Philly ends year with highest budget surplus in a decade but ‘unlikely’ to save it

Philadelphia finished its most recent fiscal year with $769 million in leftover cash in its general fund, the highest amount in at least a decade, according to a report from the city controller.

The surplus in the city's $4.5 billion operating budget is a result of overall economic growth and tax rate increases, the report released Wednesday said. City departments also filed for grant reimbursements from the state and federal governments in a more timely fashion, leading to a balance in the city's grant fund. In total, the city ended its fiscal year with a nearly $1 billion cash balance among all its funds.

The Kenney administration said that figure doesn't account for payments it still needs to settle bills for the fiscal year that ended June 30. Officials expect that the general fund balance for 2018 will be $228 million, but the final number should be known by the end of the month, city spokesman Mike Dunn said.

While $228 million would be a significant fund balance, it still raises questions about the city's ability to save for a rainy day.

Since 2011, thanks to a bill sponsored by then-Councilman Kenney, the city has had a rainy-day fund. But the fund remains empty. Every year the budget is drafted, city officials predict too small of a balance to trigger deposits in it.

When the city predicts it will have at least 3 percent of general fund appropriations left over at the end of a fiscal year, it is required by law to put 0.75 percent of fund revenues into the rainy-day account.

For fiscal year 2017, the Kenney administration predicted that the fund balance would be $42 million, or 1 percent of expenditures, and therefore not enough to put into the rainy-day fund. That fiscal year ended up with a $189.2 million balance, 4.5 percent of expenditures. That money carried over into next year's budget, because the law requires savings based on projections, not cash on hand.

For fiscal year 2018, the administration predicted a $75.5 million balance, which was again too low for a rainy-day fund transfer, but the expectation is it will be at least $228.5 million, or 5.1 percent of expenditures. And for this current fiscal year, the administration predicted a $139.5 million fund balance, 2.9 percent of expenditures, just under the rainy-day threshold.

The city's low savings rate has a negative impact on its credit rating, making borrowing more expensive. The fiscal watchdog Pennsylvania Intergovernmental Cooperation Authority (PICA) has been advocating since 2000 that the city have a rainy-day fund.

It is unclear if Kenney will instruct his finance team to use some of the 2018 leftover cash to put money into a rainy -day fund for fiscal year 2020.

"Once we close the books on FY18 (by month's end) we will better be able to determine the size of the projected fund balance and, therefore, we'd have a better sense of the likelihood of creating a rainy day," Dunn said in an email. "That conversation that will be part of the budget process for FY20, and we'll discuss it with Council at the appropriate time." City Council approves the annual budget.

The problem with Philadelphia's rainy-day fund is the way it was designed to work.

In general, funds based on forecasts of surpluses are "unlikely to trigger savings," said Mary Murphy, state and local fiscal health project director for the Pew Charitable Trusts, who has studied government rainy-day funds.

Murphy said some governments make deposits to their rainy-day funds based on actual year-end surpluses. Even then, it could be tough to save.

"We often advise states to think of other deposit triggers, just because, if you are leaving savings at such a low priority at that point in the budget year, it's challenging to build up a savings account," she said. "How can you look at your actual volatility experience and use those one-time spikes and set either that money or a share of that money aside."

Of course, some argue that Philadelphia has many immediate needs that could use any extra cash.

Councilman Allan Domb, a fiscal  hawk, said that if there is any extra money in the budget, he would like to see it go toward pensions rather than a rainy-day fund.

"It doesn't get any more torrential than that," Domb said, referring to the pension fund, which has a $6 billion shortfall in what it owes future retirees.

City Controller Rebecca Rhynhart said she made her cash report in the interest of transparency and deferred to the mayor and Council on what to do with the balance. She warned, though, that at some point there will be another recession.

"At a time when the economy is strong, it's good to put money aside," she said.