by using family-preservation and family-to-family initiatives, which use foster parents as mentors for biological parents.5 Department contract obligations grew at a rapid rate from FY 1990 to FY 1995, increasing from $158.1 million in FY 1990 to $285.7 million in FY 1995,6 or an average increase of 12.3 percent per year. Since FY 1995, placements, as well as provider costs (which are driven by placements, per diem rates, and levels of care), have moderated. We are anticipating this moderate placement growth to continue. As a result, we are projecting contract obligations in CYD for FY 2003 to be $247.5 million, an increase of 5.0 percent over FY 2002. Our estimate is based upon our review of the latest contract-utilization data available. DHS officials have been predicting that welfare reform will result in sharp increases in child placements and increased contract costs. As a result, the administration continues to be conservative when budgeting for contracted services in CYD. To date, we have not observed any significant effect on DHS costs directly related to welfare reform. As a result of the department’s initiatives, the Controller’s Office projects FY 2004 costs for CYD to be $259.8 million, a 5.0-percent increase over FY 2003 costs. Just as CYD continues to look for alternative placement methods, the division of Juvenile Justice Services continues to seek alternatives to secure detention for delinquent youths. The division has used methods such as community-based service facilities, including foster care, group homes, and emergency shelter. Juvenile Justice Services has increased the number of youths served in their homes with such programs as in-home detention, pre-hearing supervision, day treatment, prevention, and aftercare services. As a result of these initiatives, we are estimating contractual obligations for FY 2003 to be $89.7 million. For FY 2004, we project these costs to increase to approximately $95.2 million.

4 City of Philadelphia FY 2002–2006 Five-Year Financial Plan. 5 City of Philadelphia FY 2001–2005 Five-Year Financial Plan. 6 Note that these costs reflect only direct appropriations and do not include fringe benefits, rents, or utilities.


36

Demolition Costs The city’s Five-Year Financial Plan includes $2 million in funding for demolitions in FY 2003. When the budget was drafted, administration officials were planning to use the proceeds of the proposed Neighborhood Transformation Initiative (NTI) bonds to fund the remaining demolition costs. However, the demolition schedule has fallen months behind schedule and demolitions are not occurring as anticipated. For FY 2004, funding for demolitions as allocated to Licenses and Inspection is zero as demolitions are planned to be funded from NTI bond proceeds. According to the Five-Year Financial Plan, there are approximately 26,000 vacant buildings throughout the city. Over the past 12 years (FY 1990–01), the city spent approximately $134 million, an average of $11 million per year, to demolish over 15,000 abandoned and imminently dangerous structures throughout the city. Over the last five years, the administration has routinely transferred additional monies, above the budgeted amount, to Licenses and Inspections via the Mid-Year and Year-End Transfer Ordinances to fund additional demolitions. Despite this level of activity, there is still a significant inventory of dangerous buildings that need to be demolished. According to the current Five-Year Plan, there are 7,371 vacant buildings that posed a real danger to the health and safety of neighborhood residents. Unfortunately, an additional 1,000 to 1,300 “dangerous” structures are added to the ongoing inventory each year, thereby affording the city little chance to reduce the inventory of dangerous buildings despite the increased funding. The city under NTI hopes to undertake an accelerated program to eliminate this backlog in approximately the next four years. (See Table 3.5.)


37

Table 3.5

General Fund Obligations Class 200 — Purchase Of Services


FY 2001 Actual

FY 2002 Unaudited



Landfill 33.9 35.5 37.5 39.4 Telephone 13.2 13.9 13.8 14.4 Electric, Streets 10.2 9.8 10.0 10.2 Public Property Electric 18.5 18.7 19.2 19.5 Gas 8.1 6.0 6.2 6.2 SEPTA 53.0 52.1 58.5 54.9 Legal Public Defender 27.1 29.3 30.4 31.0 Court Appointed Attorneys 7.4 7.6 8.6 9.1 Mental Health/Mental Retardation 9.4 10.6 10.8 11.0 PMA Sinking Fund 37.7 46.8 42.2 38.2 Space Rent 14.2 14.2 13.8 13.8 Demolition 19.0 10.9 2.0 0.0 Ambulatory Health Care 13.4 14.3 13.1 13.5 Maternal, Infant Health Care 1.1 1.2 1.2 1.5 Philadelphia Nursing Home 26.2 27.8 30.2 31.7 Infectious Disease Control 3.3 3.1 3.6 3.8 Children and Youth 228.3 235.7 249.8 264.8 Juvenile Justice 78.7 84.7 89.7 95.2 Prisons 25.4 31.3 35.0 41.0 Homeless 10.1 9.6 10.1 10.3 Philadelphia Eagles O & M 0.0 0.0 6.8 6.8 PAID, Stadium Bonds 0.0 0.0 23.0 18.4 RDA, Blight Bonds 0.0 0.0 10.9 18.0 Subtotal 638.2 663.1 726.4 752.7All other Class 200 233.6 257.4 284.7 282.9Total 200 Class Obligations 871.8 920.5 1,011.1 1,035.6Percentage Change 2.7 5.6 9.8 2.4

Class 300 & 400 — Materials, Supplies, and Equipment

For FY 2003, we estimate general fund obligations for materials, supplies, and equipment to be $75.9 million — a decrease of $3.9 million from FY 2002. Except for the amount budgeted for vehicle purchases, the city seldom spends the total amounts budgeted for materials, supplies, and equipment. Since the creation of the Office of Fleet Management in 1994, the city has spent approximately $150 million of general fund obligations on new vehicle purchases. The city’s FY 2003–2007 Five-Year Financial Plan budgets $12.0 million each year throughout the life of the plan for new vehicle purchases. For FY 2004, we estimate obligations in this category to continue to decrease by $2.5 million to $73.4 million. (See Table 3.6.)


38

Table 3.6

General Fund Obligations Class 300 And 400 — Materials, Supplies, And Equipment


FY 2001 Actual

FY 2002 Unaudited



Materials, Supplies, and Equipment 59.8 55.0 54.8 53.2Vehicles 16.3 18.4 11.8 12.0Equipment 7.9 6.6 9.3 8.2Total 300 and 400 Class Obligations 84.0 80.0 75.9 73.4Percentage Change 5.5 (4.8) (5.1) (3.3)

Class 500 — Contributions, Indemnities, and Taxes

For FY 2003, we estimate Class 500 obligations to be approximately $92.5 million. For FY 2004, we estimate that obligations in this class will experience a slight decrease to $90.9 million due to a reduction in settlement costs. (See Table 3.7.) In a continuing effort to improve the quality of education in Philadelphia, the city has reached an agreement with the state regarding school funding. As part of the agreement, the city committed to pay an additional $45 million annually to the schools. The first $20 million will be in the form of an additional contribution to the $15 million annual payment the city has made to the district in each of the last seven years. The remainder will come from a shift in Real Estate Tax millage that will direct money to the district that previously would have gone into the city’s general fund. In FY 2003, the tax shift will amount to approximately $27 million. The Controller’s Office believes that these payments will be made in FY 2003 and that they will continue indefinitely into the future. Also included in Class 500 obligations is the operating subsidy the city pays to Philadelphia Community College. In FY 2002, the city contributed $21.8 million to the college. For FY 2003 and FY 2004, we project this subsidy to remain stable at approximately $22.1 million. Since FY 1992, when the city’s open-case inventory had over 4,000 open cases with an average case settlement in excess $34,000, the city has substantially reduce its indemnity costs. The city currently has an open inventory of 1,065 civil rights and claims division cases. Given the city’s historical trend of settling between 40 percent and 50 percent of these cases with payment, it is likely that an estimated 400 to 550 of these cases will have some financial impact on the city. According to the City Solicitor’s Office, these 1,065 cases have a potential loss in excess of $58.0 million. However, it is likely that these cases will be settled below the level of the Solicitor’s risk assessment. In FY 1994, the Pennsylvania Intergovernmental Cooperation Authority (PICA) granted approximately $23 million of bond proceeds to the city to be used to reduce the huge backlog of cases that amassed during the city’s fiscal crisis. Many of these cases were settled as part of the “Day Backward Program” which was launched in FY 1993. In FY 1995, PICA granted the city an additional $7.8 million to continue the backlog reduction. As of June 2001, there was in excess of $1.3 million of the FY 1994 grant and the entire FY 1995 grant still available to pay “Day Backward/Forward” costs. According to PICA officials, with interest earnings, the total available in the PICA Special Indemnity Fund is in excess of $12 million. PICA officials stated that they have not received a request for use of these funds since April 1995. The city has included these funds in the FY 2003 budget, but has yet to request these funds from PICA.


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Contingent liabilities and potential future costs are discussed in the following paragraphs: 1. In April 1997, a class-action lawsuit was filed against the city challenging the city’s collection of two kinds of license fees: the multi-family dwelling license fee and the residential rental license fee. The authority for these fees appears in the Philadelphia Code at §7-502(2) and §7-502(3), respectively. The plaintiffs challenged these fees on several grounds:

• That the residential rental license fee is not calculated to fairly recoup the cost to the city of carrying out the various activities required under the code;

• That the collection of the residential rental license fee is impermissibly duplicative of the multi-family dwelling license fee, at least with respect to non-owner-occupied condominium units;

• That the city should be stopped from collecting both the residential rental license fee and the multi-family dwelling license fee on the basis of its prior conduct in temporarily suspending assessment of both fees against the same dwelling unit.

Plaintiffs have demanded refund of all of the multi-family dwelling and residential rental property fees collected since 1993. During this period, the city has collected approximately $12.2 million in residential rental property license fees and approximately $24 million in multi-family dwelling license fees. 2. Sylvester J. and Vicki A. Schieber (the parents of Shannon Schieber) have brought a federal rights action against the city and the Philadelphia Police Department. The plaintiffs assert that police officers violated their civil rights under the Fourteenth Amendment’s substantive due process clause because they failed to break down the door of Shannon Schieber’s apartment in response to a 911 call. Ms. Schieber was found strangled to death in her apartment the next day. The city contends that a thorough investigation was being undertaken during which time the 911 caller retracted his original assertion that noises were heard in Ms. Schieber’s apartment. The plaintiffs seek over $10 million in lost future earnings and other damages. All District Court proceedings are currently stayed while the defendants appeal the District Court’s denial of their summary judgment motion. 3. The city has received a demand for payment from an attorney in Alabama representing an individual who has in his possession two loan certificates issued by the city in 1855 and 1856 with a total face value of $2,100 and $1,500 respectively. He has demanded on behalf of his client that the city pay the principal and accrued interest on these certificates which, according to his calculations, comes to approximately $18.1 million as of January 2002. The city has informed the claimant’s counsel that the claim is defective on its face and could not be honored by the city since the claimant has provided no proof of any kind that he is the rightful successor to any obligation of the city. 4. The Philadelphia County Personal Property Tax was a tax on intangible personal property, generally stocks. This tax provided an exemption for stock of corporations that pay the Pennsylvania Capital Stock or Franchise Tax. The city has received a number of formal and informal requests for refunds and a putative class action suit for refunds has been filed. The class action has been stayed pending the outcome of Annenberg v. Montgomery County in which the Pennsylvania Supreme Court will decide whether the Montgomery County Personal Property Tax (which is identical to the Philadelphia tax) is Constitutional. Common Pleas Court’s proposed findings concluded that there is no justification and has recommended maintaining the underlying lawful tax and severing the discriminatory exemption.


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In June 2000, The Pennsylvania Supreme Court struck down the exemption set forth in Pennsylvania’s Personal Property Tax for stock holdings in corporations that pay Pennsylvania Capital Stock or Franchise Tax. The court severed the exemption, and directed Montgomery County (the lead defendant) to provide the taxpayer with meaningful relief which could include refunds or re-assessment of the tax without exemption against all taxpayers. The City of Philadelphia imposed this tax until 1996 and is subject to timely refund claims for the years 1993 through 1996 totaling approximately $36 million. The city is also a defendant in a putative class action. The city has entered into a settlement agreement, which has received preliminary court approval and which will, if finally approved by the court, dispose of both these cases. 5. Finally, in June 1997, the city and the school district sold $106.3 million in delinquent Real Estate Tax liens to PAID. The objective of this transaction was to increase delinquent tax collections by using private agencies and to make tax revenue immediately available to the city and district, which would not otherwise be available for years. Mechanically, PAID issued bonds to finance the purchase of the tax liens and then, utilizing the services of private collection agencies, collected the delinquent taxes, remitting a portion of those taxes to fund PAID’s debt service. However, collections following the tax lien sale have been disappointing and it appears collections may fall $42 million short, leaving the private collection agencies frustrated and PAID — a public agency created by the city, but deemed independent of the city under state law — in danger of defaulting on its bonds. While some officials suggest that bond insurance will cover the shortfall, the city and school district may step in and make up the difference in an effort to prevent a default, which would protect city and district bond ratings.


Class 500 — Contributions, Indemnities And Taxes (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Community College 20.8 21.8 22.1 22.1Refunds 0.1 0.0 0.1 0.1School Contributions 15.0 60.0 35.0 35.0Other Contributions 16.2 10.7 7.3 6.5Other Indemnities* 30.3 31.3 28.0 27.2Total 500 Class Obligations 82.4 123.8 92.5 90.9Percentage Change 17.9 50.2 (25.3) (1.7)*Based upon the Controller’s analysis of current claims.

Class 700 — Debt Service

The Controller’s Office estimates FY 2003 debt service obligations to be approximately $98.4 million. For FY 2004, based upon our current analysis of the city’s debt service requirements, we estimate the city will obligate $113.3 million for general fund debt service. The city will continue to seek voter authorization as required for the Capital Budget in each of the next two years, albeit for declining amounts. The City Controller’s Office currently does not expect the city to issue any new general obligation debt in FY 2003. However, we do expect the city will complete a general obligation bond sale during FY 2004. As such, we have included the potential debt service in our FY 2004 projections. In addition we anticipate a short-term borrowing in FY 2004 equivalent to, or slightly higher than for the FY 2003 borrowing. (See Table 3.8.)


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As detailed in the Controller’s recent Mid-Year Economic and Financial Reports, the city is fast approaching its legal debt limit. As a result, Capital Budget requests should be examined more closely with the possibility of projects being postponed to later years. We continue to encourage the administration to continue its effort to minimize future long-term borrowings.

Table 3.8 General Fund Obligations Class 700 — Debt Service


FY 2001 Actual

FY 2002 Unaudited



Principal, Interest, Long-Term* 75.2 89.5 87.6 100.9Sinking Fund Reserve Payments 0.0 1.2 1.3 1.3Arbitrage 0.0 0.0 0.0 0.0Interest, Short-Term** 12.3 10.4 8.8 10.4Commitment Fees 0.7 0.7 0.7 0.7Total 700 Class Obligations 88.2 101.8 98.4 113.3Percentage Change (3.6) 15.3 (3.3) 15.1* Assumes $250 million in new General Obligation bond issues in FY 2004. ** For FY 2004 assumes TRANS of $350 million at 3.0 percent for 360 days.

Class 800 & 900 — Transfers, Advances, and Miscellaneous

The city continues to have a service and fee agreement with the Pennsylvania Convention Center Authority (PCCA). Per the agreement, the city must pay from its current operating revenues a fee equal to the annual debt service requirement on the PCCA bonds plus any operating deficit the Convention Center incurs, as well as any deficiency in the debt service reserve account. For FY 2003 and FY 2004, we estimate these payments to be $32.3 million and $32.0 million, respectively. (See Table 3.9.) Many officials have expressed a desire to expand the Convention Center. This project would be a joint venture between the city and the state. The Controller’s Office does not expect this expansion to occur anytime before FY 2004. Should Convention Center expansion move forward prior to FY 2004, Class 900 costs would increase dramatically. However, recently passed state legislation gives the city a reduced role in the operations of the current convention center and increases the number of board members without corresponding increases in the city’s representation on the board. The Street administration has stated that if the surrounding counties do not support funding for Convention Center expansion to reflect their increased role in Convention Center governance, the city may withdraw its support for expansion.


Class 800 And 900 — Transfers, Advances, And Miscellaneous (in millions of dollars)

FY 2001 Actual

FY 2002 Unaudited



Transfers* 25.6 50.7 28.0 29.5Advances and Miscellaneous** 72.9 30.3 32.3 32.0Total 800 and 900 Class Obligations 98.5 81.0 60.3 61.5*FY 2002 total reflects a General Fund payment to the Grants Revenue Fund of $18 million. **FY 2001 total reflects $45 million loan to PGW.


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The Debt Threat Expands Less than ten years ago, the city was on the brink of bankruptcy. The city was unable to fund capital projects and infrastructure repairs, and if started, projects were often unfinished. Budget deficits, both operating and fund balance, were mounting. Pension-obligation payments went unpaid in favor of operating dollars. In short, the city was “robbing Peter to pay Paul.” But, with the enactment of the PICA legislation, sound fiscal initiatives, sane spending policies, and a strong national economy, the city was able to begin the ascent back to safe financial ground. Unfortunately, the city may be returning to the “spend, spend, spend” habits of the 1980s and may be pursing unwise policies today that will undo all the progress of the last decade. The Neighborhood Transformation Initiative, the increased contributions to the School District, the loan to PGW as well as the stadium loans are beginning to put a strain on the city’s budget. As a result, the Controller’s Office continues to examine the city’s debt policy to make sure that how the city decides to incur debt today does not place such a burden on future Philadelphians that it will be more difficult to avoid fiscal peril in the future. The city must not continue to mortgage the future for the good of today. As we did in our 2001 and 2002 Mid-Year Financial and Economic Reports, the Controller’s Office continues to ask the following questions: “How much debt is too much?” Can the city continue to borrow or obtain voter authorization to borrow general obligation bonds as the city approaches its legal debt limit? Can the city afford to have its quasi-governmental agencies continue to borrow funds for which the city has leasing agreements equal to the annual debt service payments on these bonds? Is it fiscally sound to continue to borrow to meet today’s needs? The answers to these questions could have an impact on the city’s ability to continue to deliver services at the current level or the city’s ability to fund much-needed tax cuts. As of June 30, 2002, the city’s legal debt limit was approximately $1.253 billion, with a legal debt incurring capacity remaining of $133.9 million. Thus, the city cannot seek authorization for more than $133.9 million in new debt without first repaying some of it’s existing debt.7 With a stadium-finance agreement completed and Neighborhood Transformation Initiative borrowings moving forward the Controller’s Office continues to look at the city’s increasing debt service burden in an attempt to focus attention on these important questions. Prior to the inception of PICA, Philadelphia’s long-term obligation as applied against the debt limit was near its maximum. When PICA was established in late FY 1992, the remaining debt margin was a mere $82 million. From FY 1993–FY 1995, the city did little borrowing on its own. During this time, city capital budgets were funded through PICA. As a result, the city lowered its gross bonded debt and expanded its debt margin. However, with recent city borrowings and continued bonded debt authorization, the debt margin has narrowed. We are again approaching a situation similar to what occurred in the early 1990s. (See Figure 3.5.)

7 City of Philadelphia Annual Financial Report FY 2001, Table 10, p. 143. For more discussion, see the Controller’s 2001 Mid-Year Economic and Financial Report and 2001 Mid-Year Economic and Financial Report.


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Figure 3.5 — Philadelphia Is Again Flirting With Its Debt Limit

0

200

400

600

800

1,000

1,200

1,400

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Debt Limit Applied Debt Debt Margin


Fiscal Year

Mill

ion

s

While the debt limit is important, it does not present the total scope of Philadelphia’s increasing debt burden. As Table 3.10 shows, Philadelphia has a significant amount of long-term obligations, other than general obligation bonded indebtedness. Other long-term debt primarily consists of PICA obligations, as well as obligations to pay the debt service on related authority debt, including the Philadelphia Municipal Authority (PMA), the Pennsylvania Convention Center Authority (PCCA), the Philadelphia Authority for Industrial Development (PAID), and the Philadelphia Parking Authority (PPA). In addition, while the table also shows that the city’s net bonded debt has decreased considerably between FY 1986 and the present, the city has experienced a considerable (27.8-percent) increase in net bonded debt from FY 2000 to FY 2002. While net bonded debt has decreased significantly since 1986, there has been substantial increases in both other and overlapping long-term debt (PICA and other governmental agency debt).

Table 3.10

Percentage Components Of City Total Long-Term Indebtedness FY 1986 FY 1990 FY 1995 FY 2000 FY 2002 General Obligation Bond Debt 79.1 52.6 19.3 18.0 22.3 Other Long-Term Obligations 20.9 47.4 33.0 55.2 55.8 Overlapping Debt 0.0 0.0 47.7 26.8 21.9 Total 100 100 100 100 100 The City of Philadelphia is burdened by a greater amount of other long-term obligations and overlapping debt than its own bonded debt. At the end of fiscal year 2002, the City of Philadelphia had in excess of $3.8 billion in total outstanding long-term debt, excluding the debt of the Philadelphia School District and the remaining portion of the city’s unfunded pension liability — approximately $1.7 billion. This amount does, however, include the Pension Obligation Bonds of approximately $1.2 billion. The debt service on these bonds is accounted for as a fringe benefit cost. While we have not included the remaining actuarial accrued pension liability in this chart, it is included in the calculation of the city’s overall debt burden as shown in Table 3.11.


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Table 3.11

Schedule Of Outstanding City Bonded Debt FY 1986, FY 1990, FY 1995, FY 2000, And FY 2002

(in millions of dollars) FY 1986 FY 1990 FY 1995 FY 2000 FY 2002 Gross Bonded Debt* 1,436.7 1,449.9 589.3 687.2 878.1 LESS: Self-Sustaining Debt 487.9 361.1 135.9 47.0 22.8 Sinking Fund Bonds 12.0 1.3 2.0 0.0 0.0 Amounts Held by Fiscal Agents 357.7 246.4 0.0 0.0 0.0 Net Bonded Debt 579.1 841.1 451.4 640.2 855.3 PLUS Other Long-Term Obligations: PMA 130.0 427.0 435.0 340.7 300.7PAID** 15.2 14.6 13.4 1,333.4 1,323.5Philadelphia Parking Authority 8.0 7.5 6.6 5.3 111.9RDA 0.0 8.6 7.2 5.2 142.6PCCA 0.0 285.6 296.0 267.7 253.8PA Higher Education Authority 0.0 15.9 14.8 11.5 9.9Sub-total 732.3 1,600.3 1,224.4 1,963.8 2,142.4 PLUS Overlapping Debt: PICA*** 0.0 0.0 1,117.3 952.9 840.7Total Long-Term Debt 732.3 1,600.3 2,341.7 3,556.9 3,838.4*Source: City of Philadelphia Comprehensive Annual Financial Reports, Table 10. **Includes pension-obligation bonds — debt service is paid from general fund categorized as fringe benefits. ***Source: PICA 1999 Refunding Bond Official Statement. As detailed above, only 22.3 percent of this $3.8 billion amount is actually attributed to the city’s own net bonded debt. Quasi-public entities such as PICA, PMA, PAID, PCCA, and PPA issued the remaining 77.7 percent of overlapping and other long-term debt. The majority of this debt is from PICA and PAID borrowings. While the city’s own actual long-term debt obligations and its debt incurring capacity increased slightly in recent years, the city’s overall debt burden escalated dramatically. As illustrated in Table 3.12, Philadelphia’s long-term obligations — both owned and owed by the city — and debt borrowed on behalf of the city by city-related or quasi-governmental agencies have increased in the last decade. General obligation bonds represent actual city bonded debt that was borrowed for the current and future benefit of the city through infrastructure repairs and capital construction. This is the only debt that counts against the city’s debt limit. As can be seen in the table, while general obligation bond debt service has been relatively stable for a number of years, it is now increasing. Debt service costs are projected to be approximately $90 million per year or higher should the city complete a general obligation bond sale now in the planning stages.


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Table 3.12

General Fund Debt Service And Long-Term Obligations (in millions of dollars)

Actual FY

1997

Actual FY

1998

Actual FY

1999

Actual FY

2000

Actual FY

2001

Actual FY

2002 Forecast FY 2003

Forecast FY 2004

General Obligation Bonds 75.9 69.0 68.3 78.4 75.9 89.5 87.6 85.8

FY 2004 - $250 million (proposed) - - - - - - - 17.4

Phila. Industrial Correctional Ctr. (PMA)

5.9

5.9

5.9

6.0

7.9 7.8

7.6 5.5

Criminal Justice Center (PMA) 28.4 28.4 28.3 27.1 27.1 27.2 27.2 25.4

Municipal Services Building (PMA)

3.6

3.7

3.7

7.4

7.4 7.4

7.4 7.4

Philadelphia Parking Authority 0.2 0.3 0.3 0.3 0.3 1.1 5.6 5.6

PICA 109.3 109.3 107.1 107.1 107.0 107.3 79.2 76.4

PA Convention Center 24.3 24.3 24.3 24.3 24.3 30.3 24.3 24.3

PA Convention Center Expansion - - - - - - - -

RDA Housing Bonds 0.9 0.9 0.4 0.7 0.7 0.7 0.7 0.7

Blight Bonds (proposed) - - - - - - 10.9 20.8

One Parkway Building (PAID) - - - 4.1 4.1 3.7 4.1 4.1

Pension Obligation Bonds (PAID) - - 12.5 70.6 60.2 51.7 63.1 66.8

Less Paid by Other Funds - - (1.5) (8.5) (7.2) (6.2) (7.6) (8.0)

Stadium Financing - - - - - - 23.0 18.4

Eagles Stadium O & M Reimbursement - - - - - - 6.8 6.8

Sub-Total — City Long-Term Debt 248.5 241.8 249.3 317.5 307.7 320.5 339.9 357.4

Pension Unfunded Liability 160.2 168.0 142.2 105.3 100.6 122.7 165.3 207.6

Less Paid by Other Funds (19.2) (20.2) (17.1) (12.6) (12.1) (14.7) (23.1) (29.1)

Total — City Long-Term Obligations 389.5 389.6 374.4 410.2 396.2 428.5 482.1 535.9

Total General Fund Obligations* 2,463.9 2,479.6 2,616.6 2,711.2 2,881.5 2,981.1 3,118.2 3,232.7

Ratio: Long-Term to Total Obligation 15.8 15.7 14.3 15.1 13.7 14.4 15.5 16.6

City General Fund Revenues* 2,424.8 2,497.2 2,628.1 2,755.5 2,955.1 2,866.9 3,045.0 3,142.2

PICA Revenues** 109.3 109.3 107.1 107.1 107.0 107.3 79.2 76.4

Hotel Tax Revenues 17.4 17.6 21.1 26.2 33.0 29.5 31.1 32.2

Vehicle Tax Revenues 0.0 0.0 0.0 0.0 4.1 3.9 4.2 5.0

Total Revenues 2,551.5 2,624.1 2,756.3 2,888.8 3,099.2 3,007.6 3,159.5 3,255.8

Debt Service To Revenue Ratio 15.3 14.8 13.6 14.2 12.8 14.2 15.3 16.5

*Total obligation and revenue numbers for FY 2003 and FY 2004 are Controller’s Office projections. **PICA Revenues include proceeds from the 1.5-percent tax on resident wages, earnings, and net profits that finance PICA bonds.


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The city’s long-term debt has steadily increased since FY 1995 and is projected to increase through FY 2004 even as the PICA deficit-funding bonds expire (in FY 2002), relieving the city of nearly $30 million in annual debt-related payments. This, then, is the city’s debt threat. After years of decreasing, the city’s debt-service-to-general-fund-revenues ratio is increasing. The City Controller’s Office estimates that in FY 2003, the city will be spending 15.3 cents of every revenue dollar to pay off a long-term debt obligation.

If future estimates are correct, this figure will increase in FY 2004 to 16.5 cents. Essentially, this burden is the city’s mortgage, the bill the city must pay before paying any of the city’s annual obligations. If, after paying this increasing debt burden, it is unable to meet its annual obligations from its annual revenues, the city may have to increase taxes or reduce services to make ends meet. (See Figure 3.6.)

Figure 3.6 — An Increasing Debt-Service-To-Revenue Ratio Threatens The City's Future Fiscal Health

10.011.012.013.014.015.016.017.018.019.020.0

1997 1998 1999 2000 2001 2002 2003* 2004*

Fiscal Years

Per

cen

tage

*ProjectedSource: City Controller's Office

While this warning may be stark, it actually understates the potential danger. The city’s debt burden and the city’s debt-service-to-general-fund-revenues ratio have been increasing during a period of robust economic expansion. As the effects of the economic slowdown linger and revenue growth is austere, the city’s debt burden will place a much larger demand on city revenues. The debt issue bridges the present to the future and thus charges the current generation with a responsibility to posterity. Just as wise debt-related decisions in the present can improve the city and create facilities and infrastructure that will be enjoyed for years to come, unwise decisions can place the city’s future in jeopardy. As it considers issues related to debt policy, we urge the current administration to be mindful that its actions will have effects that will reach far into the future. The city’s elected leadership must not mortgage the future to meet today’s needs.


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4. The City Controller’s Preferred Place Index

Preferred Place Index Snapshot Last year, the Controller’s Office introduced the Preferred Place Index as a new tool for understanding the state of the city. The Preferred Place Index provides one more tool for measuring the city’s progress. This index — which includes data on economic, social, and governmental trends — offers a basis for comparing a broad range of statistics on the city from year to year. In addition to providing a regular update on the progress of the city generally, the Controller’s Office believes that the Preferred Place Indexprovides a starting point for tracking the city government’s performance. It is troubling to note that the index, which last year had climbed to its highest level, dropped significantly. In just one year, the index has fallen below its 2000 level, giving back all of the gains made since that year and more. Furthermore, for the first time in the years examined by the index, Philadelphia had more falling indicators than rising ones. Thirteen of the 25 indicators decreased and only nine increased. Even in the one other year when the index declined (1997 to 1998), more indicators increased than decreased. Previously, the city’s improvement had been driven by strong performance across the indicators. When the Controller’s Office debuted the Index in this report last year, the discussion was cautiously optimistic. Now, city officials and the citizenry must ask whether the city’s progress has been reversed. To move the city forward, the mayor has sought to make changes to the policies of yesterday. The Neighborhood Transformation Initiative and the Safe Streets program seek to fundamentally change service delivery in city neighborhoods. The school system is undergoing widespread reform through city and state efforts. The administration is leaving tax cuts in place and has announced plans to significantly reduce the size of the city workforce. All of these actions demonstrate efforts to provide better city services at a lower cost.

The City Controller's Office's Preferred Place Index Fell Significantly In 2002

95

100

105

Index Score 95.7 95.7 99.2 98.2 100.0 102.0 99.7

1996 1997 1998 1999 2000 2001 2002



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How Is Philadelphia Doing? Last year, the Controller’s Office introduced the Preferred Place Index as a new tool for understanding the state of the city. Since the city’s fiscal crisis, city government and others had focused largely on the financial condition of the city rather than other factors to assess the state of the city. There are, however, many other factors that can help us judge the health of the city. By many of these measures, Philadelphia is clearly a city in decline. The city lost nearly one-quarter of its residents and jobs in the second half of the 20th century — a trend that continued through the last decade. However, the city has demonstrated gradual improvement in many measures in recent years. Children are healthier and the crime rate is decreasing. All of these factors, good and bad, provide valid measures that we can use to consider the city’s condition. The fiscal crisis of the early 1990’s highlighted the importance of the city’s financial condition, but the state of Philadelphia’s fund balance is an inadequate measure of the city’s overall status. A budget surplus does not make up for the loss of population or the spreading scourge of blight staining city neighborhoods. The city has been unable to keep residents or employers from moving beyond its borders. By better understanding the forces pushing firms and families from the city, elected and appointed officials — and the citizenry — will be better able to address the city’s problems. The Preferred Place Index provides one more tool for measuring the city’s progress. This index — which includes data on economic, social, and governmental trends — offers a basis for comparing a broad range of statistics on the city from year to year. In addition to providing a regular update on the progress of the city generally, the Controller’s Office believes that the Preferred Place Index provides a starting point for tracking the city government’s performance. This index should spur city departments to consider ways to increase the index total overall through enhancements in department level performance measures. With such a focus on overall-outcome measures, the city can then make strides toward institutionalizing mechanisms to promote and ensure constant governmental improvement. The twenty-five indicators used for the index were discussed in greater detail in the 2002 Mid-Year Economic and Financial Report. The methodology and the indicators are outlined in Appendix A to this document. It is troubling to note that the index, which last year had climbed to its highest level, dropped significantly. In just one year, the index has fallen below its 2000 level, giving back all of the gains made since that year and more. Furthermore, for the first time in the years examined by the index, Philadelphia had more falling indicators than rising ones. (See Table 4.1.) Thirteen of the 25 indicators decreased and only nine increased. Even in the one other year when the index declined (1997 to 1998), more indicators increased than decreased. Previously, the city’s improvement had been driven by strong performance across the indicators.

Table 4.1 Preferred Place Index Indicator Directions: 1996–2002

1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 Improving Indicators 14 15 13 18 17 9 Declining Indicators 10 9 11 7 6 13 Unchanged Indicators 1 1 1 0 2 3 Source: City Controller’s Office


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When the Controller’s Office debuted the Index in this report last year, the discussion was cautiously optimistic. There was, however, concern that other cities and surrounding jurisdictions had fared better than Philadelphia in many of the measures used to create the Preferred Place Index. Other cities were, and are, growing, not shrinking. Other cities reduced crime more dramatically. Then, Philadelphia’s slow advance left the city losing ground to other cities. Now, city officials and the citizenry must ask whether the city’s progress has, in fact, been reversed. The Preferred Place Index is not the only warning sign about the city’s progress. In the past year, a number of surveys and studies echoed the notion that Philadelphia’s recent improvement may have stalled:

• The Beacon Hill Institute at Suffolk University ranked Philadelphia 43rd of 50 urban areas in its annual study on competitiveness. The report noted that the low rank “is a result of its poor government and fiscal policy and inadequate human resources.”

• Philadelphia was named the sixth least safe city recently, based on an analysis of FBI statistics.

• During the 1990s, Philadelphia fell from 15th to 20th place among the 38 largest metropolitan areas in the percentage of adults with a bachelor’s degree or higher, according to The Philadelphia Inquirer’s analysis of United States Census data.

• David Rusk, author of Cities Without Suburbs, noted that the economic gap between Philadelphia and its suburbs continued to worsen.

• In a September 2002 analysis of the city’s real estate market, Merrill Lynch stated that “Philadelphia’s CBD is what it is and might never be anything more than a stagnant market with little growth going forward.”

• According to Report Card 2002: The Well-Being of Children and Youth in Philadelphia, the city received a “mixed — with inconsistent progress” rating for the third consecutive year including several measures showing decline.

• Philadelphia lags its suburbs in a variety of health indicators, according to a recent study by the State University of New York Downstate Medical Center.

• Of the ten largest cities in America, Standard & Poor’s gives Philadelphia the lowest bond rating.

As outside groups question Philadelphia’s direction, the Street administration recognizes that all is not well with the city. In many areas of city government, the mayor has sought to make changes to the policies of yesterday. The Neighborhood Transformation Initiative and the Safe Streets program seek to fundamentally change service delivery in city neighborhoods. The school system is undergoing widespread reform through city and state efforts. The administration is leaving tax cuts in place and has announced plans to significantly reduce the size of the city workforce. All of these actions demonstrate efforts to provide better city services at a lower cost.


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Preferred Place Index Findings — Decline After Years Of Improvement In 2002, the Preferred Place Index fell to a score of 99.7. (See Figure 4.1.) Prior to this decline, the index had fallen only once in six years. The decrease in 2002 brings the index below the 2000 score, nearly down to the index level of 1998. This decline is actually the largest change in terms of percentage (-2.3 percent) in the index since 1997–1998 and by far the largest set back as the only other time the index declined was between 1998 and 1999 when the decrease was a much-lower 1.0 percent.

Figure 4.1 — The City Controller's Office's Preferred Place Index Fell Significantly In 2002

95

100

105

Index Score 95.7 95.7 99.2 98.2 100.0 102.0 99.7

1996 1997 1998 1999 2000 2001 2002


What The Preferred Place Index Measures The 25 indicators used for the Preferred Place Index were discussed in greater detail in the 2002 Mid-Year Economic and Financial Report. See Appendix A for information on the methodology and indicators. City Sales Tax Revenue — measures the commercial activity in the city through sales tax collections. City Wage Tax Revenue — measures the amount of wages paid to those that work or live in the city. Real Estate Rent and Occupancy — measures the demand for Class A office space in the city. Value of Construction Permits — measures the amount of construction activity in the city. Business License Income — measures the number of new businesses starting in the city. Employment in Philadelphia — measures the number of people working in the city. Unemployment of Philadelphians — measures the number of city residents who are unemployed. Hotel Nights — measures the strength of the hospitality industry through occupancy in major hotels. Migration Trend/Average Wages — measures total wages that the city loses when people move out. Migration within the PMSA — measures the number of people that move to the suburbs each year. Immigration — measures the net number of immigrants moving to the city. Library Circulation — measures civic involvement by looking at total circulation of library materials. Air Quality — measures the number of good air days as a proxy for overall environmental health. Home Sales Price — measures the average home sales price to show the health of city real estate. Unnatural Death Rate — measures how many people die in accidents, suicides, assaults, and legal intervention. Infant Mortality — measures the number of infant deaths as a proxy for health care in the city. Teenage Births — measures the number of children born to teenagers in the city. Major Crimes — measures the total number of major crimes in the city. Dependency Ratio — measures the percentage of residents receiving public assistance. School Student Performance — measures the performance of 11th graders on the PSSA test. High School Graduation Rate — measures the percentage of students who graduate within four years. Low-Income Students — measures the percentage of students classified as low income. Cost of Government per Resident — measures the total cost of government divided by population. City Employees per Resident — measures the number of city employees divided by population. Cost of Capital — measures the city’s bond rating as a proxy for financial stability.


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The decrease in the index was not uniform. As indicated in the table below, the eight economic indicators were the weakest of the index. Seven of the eight economic indicators fell between 2001 and 2002. Migration data, which is subject to revision by the Internal Revenue Service, also demonstrated a troubling decrease. However, the decline in the index was not confined to indicators related to the economy or migration. Ratings fell for a broad range of indicators including Home Sales Prices, Air Quality, High School Graduation Rate, Student Performance, and Cost of Government Per Resident. (See Table 4.2.)

Table 4.2 Preferred Place Index Indicators and Index Scores: 1996–2002

Indicator 1996 1997 1998 1999 2000 2001 2002 City Sales Tax Revenues 86.4 93.3 95.2 100.4 100.0 104.5 99.5 City Wage Tax Revenues 90.7 89.9 93.8 97.3 100.0 101.6 101.5 Real Estate Rent and Occupancy 75.9 78.6 81.7 95.1 100.0 96.0 89.1 Value of Construction Permits 94.5 98.0 133.7 103.2 100.0 102.8 102.7 Business License Income 144.3 105.6 95.9 93.3 100.0 95.2 99.5 Employment in Philadelphia 99.1 98.8 98.0 99.0 100.0 101.9 100.4 Unemployment of Philadelphians 73.8 83.6 85.2 96.7 100.0 100.0 95.1 Hotel Nights 85.8 94.6 93.2 92.6 100.0 118.1 114.6 Migration Trend/Average Wages 107.5 117.2 108.8 115.5 100.0 100.9 82.0 Migration within the PMSA 102.1 108.2 112.8 107.7 100.0 102.7 84.5 Immigration 89.3 57.7 94.4 70.3 100.0 86.0 95.5 Library Circulation 102.4 102.6 95.7 97.0 100.0 105.2 110.8 Air Quality 87.0 88.8 93.0 86.3 100.0 104.7 91.3 Home Sales Prices 95.0 92.3 90.0 101.6 100.0 99.2 82.7 Unnatural Death Rate 91.4 84.4 93.6 79.8 100.0 101.4 106.8 Infant Mortality 91.1 100.0 100.8 94.3 100.0 105.7 116.3 Teenage Births 88.5 89.7 92.3 98.7 100.0 106.4 110.3 Major Crimes 96.9 99.2 111.8 98.9 100.0 106.0 111.0 Dependency Ratio 33.8 52.8 67.2 88.1 100.0 110.5 116.4 School Student Performance 101.7 99.1 98.7 99.6 100.0 103.5 102.6 High School Graduation Rate 85.9 86.5 91.7 96.1 100.0 101.9 95.4 Low-Income Students 92.5 90.5 94.6 97.2 100.0 107.5 107.5 Cost of Government Per Resident 105.8 104.1 103.5 100.3 100.0 96.6 96.6 City Employees Per Resident 108.0 105.8 103.6 102.8 100.0 98.6 99.0 Cost of Capital 97.7 97.7 97.7 97.7 100.0 100.0 100.0 Total (using weighted data) 95.7 95.7 99.2 98.2 100.0 102.0 99.7 The Glass Was Half-Full — Is It Now Empty? Last year, the Controller’s Office noted that, although Philadelphia was improving gradually, its progress was too slow. Rather than gradually rising over 100, the index should have been climbing toward 125 — a level that would have reflected the progress made by competitor jurisdictions. Over the past year, however, the city lost ground. The sudden decline in the Preferred Place Index certainly has many causes. Foremost, the recession and sluggish recovery have dimmed the city’s prospects for strong economic growth. In addition, the city’s hotel industry was negatively affected by the attacks of September 11th and it has been difficult to maintain the high demand level of 2000, which was bolstered by the Republican National Convention. Nonetheless, weakness in the Preferred Place Index should raise warning flags for Philadelphia. The city must aggressively work to enhance the quality of life for its residents and to improve the city’s outlook on the whole. Perhaps most of all, Philadelphia must stop the constant loss of residents that is robbing the city of its vitality. Dozens of people move out of the city every day, and too few are replaced by newcomers. The administration points to relatively high levels of satisfaction in the survey performed for the Mayor’s Report on City Services, but while many of those who stay may be satisfied, those who are


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dissatisfied do not express their dissatisfaction in polls — they vote with their feet and move out of the city. As long as the city is shrinking, it will struggle to balance its budgets, improve its schools, and attract new companies. Although there are significant challenges for the city, there are also opportunities. Mayor Street has publicly stated his commitment to reducing the cost of government to fund tax reductions as well as expansion of critical city services. With an improved quality of life and a reduced tax burden, Philadelphia can become a more attractive option for firms and families. Similarly, an outstanding location, recent economic development successes, and an exceptional array of non-profit and civic organizations can help to turn the city around. Working together, government, business, and the citizenry can make Philadelphia a preferred place to live, work, and do business.


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Conclusions and Recommendations This year provides us all with a historic opportunity to address the onerous and confusing tax structure that places Philadelphia at a competitive disadvantage. The growing tax-reform movement is demanding change in Philadelphia. A Tax Reform Commission has been created with the authority of the City Charter to make recommendations for change. Mayor Street has publicly declared his intention to dramatically reduce the cost of government in order to fund tax reductions and the expansion of mayoral initiatives. More than ever, significant change seems possible. If implemented, the following recommendations could hasten the day when Philadelphia ends its long-term exodus of firms and families and becomes a preferred place to live, work, and visit. Make The Tax Reform Commission A Catalyst For Change The Tax Reform Commission created pursuant to a charter change is examining the city’s tax structure and preparing to make final recommendations in November 2003. The Commission is well positioned to make change. The appointments on the Commission represent major governmental and private-sector stakeholders and the Commission’s advisory panel represents a wide variety of groups concerned about the city and its future. Its recommendations will represent thoughtful ways to reduce the onerous burden of city taxes. More important, those recommendations should have the broad-based support of the Commission’s appointing authorities and the institutions and organizations advising its work. With the proper support, the Tax Reform Commission can create the proper consensus regarding how to approach tax reform. To complete its work, the Commission requires the most complete information and analysis on city taxes and the city’s budgetary condition. To accomplish change, the city’s elected leadership must be prepared to enact the Commission’s recommendations as part of preparations for the 2005–09 Five-Year Financial Plan. The city should provide the Commission with all available resources to do its job and act swiftly on its recommendations upon their release. Implement The Recommendations Of The Controller’s Tax Structure Analysis Report In its work, the Tax Reform Commission should give close scrutiny to the analyses and recommendations of the Controller's November 2001 Tax Structure Analysis Report. More than a year in the making, the document reviewed the role that city taxes play in driving residents and employers from Philadelphia, analyzed theoretical and empirical perspectives on taxation, and evaluated city taxes and tax rates in comparison with rival cities and surrounding jurisdictions. As a product, the report proposed the elements of a new tax structure for Philadelphia designed to attract and retain jobs and residents. The need to reduce taxes is abundantly clear, and it is equally clear that tax cuts can work to improve economic conditions in the city without compromising budgetary priorities. Philadelphia’s experience in recent years provides compelling evidence that a tax cut does not necessarily threaten revenues. Despite growth in the U.S. economy since 1992 and growth in the regional economy since 1993, it was not until after the city reduced taxes that it experienced job growth. Even with a cumulative 8.0 percent cut in the tax rate, total Wage Tax collections actually increased by 18.8 percent between FY 1995 and FY 2001. The Tax Reform Commission should use the City Controller’s Tax Structure Analysis Report to form the foundation of its own recommendations for a new tax structure for Philadelphia that will fund the city's needs, be fair to taxpayers, and further the city's goals of economic development and neighborhood transformation. Without significant change to the city’s tax structure, Philadelphia will continue to lag economically behind competitor cities and surrounding jurisdictions and population decline will continue. By reducing the overall cost of living and doing business in Philadelphia, and improving a tax structure that impedes smart growth, the city’s elected and appointed leadership can make an important stride toward making Philadelphia a preferred place to live, work, and visit.


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Work With The New Governor And General Assembly To Make Statewide Tax Reform Work For Pennsylvania — And Philadelphia As former Philadelphia Mayor and newly sworn-in Pennsylvania Governor Ed Rendell sets to work with a new General Assembly, there is an air of anticipation over the promise of statewide tax reform. With localities across the Commonwealth seeking relief from high property-tax bills as well as alternate sources of revenues to fund educational and other governmental services, there is a clear imperative to address taxation issues. The case of Philadelphia complicates tax issues. Because Philadelphia is less reliant on taxes on real estate and more reliant on taxes on wages — and because the Commonwealth currently allows Philadelphia to tax non-resident wages while prohibiting suburban jurisdictions from taxing those workers’ wages — statewide tax reform must treat the case of Philadelphia with special attention. Thus, statewide tax reform has the potential to be very beneficial or very harmful to Philadelphia depending on how it resolves issues particular to taxation in Philadelphia and its suburbs. The focus on statewide tax reform presents a significant opportunity for the city, but recent experience with legislative changes at the state level provides a cautionary note that change can be less positive if the city does not ensure that its interests are protected. City government should work closely with state officials to see that the interests of the city and its taxpayers are well-represented as part of discussions surrounding statewide tax reform. Similarly, Philadelphia’s Tax Reform Commission should pay careful attention to current and proposed state tax laws as it considers potential reforms to the city’s tax structure. Philadelphia is one of the nation’s — and the world’s — great cities, but it is just a portion of the Commonwealth of Pennsylvania. If the city can work to make tax reform work well for all involved, Philadelphia, the Commonwealth of Pennsylvania, and all the citizenry will benefit. Reduce City Expenditures To Enable Significant Tax Reform While locally generated tax and non-tax revenues have exceeded expectations in recent years — and continue to exceed current expectations — expanded city spending could threaten to limit the city’s ability to reform its onerous tax structure. Mayor Street has pledged to do more with less and dramatically reduce the cost of government so the city can afford both tax cuts and service expansion. Because personnel costs, including benefits, comprise nearly 60 percent of the city's operating budget, any effort to reduce the cost of government could mean employing fewer people in government. The mayor’s stated belief that the city workforce can be cut by 2,500 positions is an encouraging step toward meeting the commitments to tax reform and service expansion. The city currently has an excellent opportunity to meet the mayor’s goal. The DROP program — the city’s retirement incentive program — provides the city with an opportunity to rationalize the size of the city workforce through attrition or reduce the cost of personnel by replacing high-paid employees with lower-paid employees. The city should work to achieve a rightsized workforce and a government the citizenry can afford and it can rely on the City Controller’s Office to aid its efforts. The Controller’s Office offers its expertise and assistance in efforts to reduce the cost of government. With its Innovative Employee Incentive Program, the Controller’s Office generates recommendations from the city workforce on how to make the government more efficient and effective. With its annual audits of governmental operations, the Controller’s Office generates recommendations to save and generate millions of dollars each year. In the Tax Structure Analysis Report, the annual Mid-Year Economic and Financial Report, and other special reports, the Controller’s Office has detailed bold initiatives that could expand the city’s ability to afford tax reductions as well as new governmental programs.


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Heed The Warning Of The Preferred Place Index In the 2002 Mid-Year Economic and Financial Report, the City Controller’s Office debuted the Preferred Place Index, a comprehensive matrix to gauge the progress of the city in becoming a preferred place to live, work, and visit. The measures in the Preferred Place Index provide sound ultimate outcome measures that track the city’s progress. Whereas last year, the Preferred Place Index showed that the city had made slow but steady progress toward improvement, this year the data show that the city has taken a step back. For the first time in the years examined by the index, Philadelphia had more falling indicators than rising ones. Even in the one other period when the index declined (1997 to 1998), more indicators increased than decreased. Previously, the city’s improvement had been driven by strong performance across the indicators. This reversal is echoed by a number of independent sources that question the city’s direction. This is a clear sign that the city must do more to make Philadelphia a place where firms and families want to be. The downturn in the Preferred Place Index could be a one-year blip on the screen if the city takes the necessary steps to improve quality of life while reducing the high cost of city taxes. If the city does not take those necessary steps to improve services while decreasing the cost of government, the downturn could be the beginning of a disturbing trend that Philadelphia must avoid if it is to truly be a preferred place. Implement New Budgetary Tools To Encourage Enhanced Governmental Efficiency And Effectiveness At the most basic level, Philadelphia’s budgeting process works. The city’s elected officials publicly determine how to raise and spend money to serve the public. Revenues are collected, employees are paid, supplies are purchased, and services are delivered. Government works under the current system, but does it work as well as it could? Is the public adequately involved in decisions surrounding how to raise and spend tax dollars? Do public officials have the right information before them to help guide decisions on how to use resources? Is Philadelphia government as efficient and effective as it can be? Although public attention is rarely focused on the budgeting efforts of governments, the budget process plays a central role in fostering effective governmental operations. There is a great deal of good news about Philadelphia’s budget system. Ten years ago, as the city confronted its fiscal crisis, it lacked many of the budgeting tools that we now take for granted. The city did not have Five-Year Plans, Quarterly City Managers Reports, the Mayor’s Report on City Services, or monthly departmental reports to the budget office. The Pennsylvania Intergovernmental Cooperation Authority did not exist, and the Controller’s Office provided less oversight of the budget process. These new tools and this enhanced focus on budgeting matters have helped move the city from the brink of bankruptcy to fiscal stability. They provide government officials and the public with an increased ability to consider city spending and its consequences. In the months ahead, the Controller’s Office will complete a project that will identify additional reforms that can improve the budget system — ways to encourage high performance and excellent service while reducing the cost of government and making the budget more useful to public managers, elected officials, and the citizenry. The Controller’s Office will identify the best examples of efficient, accountable, and accessible government throughout the United States and the world. Rather than focusing on theoretical ways to improve government, this effort will seek the best practices in use elsewhere and propose changes to adapt these practices to Philadelphia’s needs. These reforms will be designed to establish a government that responds to performance-based incentives rather than less outcome-oriented incentives.


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Appendix A — Preferred Place Index Methodology And Indicators The following paragraphs provide additional explanatory information about the measures used in the Preferred Place Index. Each paragraph discusses the rationale for including the measure, the thought process behind the weighting of the measure, and other information about the statistics and their use. Methodology

Weighting system Each indicator included in the index was assigned a weight. There are 25 indicators in the index, and the average weight is four. The sum of all weight factors is 100. The highest weight given to a single indicator is seven, and the lowest weight given to a single indicator is one. The weighting is intended to give each indicator an appropriate level of influence on the outcome of the index. Each factor was weighted to reflect its relative importance for the index and to smooth the data that were highly variable.

Indexing Each indicator is indexed to its 2000 value. Several indicators use data available only on a delayed basis. For these indicators, the 2002 value may actually reflect data from 2000 or 2001. In the case of all indicators, the most recent available data were considered to be the 2002 data, and earlier data were assigned to the corresponding earlier years. Abnormalities in the data series timing are noted in the indicator descriptions below. Unless otherwise indicated, the data series used is based on fiscal years 1996 to 2002. The monetary figures were adjusted for inflation, using fiscal year 2000 as the base year. Figures for earlier years of several indicators were adjusted to reflect final, non-preliminary data now available. These changes did not materially affect the index. To index each indicator to its 2000 value, the City Controller’s Office calculated the absolute value of the difference between each year’s number and the 2000 number. This figure was divided by the 2000 number and multiplied by 100 and then added to the index base to create each year’s index score. Economic Indicators

City Sales Tax Revenues Sales Tax revenue is an important indicator of the level of commercial activity taking place within the city. These figures are available from the city’s Comprehensive Annual Financial Report (CAFR). The data are adjusted for inflation and include the total Sales Tax revenue that the city recognizes from its 1.0-percent Sales Tax. This indicator has a weight of five to reflect its importance as a measure of economic activity.

City Wage Tax Revenues This indicator includes annual Wage, Earnings and Net Profits Tax revenues, including taxes collected on behalf of the Pennsylvania Intergovernmental Cooperation Authority. The data are adjusted for inflation and for changes in rates for these taxes. All data have been standardized to reflect the amount of tax that would have been collected using the 2000 tax rate. The Controller’s Office recognizes that reductions in these tax rates have likely encouraged additional economic activity in the city. However, as a proxy for city employment and wages, it was necessary to hold constant for tax rate and inflation to better gauge the amount of economic activity in the city. Data for 1996 to 2000 were gathered from the Mayor’s Operating Budget in Brief for fiscal years 1998 to 2002. Data for 2001 and 2002 were gathered from Revenue Department Memorandum: Comparative Report of Revenue for June, Final 2001 and 2000. Wage Tax revenue has a weight of five to reflect the importance of the indicator as a measure of wages and employment.


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Real Estate Rent and Occupancy

This indicator is calculated by multiplying occupancy in class A1 space with average rent for class A1 space and adding it to occupancy times rent for class A2 space. The measure is intended to capture the amount of class A space needed by businesses and the rental rates paid by these businesses. Increased business activity in the city drives increases in rental and occupancy rates. The data were provided by Grubb & Ellis, and the rents were adjusted for inflation. Data for 2000, 2001, and 2002 are from the end of the third quarter, and data for other years are from the end of the calendar year. This indicator has a weight of four.

Value of Construction Permits The Department of Licenses and Inspections issues building permits, which are required for a variety of changes to real estate. The value of these building permits serves as a proxy for the amount of investment in real estate taking place within the city. The data for this indicator are available in the Department of Licenses & Inspections Building Permit Annual Summary Report, and are indexed for inflation. Because investment in real estate generally cannot be moved, this indicator demonstrates the willingness of investors to make longer-term investments in the city and is, therefore, given a weight of five.

Business License Income Each new business must pay a $200 license fee to start a business in Philadelphia. The number of licenses issued in a given year provides insight into the economic vitality of the city since it tracks the number of newly created businesses in the city. This indicator uses Business Privilege License revenue (the amount is not adjusted for inflation because the license amount has not changed) as a proxy for the actual number of licenses. This indicator has a weight of four.

Employment in Philadelphia This indicator tracks total employment in Philadelphia. The total number of jobs in Philadelphia is a central measure of the city’s ability to retain business and encourage the creation of new jobs. The Bureau of Labor Statistics (BLS) provides these data, and they are based on the location of employers. The data for this indicator are available from the BLS on their web site (www.bls.gov) for 1997 to 2001. Earlier years are available on CD-ROM from BLS. The most recent available calendar year for this data is 2001. As a result, the statistics used in this indicator are from the years 1995 to 2001. Due to the importance of job creation in the city, this indicator has a weight of six.

Unemployment of Philadelphians While employment in Philadelphia is an important indicator of economic activity in the city, unemployment of Philadelphians is also a key component of any measure of the city’s quality of life. Unemployment is closely tied to a variety of social problems, such as poverty. These data are available from the Pennsylvania Center for Workforce Information and Analysis based on the county of residence of those that are unemployed and are not seasonally adjusted. The most recent available data are from calendar year 2001. As a result, this indicator uses statistics from the years 1995 to 2001. Reflecting the importance of a low unemployment rate and its ties to several social problems, this indicator has a weight of five.


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Hotel Nights This indicator tracks the number of occupied hotel rooms in Center City Philadelphia. PKF Consulting tracks the occupancy of approximately 22 major Center City hotels. These data are based on calendar years. The statistics used in this indicator are from the years 1995 to 2001. Because final data is not yet available for 2001, the 2000 hotel occupancy data was adjusted by the percentage change in Hotel Tax revenues to yield an estimated 2001 value (assigned to 2002 in the index). This indicator is intended to provide a measure of the amount of business and leisure travel activity in Philadelphia. Because travel activity has only an indirect impact on most Philadelphia residents, this factor has a weight of two. Quality of Life and Social Indicators

Overall Migration Trend and Average Wages This indicator measures a central aspect of city vitality — whether people want to be in Philadelphia or not. It also seeks to capture the economic activity (as weighted for inflation) lost because of out-migration from the city. In essence, this statistic demonstrates the total net wages lost to migration. To arrive at this figure, the City Controller’s Office multiplied the number of returns filed by in-migrants by their median income and subtracted the comparable figure for the out-migrants. The statistics for this indicator are available from the IRS in its county-to-county migration data. The most recent data available in this series are from the 2000 to 2001 time period. As a result, the data for this series begin with the 1994 to 1995 data. The years indicated in the IRS data refer to the filing years, rather than the tax years. The IRS data are also particularly useful due to their ability to relatively accurately track migration. Nonetheless, the data have several limitations that are briefly outlined here. The IRS data track only those migrants who filed tax returns for two consecutive years. As a result, low-income residents falling below the filing threshold (ranging from $7,450 to $15,200, depending on age and filing status) often will not be counted. In addition, people who change their filing status may not be counted until they have filed two consecutive returns. The 2000 to 2001 data may have been affected by a change at the IRS in the way that it accounts for the timing of inter-county migration by taxpayers. In recognition of the complications caused by this change in data collection, the IRS will release updated estimates in April, 2003. This indicator has a weight of seven due to the central importance of the city’s loss of its population and its economic base.

Migration within the PMSA In addition to assessing the changes in overall out-migration, we track the net migration taking place within the nine-county PMSA. With this indicator, our intention is to identify as accurately as possible the net number of people leaving the city for the surrounding suburbs. As mentioned above, the IRS data do not capture all migration trends of the city. However, it is a useful indicator of the changes taking place. This indicator is important for the city because the migrants leaving the city for its suburbs are often leaving for reasons specific to the city. These migrants wish to live in the Greater Philadelphia Region but not in Philadelphia proper. These data are derived from the same data set as the overall IRS migration data, and it shares the limitations of that data. As a result, and because these data are a subset of the total overall migration trend numbers, this indicator is weighted a three.


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Immigration Recognizing the important role that immigrants play in the growth of many American cities, we included a measure of the net number of immigrants in Philadelphia. Using the IRS data, we identified those migrants with foreign addresses as either their origin or destination address and calculated the net number of immigrants. This factor was weighted a one because it is a subset of the total overall migration trend numbers and because of the significant potential for immigrants to fail to be counted by IRS data due to low income levels and other limitations.

Library Circulation As an indicator of civic engagement and access to public services, we have included the total number of items circulated by the Free Library of Philadelphia. This indicator is available in the Mayor’s Report on City Services. This factor was weighted a two because it focuses on a less central aspect of quality of life in the city.

Air Quality We believe that a quality of life indicator for Philadelphia would be incomplete without some measure assessing the natural environment in the city. In particular, because air quality affects all residents of the city directly, we include the percentage of days with good air quality each year. These data are available from the Philadelphia Department of Health in accordance with EPA regulations. These data are collected on a calendar year basis, and this indicator uses data from 1995 to 2001. Because of significant variability in the data, this component has a weight of one.

Home Sales Prices The residential real estate market also provides an indicator of quality of life in the city because more people will be willing to buy homes and homebuyers will be willing to pay more for houses as the quality of life improves. This indicator tracks the median home sales price for single family houses sold in arm’s-length transactions for more than $100. The most recent data available are from 2001 and are reported on a calendar year basis. Due to missing data, statistics for 1995 and 1996 are estimated on a straight-line basis from the 1993 and 1997 data. During this time, median sales price changed minimally, from $47,500 in 1993 to $47,000 in 1997. The figures are adjusted for inflation to 2000 dollars. Although home sales price is an important indicator of quality of life in the city, it is weighted three because of the significant variation in the data and the lack of a full data series.

Unnatural Death Rate Health statistics are a basic measure of an area’s quality of life. Rather than selecting one statistic, we have combined the number of deaths by suicide, “assault and legal intervention,” and accidents per 100,000 people. This indicator measures, to an extent, the number of people dying in unnatural ways. As the city improves, we would hope that the unnatural death rate would decrease — indicating greater mental well being, enhanced security and a generally safer city environment. These data are available from the Philadelphia Department of Public Health. Health statistics are reported after a significant lag, and the first available data are from calendar year 2000. This indicator uses data from 1994 to 2000. All rates provided as a proportion of population are based on the Census estimated population for the appropriate year. The Department of Public Health did not make adjustments to the Census population estimates. Because this indicator provides insight into several quality of life issues, such as crime and traffic safety, it is weighted six.


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Infant Mortality Infant mortality is a key indicator in assessing the success of the health system as well as the socio-economic situation in the city. This indicator tracks the number of infant deaths per 1,000 live births. This statistic is reported by the Philadelphia Department of Public Health with the constraints outlined in the unnatural death rate section. Because there are several health-related measures used in the index, the weight for this factor is three.

Teenage Births

The teenage birth rate is an important indicator because of its ties to other socio-economic factors, such as high school completion rate and poverty. These data are based on the percentage of births to city resident mothers under 18 years old. Again, this statistic is based on data available from the Philadelphia Department of Public Health. It is weighted three because there are several health-related measures in the index that track similar trends.

Major Crimes Crime and related perceptions about security in the city affect quality of life significantly. This indicator tracks the number of major crimes (Part I Crimes), including murder (which is also reflected in the Unnatural Death Rate measure), rape, robbery, aggravated assault, burglary, theft, and motor vehicle theft occurring in the city. These data are available from the Pennsylvania State Police Uniform Crime Reporting Unit. These data are based on calendar years and use the time series from 1995 to 2001. Data from 2000 and 2001 are from the state’s Uniform Crime Report web site and earlier data are based on printed Uniform Crime Reports. Due to the impact of actual and perceived crime levels on quality of life, this indicator has a weight of seven.

Dependency Ratio

This indicator seeks to provide an understanding of the number of people receiving public assistance in proportion to the number of employed Philadelphians. Specifically, we identified the unduplicated number of persons receiving cash assistance in Philadelphia during October of each year. This number was divided by civilian labor force employment of Philadelphians during the same month. This indicator uses data from October 1996 to October 2002. These data are available from the Bureau of Program Evaluation at the Pennsylvania Department of Public Welfare and the Center for Workforce Information and Analysis at the Pennsylvania Department of Labor & Industry. Because of significant changes to this indicator caused by federal welfare reform laws (which may track changes in classification as recipients of benefits, as opposed to actual changes in individuals’ impoverished status), it is weighted one.

School Student Performance The quality of Philadelphia’s school district is one of the major factors that pushes residents out of the city. As a result, we consider several measures relating to schools. We include the combined scaled score for 11th graders on the Pennsylvania System of School Assessment (PSSA) math and reading tests (the scores for 11th graders are used instead of scores from younger students to focus on students who have nearly completed their experience in the Philadelphia public schools). These scores are available from the state school assessment web site (www.paprofiles.org) and from the School District of Philadelphia’s Office of Assessment. The 2002 statewide scaled score average for the PSSA math and reading tests for 11th grade rose to 2,640; the Philadelphia score for the same year fell to 2,350. Because of the significance of school performance, this factor has a weight of six.


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High School Graduation Rate This statistic measures the number of students graduating within four years of their enrollment in high school. We chose the four-year rate in an effort to focus on those students who generally have avoided problems that may delay graduation. These statistics are available from the School District of Philadelphia’s Office of Assessment. The statistics are based on school years, and the most recent data are from the 2001 to 2002 school year. Data from the most recent year are preliminary. An increase in the requirements for graduation may have led to a decrease in the graduation rate for the most recent school year. This factor is weighted a six because of the central role of the education system in advancing quality of life.

Low-Income Students The school district estimates the percentage of low-income students meeting the eligibility standards for federal Title I financial assistance. These statistics are calculated by determining the number of students from families receiving welfare assistance and adjusting this number to reflect those who would be eligible for assistance but are not receiving it. The school district uses a formula developed by Professor William Yancey of Temple University to calculate the appropriate adjustment. These statistics are tracked for each school year and are available from the Philadelphia School District’s Division of Student and School Progress. Because these statistics have been significantly affected by federal welfare-reform efforts, which may track changes in classification as recipients of benefits, as opposed to actual changes in individuals’ impoverished status, this statistic is weighted a three. Governmental Effectiveness & Efficiency

Cost of Government Per Resident In addition to economic and social indicators, we believe it is important to assess the efficiency and effectiveness of the city’s government. A central indicator of governmental efficiency is the cost of government per capita. Although there are many ways to define cost of government, we have limited our focus to the city and school district general funds minus state and federal aid funds. To estimate the population of the city, we have adjusted the 2000 Census population estimate with the net number of exemptions leaving the city each year as reported in the IRS migration data as well as the number of births and deaths occurring in Philadelphia. These data were compiled from the city and school district CAFRs, as well as the United States Census and the IRS county-to-county migration data. The financial data are based on fiscal years, and the adjustments to the population are based on tax return data, generally filed in April of each year. Reflecting the importance of an efficient government, this indicator has a weight of five.

Number of City Employees Per Resident Another important indicator of the city’s efficiency is the number of general fund city employees per capita. This indicator illustrates efforts by the city to streamline its workforce. These data are available from the city’s personnel inventory listing. The estimates of population outlined in the Cost of Government Per Resident section were also used for this indicator. Reflecting the importance of an efficient government, this indicator has a weight of five.


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Cost of Capital To reflect the credit worthiness of Philadelphia’s government, we have included a measure of the city’s cost of capital. This measure is based on the estimated cost of capital on a specific date (12/10/2001) for each bond rating the city has held over the past several years. By comparing the cost of capital based on interest rates from a single point in time, we eliminate the significant external changes occurring in the bond market. These estimates are based on data from Bloomberg L.P. and discussions with bond specialists at First Miami Securities, Inc. and Charles Schwab. The estimates are based only on the city’s ratings by Moody’s. Because this measure tracks the financial industry’s view of Philadelphia, not necessarily its overall attractiveness as a place to live, this indicator has a weight of two. Raw Data Table A.1 outlines the data used to create the index. These data reflect the changes outlined in the indicator descriptions above.

Table A.1 Preferred Place Index Raw Data Values: 1996–2002

Indicator 1996 1997 1998 1999 2000 2001 2002 City Sales Tax Revenues $89,594,806 $96,706,899 $98,706,970 $104,153,940 $103,697,857 $108,406,707 $103,226,321 City Wage Tax Revenues (000s) $1,127,127,237 $1,117,076,173 $1,165,068,997 $1,209,106,768 $1,242,337,000 $1,262,190,180 $1,260,579,539 Real Estate Rent and Occupancy $561,531,775 $581,352,456 $604,828,517 $703,388,894 $739,958,817 $710,086,187 $659,105,550 Value of Construction Permits $9,157,533 $9,491,113 $12,953,291 $9,997,250 $9,689,000 $9,955,901 $9,949,242 Business License Income $3,122,225 $2,285,984 $2,075,827 $2,018,656 $2,164,029 $2,059,395 $2,153,494 Employment in Philadelphia 650,621 648,755 642,976 649,467 656,354 668,793 658,827 Unemployment of Philadelphians 7.7% 7.1% 7.0% 6.3% 6.1% 6.1% 6.4% Hotel Nights 1,650,400 1,820,200 1,793,700 1,781,200 1,923,900 2,271,300 2,205,432 Migration Trend/Average Wages ($331,516,037) ($296,451,156) ($326,635,435) ($302,780,338) ($358,213,741) ($355,042,565) ($422,702,898) Migration within the PMSA (15,798) (14,803) (14,071) (14,895) (16,133) (15,703) (18,630) Immigration 793 512 838 624 888 764 848 Library Circulation 6,494,067 6,503,585 6,066,582 6,152,604 6,341,612 6,668,923 7,024,391 Air Quality 71.5% 73.0% 76.4% 71.0% 82.2% 86.1% 75.1% Home Sales Prices $51,984 $50,541 $49,286 $55,639 $54,747 $54,309 $45,263 Unnatural Death Rate 93.2 99.2 91.3 103.1 85.8 84.6 80.0 Infant Mortality 13.4 12.3 12.2 13 12.3 11.6 10.3 Teenage Births 8.7% 8.6% 8.4% 7.9% 7.8% 7.3% 7.0% Major Crimes 108,710 106,258 93,052 106,601 105,455 99,111 93,888 Dependency Ratio 43.0% 38.1% 34.4% 29.0% 25.9% 23.2% 21.6% School Student Performance 2,330 2,270 2,260 2,280 2,290 2,370 2,350 High School Graduation Rate 48.9% 49.2% 52.2% 54.7% 56.9% 58.0% 54.3% Low-Income Students 80.0% 81.5% 78.4% 76.5% 74.4% 68.8% 68.8% Cost of Government/Resident $1,741 $1,773 $1,784 $1,844 $1,849 $1,912 $1,913 City Employees/Resident 0.0149 0.0153 0.0156 0.0158 0.0162 0.0164 0.0164 Cost of Capital 5.74% 5.74% 5.74% 5.74% 5.61% 5.61% 5.61% Source: City Controller’s Office (based on above-listed resources)

Documents

2003 Mid-Year Economic And Financial Report this year of opportunity with regard to tax reform, I present my 2003 Mid-Year Economic and Financial Report, the latest installment of