Coronavirus could cost Philly up to $647 million — but layoffs are avoidable, city controller says

The coronavirus pandemic could cost the city government $344 million to $647 million in lost tax revenue through June 2021, according to an analysis by the Philadelphia controller’s office.

Although such a hit to coffers would be significant — the current budget is about $5 billion — Controller Rebecca Rhynhart said she believes the city should be able to avoid laying off municipal workers or cutting core services by tapping reserves, reducing overtime spending, pausing newer initiatives championed by Mayor Jim Kenney, and taking advantage of a new federal loan program for local governments.

“I don’t think that you need to lay off city employees to manage through this,” said Rhynhart, an elected official who oversees city finances and has sparred with Kenney. “There have to be things on the table that could be things that the mayor really wants."

Rhynhart declined to specify which of Kenney’s priorities could be cut. The mayor has previously championed investing in high-quality prekindergarten programs and revitalizing rec centers and parks. Earlier this year he proposed a new scholarship program for Community College of Philadelphia and an initiative to bring street sweeping to every neighborhood.

Kenney spokesperson Mike Dunn said Rhynhart’s view “seems much more concerned with generating press as opposed to governing.”

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Kenney, who in early March proposed a $5.2 billion budget for the fiscal year beginning July 1, will on Friday present to City Council a revised spending plan reflecting anticipated losses caused by the pandemic that is expected to include significant cuts.

“The mayor will propose a budget on Friday which shows the seriousness of the problems the city faces,” Dunn said in a statement.

Kenney has so far kept mum about how much he expects the city to lose due to his orders and those of Gov. Tom Wolf shutting down nonessential businesses to slow the spread of the virus. But other officials have said the administration is looking to cut up to 20% from some departments.

» READ MORE: Philly schools face $1 billion hole over 5 years as Kenney administration asks departments to cut budgets by 20%

The mayor two weeks ago said making decisions about the revised budget is “not going to be pleasant.”

"It’s almost like a depression and a pandemic at the same time,” Kenney said. “And I don’t know if the city or the country has ever gone through that, two simultaneous crises.”

Philadelphia’s dependence on its highest-in-the-nation city wage tax, which is about 3.4% for commuters and 3.9% for city residents and its largest revenue source, may make it more vulnerable to the economic fallout from COVID-19. Unlike real estate levies, the wage tax is particularly sensitive to swings in employment levels.

Additionally, people who live in the suburbs and work in the city, who make up 40% of the wage tax base, do not have to pay if they are being required to work from home during the pandemic. Rhynhart’s report found that the loss of that commuter revenue could cost the city roughly $30 million if stay-at-home orders extend through the end of June. Rhynhart’s office did not include those potential losses in its projections, saying in the report that the impacts were “highly uncertain at this time."

Managing Director Brian Abernathy has said that the city has enough money in reserves to make it through the current fiscal year, which ends June 30, without cuts. In March, City Council approved a bill requested by Kenney giving the administration permission to spend up to $85 million of the current budget’s fund balance to fight the coronavirus.

» READ MORE: Philly City Council adds $400,000 to spend as it chooses in $85 million coronavirus response measure

The city’s initial purchases with the emergency funds included $5.6 million for personal protective equipment like N95 masks, $900,000 for a testing site, and $730,000 for inmate health-care services at city jails, according to a memo obtained by The Inquirer.

Although there is uncertainty about the tax impact, the Kenney administration has worked to eliminate uncertainty around the city’s biggest expense — labor — as the contracts for the four major municipal unions expire this year.

Instead of lengthy negotiations over what are typically four-year contracts, Kenney has pushed for one-year deals that largely continue the terms of the current contracts with raises of 2% to 2.5%. The unions for firefighters, police officers, and white-collar workers have all agreed to short-term pacts, while the union for blue-collar workers remains in negotiations with the administration.

Rhynhart said that if Kenney on Friday proposes significant service cuts or layoffs, it would be fair to question why the administration agreed to include raises in the one-year deals.

“I believe that we can manage through without core service reductions, and in this situation the wage increases are OK," said Rhynhart, who served as budget director under former Mayor Michael Nutter and chief administrative officer under Kenney before running for office. "However, if the proposed budget is saying otherwise, then I think it’s right to question the administration’s decision to give raises.”

Dunn shot back, saying that city employees working during the crisis deserve the raises. He noted that they were paid for by a reserve fund that the city maintains to cover the cost of labor agreements.

“It is surprising that someone who was responsible for the city’s administrative functions doesn’t understand that the city employees working on the front lines deserve respect, admiration, and to be compensated fairly,” Dunn said.

In its analysis, planned for release Monday, Rhynhart’s office examined two scenarios for the fiscal impact of the coronavirus. In the less severe scenario, the economy rebounds by early next year, and city tax collections fall by 4%. In the other, the downturn extends through the end of 2021, resulting in a 7.5% reduction.

The analysis projected more significant losses from the restaurant, retail, and leisure and hospitality industries, which make up 12% of wage tax revenue, than the health care and social service sectors, which account for 21%.

Rhynhart cautioned that uncertainties about how the virus will spread in the coming months and how governments will respond make it impossible to provide a precise estimate, and said her office would update its projections as the pandemic unfolds.