Yay! The City has more money than it thought! Oh no! The City has more money than it thought.
The Pennsylvania Intergovernmental Cooperation Authority or PICA (pike-uh), released its analysis of the City's FY07 fund balance (def: the amount by which revenue was over or under expenses - in this case over).
You see, the city is required, every year, to create a 5-year plan which anticipates the next 5 fiscal years and takes steps to make sure that the budget remains balanced or in surplus during that time. So estimates are made. In this case, the city estimated that they would have positive fund balance of about $215 million. That "balance" would then be carried over and factored into future budgets. In other words, this doesn't mean the city has an extra $215 million. All of that money has already been allocated.
However, when the 2007 fiscal year ended (last June) it became clear that the fund balance was actually about $297 million or about $80 million more than they had anticipated. THAT is an extra $80 million.
Imagine your own household budget as a comparison. In September you plan out the final three months of the year. For October you anticipate that your household will take in about $5000 bucks after taxes. You expect to spend (on housing, food, health care, entertainment, travel, utilities, etc.) about $4000. However, you know that in November and December, with the holidays coming, you'll need to use that extra thousand bucks. So you factor it in and end up with an anticipated balanced budget for those three months.
October comes and goes and at the end you realize that you actually took in about $6000 (you worked extra hours, won a grand in a raffle or one of your investments paid off bigger than expected). So now you DO have an extra $1000 because when you planned things out, you were able to balance your budget without it.
That's essentially what happened with the City. Here's how our analogy works:
- your next "3 months" = the city's next 5 years
- your October = the city's 2007 fiscal year
- your $5000 income for October = the city's revenue for 2007 (around $3.7 billion)
- your $4000 in expenses = the city's expenses for 2007
- your anticipated extra $1000 = the city's anticipated positive fund balance of $215 million
- the extra $1000 you ended up with on top of that = the extra $80 million the city ended up with
- the extra hours, raffle winnings and investment income that got you the extra $1000 = the city's higher than expected tax revenue, higher payments from the state government, and higher than expected interest income.
So does this mean you can expect an extra $1000 bucks every month? If you heed the same warnings that PICA makes for the city, you'd realize that you have to:
- Stop factoring in the repayment of that $1000 loan you made to your unemployed, drunken, unreliable uncle as part of your income in December. For the city that means, stop anticipating repayment of a $45 million loan from PGW as part of your future revenue.
- Understand that your kid is not going to go to college for free on a baseball scholarship and start getting ready for it. For the city that means, knowing that it's could be paying more to its employees for salary and benefits when their contracts expire in the summer of '08.
- Understand that your parents are going to stop slipping you $50 bucks a month. In the city's case, the federal and state governments are going to reduce the amount of cash they send its way.
- "brace" for the fact that you're younger kid is going to need orthodontic work. The city is going to have to cough up some money to the school district, which is anticipating some funding difficulties of its own.
So what should you do with that $1000? Again, if you follow PICA's suggestions for the City, you would:
- Pay back the money you borrowed from your 401k which caused it to become seriously underfunded. For the city that means actually paying the employee pension fund now, while they have this unanticipated money, to take a step toward fixing that severely underfunded obligation.
- Hire a contractor to fix that leak in your dining room ceiling that you think is coming from your bathroom but isn't so annoying as long as you put a bucket under it to catch the drips. This way, you won't be faced with a MUCH larger bill when your bath tub ends up on your Thanksgiving dinner. For the city, this means putting the extra $80 million into much needed infrastructure improvements.
- Pay down your credit card so you can reduce the amount you pay each month on finance charges. Pretty obvious one here. The city paid about $43 million more for debt service in 2007 than it did in $2001 (and it's only going to get worse). That's $43 million that didn't go to hiring police or mowing the grass at rec centers.
- Use the money to pay your tuition for your MBA so you can make the big bucks. For the city that means paying for a more competitive tax structure so that more businesses and people will move in and, in turn, increase revenues.
- Set the money aside, somewhere safe, and don't touch it unless there's an absolute emergency - like a car accident or health problem. In the city's case, that means establishing a rainy day fund in case their some totally unanticipated emergency that requires several million dollars. Emergencies include: lower than expected revenue because of a recession, a huge snowstorm requiring massive overtime costs, etc.
Of course you can divide your $1000 bucks among a number of these things, just like the city can divide its $80 million.
So now, we wait and see what the city will do.
(edited to add) So far, the Philadelphia Business Journal is the only publication I've seen that has covered this story. Hopefully they'll keep track of what the city does too.