The coronavirus pandemic will cost Philadelphia hundreds of millions of dollars in lost tax revenue and emergency spending, forcing the city to cut its budget and reduce services and staffing, Mayor Jim Kenney said Tuesday.
Faced with decisions “the likes of which have never been needed," Kenney said he would scrap the $5.2 billion spending plan that he proposed in March for the upcoming fiscal year, and present a new plan to City Council on May 1. He did not specify proposed cuts, but vowed to minimize the impact on services that help the most vulnerable residents.
“It’s not going to be easy, and it’s not going to be pleasant," Kenney said, participating in a virtual news conference via video feed from his home. “But at the end of it, we need a balanced budget.”
Kenney’s announcement comes as city and state governments across the country are grappling with billions of dollars in lost tax revenue, and are scrambling to respond to the public health crisis. In some places, leaders have already taken action to save money; Pennsylvania Gov. Tom Wolf laid off about 2,500 state workers last week.
Philadelphia officials have declined to give specific estimates of the coronavirus’ financial impact on the city, and Kenney said it will depend on how long businesses stay closed and how severe the health crisis becomes. As of Tuesday, there were 4,272 confirmed cases of COVID-19 in Philadelphia and 65 deaths; public health officials say a peak is yet to come.
But an analysis by the Pennsylvania Intergovernmental Cooperation Authority (PICA) found that the city could lose between $310 million and $400 million in revenue in the current quarter, which runs from April through June. That’s on top of any losses from March, when businesses closed and social distancing measures began. (The city’s March revenue report will not be publicly available until May, city spokesperson Mike Dunn said.)
Harvey Rice, PICA’s executive director, said it’s too soon to estimate when the pandemic’s impact will subside or how long it will take the city to recover.
“It all depends," he said. "On July 1, is everything back to normal?”
PICA’s estimated drop in revenue would represent a significant portion of Philadelphia’s quarterly revenues; the city reported $996 million for the quarter that ended in December.
Kenney said his March budget address — in which he pitched funding for antipoverty plans, a scholarship to make community college free for thousands of students, and expanded street sweeping — “seems like an eternity ago."
City officials had said last year that they were preparing for a possible recession. But they had not prepared for a sudden halt to the economy caused by the closure of nonessential businesses and stay-at-home orders.
“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 has about $439 million in its reserve fund, which officials have warned would cover just 30 days of the city’s operating expenses.
City Councilmember Allan Domb said the COVID-19 crisis could cause the city to lose all of its reserves “and could put us into the negative next year by a couple hundred million dollars, unless we adjust our budget going forward."
Domb said budget adjustments will be needed, and long-term recovery will require the city to expand its economy.
“This isn’t going to be something that we’re going to be able to tax ourselves out of,” he said.
The city’s finances are especially vulnerable in economic downturns due to reliance on the wage tax, which accounts for more than one-third of general fund revenue. Philadelphia collected $1.7 billion in wage tax revenue in the last fiscal year.
Other municipal and county governments tend to rely heavily on property taxes, which are more stable during economic downturns.
“It will be a lot worse for Philadelphia and, I would argue, also for New York City than Pittsburgh, which does not have a significant wage tax,” said Robert Inman, a professor of finance at the University of Pennsylvania. “So cities that are property-tax based are going to much less significantly affected.”
An additional hit could come from the closing of Center City offices, as many who remain employed now work from home. More than a third of Philadelphia workers live outside of the city, according to city financial data. Many of those employees are now eligible to stop paying the tax during the time they are required to work elsewhere.
Other tax revenues have also dropped off, including business taxes, the use and occupancy tax, the amusement tax, hotel taxes, and the liquor-by-the-drink tax. That reality will force tough choices, Kenney said.
“When there’s no money, there’s no money,” he said. “And right now we haven’t been taking in hardly anything.”
Almost a dozen years ago, the Great Recession also resulted in significant cuts to Philadelphia’s budget under Mayor Michael Nutter, Kenney’s predecessor. The impact was long-lasting and services were slowly restored; for example, the city only in November opened four firehouses that were decommissioned during the recession and stayed closed for 11 years.