A state board approved Philly’s longterm financial plan. But the pandemic has created huge challenges going forward.

The state board that oversees Philadelphia’s finances approved the city’s five-year financial plan Tuesday while raising concerns about razor-thin cash reserves coming out of the coronavirus pandemic and the costs of labor contracts that Mayor Jim Kenney’s administration is negotiating.

The Pennsylvania Intergovernmental Cooperation Authority, a Harrisburg-appointed five-member board created in the early 1990s to help pull the city from the brink of bankruptcy, voted unanimously to approve the financial road map that City Council and the Kenney administration adopted last month alongside this year’s $5.27 billion budget.

But members were quick to highlight the city’s precarious position in the coming years and uncertainty over the future of revenue sources like the wage tax on suburbanites who work in the city.

The amount of money that is expected to be left unspent in each budget year ranges from $86.5 million this year to a peak of $140.5 million in 2023. Those projected fund balances are well below the Government Finance Officers Association’s recommendations, which for this year alone would be almost $900 million.

“Risks do pop out at us, and one is the economic growth. Are we going to bounce back immediately, or how long is it going to take?” said Harvey Rice, PICA’s executive director. “If the pandemic comes back or other events occur, that could put stress on the fund balances.”

Additionally, the city exhausted its $34.3 million rainy day fund during the pandemic and does not plan to contribute to it over the next five years, despite getting $1.4 billion from the federal pandemic-relief package.

“That $34.3 [million] went in the blink of an eye when the pandemic hit,” said board member Alan Kessler, a Duane Morris attorney appointed by Pennsylvania Senate Democratic Leader Jay Costa. “It’s just hard to understand how, with those hundreds of millions of dollars, we couldn’t at least carve out essentially a refund of the rainy day fund.”

City Finance Director Rob Dubow said that the American Rescue Plan, the federal legislation that sent the city $700 million in May and will provide another $700 million next May, prohibits directing those funds to the rainy day fund. Instead, the city plans to set aside $225 million, including $75 million already allocated in this year’s budget, for a new pandemic and recession reserve fund. If those funds are not needed for pandemic-related costs, they could eventually be used to buttress future fund balances, Dubow said.

“That’s our plan for trying to build up our fund balances over time,” he said.

Another area of concern for the board was whether the city, which put $200 million into a labor reserve, has set aside enough money to pay for the four major municipal union contracts, which cover police officers, firefighters, blue-collar employees such as sanitation workers, and white-collar employees such as low-level supervisors. Rice noted that the price tag of even a 2% raise for those city employees, which would be in keeping with recent inflation rates, would be $381 million.

It’s not uncommon for the city to lowball the amount of money it will need for labor contracts, in part to prevent being held to larger numbers in contract talks. But if it does exceed the labor reserves in the plan, as is expected, the Kenney administration will need to submit a revised five-year plan to PICA showing how it will pay for those costs.

This year’s five-year plan may be the next-to-last to be reviewed by PICA, which was created to issue and oversee the repayment of $1.1 billion in state-backed bonds that helped the city survive its early ’90s fiscal crisis. The bonds, which are repaid by a 1.5% addition to the wage tax for city residents, will be fulfilled following next year’s vote, and the board is scheduled to be dissolved.

Some local leaders, however, have said they want to see PICA or a similar organization continue past that date, arguing that the five-year planning process forces the city to think long-term and provides critical oversight to decisions that are often made behind closed doors when Council members and the mayor negotiate the budget.

“PICA has played a crucial role in ensuring responsible budgeting across four mayoral administrations, and this administration believes the city will benefit from continued oversight,” a Kenney spokesperson said in 2019.