Inside Take: What to Expect From Mayor Nutter’s Last Budget

(Editor’s note: This is an opinion column from a Citified insider.) 

This year’s budget will look a lot like last year’s: Mayor Nutter is in his final months, and he won’t be in office for the full fiscal year, so a caretaker budget is likely. But, even if he were continuing on, the budget probably wouldn’t change drastically. Why? Because Philadelphia has traditionally done incremental budgeting, where each department and agency looks at what it spent during the past year and adjusts upwards or downwards slightly.

There is one big pro and several cons to incremental budgeting. The pro? It’s the least time consuming approach.

The cons? Incremental budgeting can limit people’s ability to “think big.” It can lead to situations where the focus is on inputs (money) and outputs (for example, new road pavers purchased) as opposed to outcomes (for example, the number and timeliness of potholes paved). And without a focus on outcomes, it’s hard to benchmark the value you’re getting from one program or department compared to another. Finally, in times of economic hardship, incremental budgeting can lead to across-the-board cuts since, again, it’s difficult to ascertain the value of one department over another.

However, there is hope on the horizon: the City has plans to begin program-based budgeting, but when this is actually going to occur is unclear. With program-based budgeting, the costs of every city function—from trash collection to policing to the morgue—must be broken down into clear categories like salary, fringe benefits, space rental and maintenance, materials/supplies, fleet costs, energy costs. Those costs are balanced against any revenue a program might generate. Most importantly, with program-based budgeting, the effectiveness of each function must be measured with specific metrics. That leads to better informed, more meaningful budget decisions.

Since it’s an election year, this year’s budget hearings will likely be more about political grand-standing than about actual numbers: Political grand-standing is a common occurrence during budget hearings, but you should expect an extra dose in an election year. Think about it: elected officials are officially barred from campaigning in City Hall, but the budget hearings provide an opportunity where they can talk about issues they care about, share their platform, and highlight some policy successes. An added bonus: the press is always on hand, and may even quote them in an article.

What’s going to happen with property tax revenues? The City reassessed all the properties in Philadelphia in 2013 and moved to a new property tax system in 2014—the Actual Value Initiative—but the move was “revenue neutral,” meaning in the first year of its existence, the City didn’t bring in more revenue than it did under the old system. The idea was that property values would be reassessed each year, and the theory was that since the total property value rose from one year to the next, the City would bring in more revenue, even while keeping the tax rate the same.

But most property tax bills are unchanged this year. Why? Because the City actually didn’t do reassessments in 2014 (see page 25), either because the city was overwhelmed by AVI appeals (the stated reason) or was reluctant to reassess on the eve of an election (you decide which).

However, properties are being reassessed this year, and those new values will be reflected in the tax bill you have to pay by March 2016. What will the city do with the increased property tax revenue? Keep it? Or cut the tax rate to continue to keep things revenue neutral? My guess is on the former; elected officials would be loath to turn down extra money, particularly if they don’t even have to make the unpopular move of raising a tax rate.

How will the City honor the School District’s request for more money? The School District has asked the City for an additional $103 million next year. Sadly, even that much additional money would only maintain the status quo, which many would argue is not nearly good enough. How much would the District need to truly start down a path to academic improvement? – an additional $370 million next year.

So, how much will the city come up with? As mentioned above, the City will probably reap some additional money from property taxes, with 55% of total property tax collections going to the School District. The City could also raise the property tax rate and/or give the schools a bigger share of property tax collections. Advocates have argued for increasing the share of property tax collections that goes to the District from 55% to 60%, resulting in $80 million more for the District each years. While this increased sustainable funding would certainly be a boon to the District, it also means the City would have to make $80 million in cuts to its budget in the absence of additional revenue collections. Or maybe the city will try to increase the sales tax (again), or pass a new sin tax (again), perhaps on soda. Both are long-shots. The first would require state approval, the second has been twice rejected by council.

The District will likely ask state for more money, but with the State facing it’s own budget deficit of over $2 billion, that’s by no means a sure bet. You may ask yourself: if the state can’t give the District what it needs, why doesn’t the City just do it in one fell swoop? Like, why didn’t we discuss selling PGW for $700 million and giving all the money to the School District? Well, it’s because of this little thing called “maintenance of effort.” Under this state legislative clause, the City has a legal obligation to sustain its support of the District at the prior year’s funding. In plain terms, this means the City cannot give any less to the District than it gave the prior year, with very little wiggle room. This is why the City can’t ever, and won’t ever, just give the District a multi-million dollar bailout (not that this would necessarily be prudent on the City’s part anyway).

Leave a comment below with your predictions for the 2016 budget…

Rachel Meadows used to do budget analysis as a staffer to former Councilman Bill Green, and she currently helps teach a graduate-level budgeting course at Penn’s Fels Institute of Government. You can follow her on Twitter @rachelmeadows.