Full text of Business Review (Federal Reserve Bank of Philadelphia) : March/April 1977

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Federal Reserve Bank of Philadelphia
M A R C H APRIL1977

THE FUTURE OF
AMERICAN
THOMAS BRADLEY
ANTHONY DOWNS
MARTIN MEYERSON
ANITA SUMMERS
DONALD RAIFF
LENNOX MOAK
CARLA HILLS
Last October, as part of the Philadelphia Fed’s Bicentennial celebration, these seven
authorities on urban economics and finance gathered here to discuss the future of American
cities. The proceedings of that conference now are available.
To get your free copy of The Future of American Cities, write to the Department of Public
Services, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19106.

The B US I NE S S REVIEW is published by
the Department of Research every other
month. It is edited by John J. Mulhern, and
artwork is directed by Ronald B. Williams.
The REVIEW is available without charge.
Please send subscription orders, changes
of address, and requests for additional
copies to the Department of Public Services
at the above address or telephone (215) 5746115. Editorial communications should be
sent to the Department of Research at the
same address, or telephone (215) 574-6418.
*

*

*

*

*

The Federal Reserve Bank of Philadelphia
is part of the Federal Reserve System—a
System which includes twelve regional




banks located throughout the nation as well
as the Board of Governors in Washington.
The Federal Reserve System was estab­
lished by Congress in 1913 primarily to
manage the nation’s monetary affairs. Sup­
porting functions include clearing checks,
providing coin and currency to the banking
system, acting as banker for the Federal
gov ernmen t, s u pe rv i s i ng c ommer ci al
banks, and enforcing consumer credit pro­
tection laws. In keeping with the Federal
Reserve Act, the System is an agency of the
Congress, independent administratively of
the Executive Branch, and insulated from
partisan political pressures. The Federal
Reserve is self-supporting and regularly
makes payments to the United States
Treasury from its operating surpluses.

FEDERAL RESERVE BANK OF PHILADELPHIA

Philadelphia’s
Fiscal Story:
The City and
the Schools
By Nonna A. Noto and
Donald L. Raiff*
are of long standing. Like other large
cities, Philadelphia has been plagued for
years by expenditures that rise faster
than locally raised revenues. Grants from
Washington and Harrisburg have brought
more money to Philadelphia, but much of
this money is earmarked for certain pro­
grams before it even arrives. Changes in
accounting practices have helped reduce
reported cumulative budget deficits; but
they haven’t reduced these deficits to zero,
and they have pushed the City and School
District toward heavier dependence on
short-term borrowing.
Fiscal year 19771 was to have been the
year when temporary tax hikes would
wipe out past deficits and put Philadel­
phia on a sounder footing. But the City
most likely won’t be able to pay off all of

Over the last several years, the fiscal
condition of America’s large cities has
garnered more and more space in the
nation’s press. The best known case is
New York City’s, but many other urban
centers, including Philadelphia, have faced
or are facing budget difficulties.
While the attention is new, the causes
*The following study is presented in two parts—a
main text and four data appendices. Figures in the text
are numbered with arabic numerals. Figures in the
appendices are numbered with roman and arabic
numerals; for example, ‘II. 3’ is the third figure in
Appendix II.
The authors are members of the Research Depart­
ment at the Federal Reserve Bank of Philadelphia.
Nonna A. Noto, who joined the bank staff in 1974,
holds a Ph.D. from Stanford University. She special­
izes in urban economics and public finance. Donald L.
Raiff was trained in monetary theory and econometric
forecasting at Ohio State University and has been with
the bank since 1972. Mary M. Hinz, trained at
Washington University, collected most of the basic
data for this study and prepared it for analysis with the
help of A. David Fellner, who was trained at the
University of Pennsylvania.




'Philadelphia’s fiscal years now run from July 1 to
June 30. Fiscal year 1977 began July 1, 1976. Unless
noted otherwise, years referred to in the text, figures,
and appendices are fiscal years. Figures for 1977 are
budget data.

3

BUSINESS REVIEW

MARCH/APRIL 1977

last year’s deficit this year, and the School
District faces an even larger deficit than
in 1976. Unless aid from Washington and
Harrisburg takes an unexpectedly sharp
turn upward, keeping revenues and ex­
penditures in line over the long haul is
going to take some combination of con­
tinued higher taxes, spending restraints,
and productivity improvements.

eral and state government financed most
of this expansion. Of the $630 million ad­
ditional revenues raised over this period,
two-thirds can be traced to intergovern­
mental aid (Figure 1).

FIGURE 1
TO 1 9 7 6 , TWO-THIRDS OF
PHILADELPHIA’S
REVENUE
IN C R E A S E S
CA M E FROM
HIGHER LEVELS OF GOVERNMENT
FROM 1 9 7 0

BUDGET TRENDS
In 1976, the City and School District of
Philadelphia combined had a cumulative
deficit of nearly $90 million. In all likeli­
hood, this deficit will not be wiped out in
1977 despite hefty increases in local tax
rates. What combination of underlying
trends in revenues and expenditures in
this typical old Northeastern metropolis
has produced the present situation?

Total Revenue
(millions of dollars)

SLUGGISH REVENUES
From 1970 to 1976, total revenues for
the City and School District nearly dou­
bled.2 But little of this growth came from
local tax sources: the wage and property
tax bases grew, but not very much, and
rate hikes were held down to around 10
percent for each tax. Revenues from Fed­

2The analysis of the School District is based on its
General Fund only. T he analysis of the City's revenue
and expenditure patterns is based on a group of funds
whose 1976 condition can be compared with their 1970
condition despite accounting changes in the interim;
these funds are enumerated in Figure 1.1, note *. Funds
that are selfsupporting or lack access to tax revenues
are excluded. The analysis of the City’s deficit and
consolidated cash position discussed later in this
report is based on the City’s own definition of its
Principal Operating Funds (see note 12).
Previous studies by the Philadelphia Fed dealt with
1970, 1973, and 1974, and their results, which are used
here, were published in the bank’s Business Review.
See David W. Lyon, "The Financial Future of City and
School Government in Philadelphia,” March 1971;
William A. Cozzens, “Philadelphia’s Budgets: Past,
Present, Future,” April 1974 and “Philadelphia City
and School District Budgets: A Year of Austerity,”
April 1975.




The Property Tax. The property tax was
the slowest growing of all principal reve­
nue sources, mainly because assess­
ments failed to keep up with rising market
values. This failure has been a serious
impediment to revenue growth. Estimates
by the City Finance Director’s office sug­
gest that the market value of Philadel­
phia’s real property grew by at least 48
percent from 1970 to 1976, roughly match­
ing the cost-of-living index, but the dollar
value of assessments grew by only 19 per­
4

FEDERAL RESERVE BANK OF PHILADELPHIA

can be credited to two areas: Center City,
with its high-rise office and commercial
construction and its rehabilitation of his­
toric residential neighborhoods, contrib­
uted 43 percent; and the large, still-devel­
oping area of Northeast Philadelphia
contributed another 37 percent, mainly in
new construction. As the supply of open
land diminishes, continued growth in the
property tax base will turn increasingly
upon rehabilitating the present stock of
buildings and converting it to more pro­
ductive uses.
In short, property tax revenues have
grown slowly during the 1970s. This slow
growth has put the School District, which
relies heavily on property taxes, in finan­
cial difficulty. The City hasn’t been hit so
hard because it has the more responsive
wage tax to fall back on.
The Wage T ax. In 1970, property taxes
were the single largest source of revenue
for the City and School District combined.
But by 1972, the wage tax had surpassed
the property tax as Philadelphia’s largest
local revenue source. In contrast to the
property tax, the wage tax has been rela­
tively responsive to inflation. Without
sizable gains in the number of people
employed, however, wage tax revenues are

cent. As market values diverged from as­
sessed values, the aggregate assessment
ratio fell from 50.1 percent in 1970 to 40.1
percent in 1975. Because the assessment
ratio fell faster than tax rates rose, the
effective tax rate (with respect to market
value) remained below its 1970 level (Fig­
ure 2). The dramatic 30-percent hike in
the property tax rate for 1977 can be
viewed as an alternative to restoring the
50-percent assessment ratio for property
throughout the City.3 Either approach re­
turns the effective property tax rate to its
1970 level.
Growth in the market value of real es­
tate— apart from inflation and increased
demand—depends heavily on getting new
structures built and old ones upgraded.
But neither kind of investment has been
widespread. Of the $900-million increase
in the value of Philadelphia’s taxable prop­
erties between 1970 and 1976, 80 percent
‘City of Philadelphia, Office of the Controller, Real
August 31, 1976, p. IV-2.
In Philadelphia, the Board of Revision of Taxes
(appointed by the Board of Judges of the Court of
Common Pleas) is responsible for assessing properties
and reviewing assessment appeals. The property tax
millage and its distribution to the City and the School
District are set by the elected City Council.

Estate Tax,

FIGURE 2
AS A S S E S S M E N T S LAG BEHIND M A RK ET VALUES,
EFFECTIVE PRO PERTY TA X RA T ES FALL

Year
1970
1971
1972
1973
1974
1975

Nominal
Millage
(dollars per
thousand)
44.75
44.75
44.75
44.75
44.75
47.75

X

Average
Assessment Ratio
(percent)*
50.1
46.7
42.9
42.9
41.4
40.1

=

‘ Information provided by Office of the Director of Finance, City of Philadelphia, May 1975.




5

Effective
Millage
(dollars per
thousand)
22.42
20.90
19.20
19.20
18.53
19.15

MARCH/APRIL 1977

BUSINESS REVIEW

THE FISCAL STORY IN BRIEF
From 1970 to 1976, annual expenditures by the City and School District of Philadelphia
almost doubled, rising from about $3/4 billion to about $ 1 1 /2 billion. Revenues fell short of this
expenditure growth. Although Federal and state allocations were up sharply, their impact on
Philadelphia’s budget position was not as large as their dollar value, since many of them were
earmarked for designated programs.
In response to Philadelphia’s fiscal difficulties, local officials have tried to close the gap
between revenues and expenditures by raising taxes and holding the line on spending. They
also have tried to manage their accounts more advantageously and to meet financing require­
ments out of internal cash flow. Some of these efforts have helped, but Philadelphia still ended
1976 with a cumulative budget deficit of nearly $90 million.
Increased revenue from local or outside sources, and expenditure restraint through service
cuts and productivity gains, could improve Philadelphia’s current budget position and its long­
term fiscal health. But each alternative has pros and cons. Philadelphia’s task is to find a
workable combination of these alternatives.

unlikely to expand much in excess of the
cost of living.
Philadelphia lost about 121,000 jobs
(13 percent) from 1970 to 1976. If average
wages or tax rates had not increased, the
trend in employment would have caused
an actual decline in wage revenues. But
the tax base per worker has risen, and
this rise has contributed in an important
way to actual wage tax revenues. General
productivity and cost-of-living increases
in all industries have brought this in­
crease in the wage base about (Figure 3).
Shifts between manufacturing and non­
manufacturing sectors have had little
measurable impact on the wage base per
worker.4

Over the whole period 1970-76, however,
the total wage tax base failed to keep up
with the local price index, as declining
employment offset rising wages per work­
er. Only an increase in the tax rate (from 3.0
percent to 3.3125 percent of wages, effective
1972) allowed wage tax revenues to keep
pace with the cost-of-living index. This 10percent rate hike accounts for approxi­
mately 29 percent of 1976’s increase in wage
tax revenue over the 1970 level. The recent
30-percent increase in the tax rate (to 4.3125
percent) is expected to contribute 81 per­
cent of 1977’s projected increase in revenue
over 1976.
Other Local
raises revenue
taxes, parking

4For a detailed description of the change in the
composition of the City’s economy, see “Jobs in Phila­
delphia: Experience and Prospects,” Business Review,
Federal Reserve Bank of Philadelphia, December 1975.
To test the impact of the change in the composition of
employment on average earnings from 1970 to 1975,
weighted average earnings figures were calculated for
both years by multiplying the 1969 median industry
earnings in the Philadelphia S M S A times the percent­
age of Philadelphia (city) employment for that indus­
try and summing across all industries. The resulting
estimates—$7,534 using 1970 employment weights
and $7,467 using 1975 employment weights—show a
decline of less than 1 percent and suggest that the
changing composition of employment caused almost
no change in the average wage tax contribution per




Revenues. Philadelphia
locally from business
fines, airport service

worker, even though workers in the declining manu­
facturing sector generally are paid better than workers
in the growing service sector. Philadelphia expe­
rienced relatively large employment declines in the
low-paying manufacturing industries—apparel (1969
median earnings $5,444), textiles ($6,083), and retail­
ing ($6,083)—where median earnings were below
those in the growing services industry ($6,574). In
calculating average earnings, these low-pay figures
cushioned the impact of losses in such high-paying
manufacturing industries as nonelectrical machinery
($8,851), electrical machinery ($8,539), and fabricated
metals ($8,350), as well as construction ($9,240).

6

FEDERAL RESERVE BANK OF PHILADELPHIA

kept pace with inflation. The sources
available to the City, however, have
proven much more responsive than those
available to the School District in the
1970-76 period. Other local revenues for
the School District grew by only $12 mil­
lion or 38 percent, contributing less than
5 percent of the total increase in its rev­
enues, while other local revenues for the
City have grown by $56 million or 48 per­
cent, contributing almost 15 percent of the
incremental City revenue generated during
this 6-year period.
While the business tax component of
this revenue catch-all is likely to grow
along with inflation, any real expansion in
other local revenue sources will depend
upon a restructuring of Philadelphia’s
system of levying charges and selling its
services.

FIGURE 3
DESPITE EMPLOYMENT LOSSES,
HIGHER WAGES AND TAX RATES BOOST
CITY WAGE TAX REVENUES
Wage Tax Revenues
(millions of dollars)

Intergovernmental Revenues. Nonlocal
sources of funding have altered the shape
of Philadelphia’s budgets over the last six
years. Sixty percent of the growth in City
revenues and 73 percent of the School Dis­
trict’s revenue growth were allocated from
Commonwealth or Federal coffers. But the
impact of this revenue growth on the City
has been quite different from its impact on
the School District. The share of intergov­
ernmental funds rose from 14 percent to 34
percent of City revenues, a much more dra­
matic increase than for the School District.
Education has a long tradition of being
heavily supported by the state of Pennsyl­
vania. In 1970, Commonwealth contribu­
tions already amounted to half of the Dis­
trict’s revenues. The state’s share rose to
60 percent by 1976 (Figure 4).
Many of the intergovernmental transfers
received by Philadelphia have been cate­
gorical grants—grants earmarked for
designated programs. Categorical grants
to the City from the Federal government
(which increased from $35 million in 1970
to $130 million in 1976) are designated
primarily for health and welfare programs,
manpower training, and community devel-

SOURCES: Actual wage tax revenue data taken from
the Annual Report of the Director of Finance of the City
of Philadelphia, 1969-70 through 1975-76, and from The
Mayor’s Operating Budget and Programs, Fiscal 1977.
The Federal Reserve Bank of Philadelphia estimated
the wage tax revenues that could have been expected if
the 1970 tax rate of 3 percent and the 1970 average wage
tax base per worker of $6,378 had held constant, as well
as the revenues that would have been produced by
actual wage increases without any tax increase.
Employment data for 1969-73 come from the U.S.
Department of Labor, Bureau of Labor Statistics,
Mideast Region, Employment Structure and Trends:
Philadelphia, Report No. 14, Supplement No. 3, May
1975. Employment data for 1974-76 come from the
Commonwealth of Pennsylvania, Bureau of Employ­
ment Security, “Labor Market Letter, Philadelphia
Area,” April 1976. For 1977, the Federal Reserve Bank
assumed a 1.5-percent employment growth rate based
on the forecasts of the Economics Research Unit of the
University of Pennsylvania, Philadelphia Econometric
Model Project, March 15, 1976.

charges, and a host of other sources, as
well as from wage and property taxes. For
the City and School District combined,
these other local revenues have just about




7

MARCH/APRIL 1977

BUSINESS REVIEW

percent of the City’s total intergovern­
mental revenues of $302 million.
In 1976, state grants ranked as the single
largest source of revenue for the City and
School District budgets combined. Com­
monwealth allocations to the City (which
rose from $33 million in 1970 to $119 mil­
lion in 1976) are designated primarily for
health and welfare programs and courts.
But the state’s larger funding endeavor is
the School District, to which it allocated
$315 million in 1976, up from $140 million
in 1970. For the most part, these monies
were unrestricted instructional subsidies
to the General Fund, the level of which is
established by a statewide formula.6
Intergovernmental funding has influ­
enced both the revenue side and the ex­
penditure side of Philadelphia’s ledgers.
It has supported two-thirds of the expan­
sion in the combined City and School
District budgets. And its earmarking pro­
visions have helped to shape the pattern of
expenditures.

FIGURE 4
THOUGH FEDERAL GRANTS HAVE GROWN
MOST RAPIDLY,
LOCAL INCOME TA XES STILL DOMINATE
THE CITY’S REVENUE PICTURE . . .
Total Revenue (percent)

. . . BUT THE STA TE PROVIDES
THE LARGEST AND THE FA STEST
GROWING SHARE OF THE
SCHOOL DISTRICT’S FUNDS
Total Revenue (percent)

RISING CITY AND SCHOOL
DISTRICT EXPENDITURES
Philadelphia has been no exception to
the general pattern of rising state and local
expenditures throughout the United States.
Over the period 1970-76, the City’s currentdollar (nominal) operating expenditures
rose by 91 percent, from $502 million to
$959 million. School District expenditures
grew slightly less rapidly, by 86 percent,
from $282 million to $526 million.
Both higher prices and a larger volume of
purchases contributed to spending in­
creases. About two-thirds of the increase
in the School District’s and three-quarters

SOURCES: See Figures 1.1, 2.

opment.5 In 1976, Federal Revenue Sha r­
ing funds—which, in contrast to categori­
cal grants, are relatively unrestricted
with respect to use—accounted for only 17

"Federal subsidies to the School District’s General
Fund have grown only from $6 million in 1970 to $9.6
million in 1976. Not treated in this analysis, which is
restricted to the School District’s General Fund, are the
largely Federal categorical funds which grew from
$33.5 million in 1970 to $74.9 million in 1976. These
funds support programs such as Flarly Childhood
education, preschool day care, and special elementary
education programs.




B
The amount of the instructional subsidy varies
directly with the number of students and the percent­
age of children from poverty families in the district,
and it rises when the population density of the district
exceeds 10,000 per square mile or the real estate
market value per student falls below the state average.
The state also subsidizes Vocational and Special Edu­
cation programs directly.

8

FEDERAL RESERVE BANK OF PHILADELPHIA

of the increase in the City’s spending over
this period are accounted for by higher
prices. The School District’s real expendi­
tures grew by 29 percent. (Real expendi­
tures are current-dollar expenditures
adjusted for price increases. See Box.)

Because the things the City buys had risen
in price even faster than the School Dis­
trict's purchases, the City had a lower rate
of real expenditure increase—23 percent—
despite its higher rate of increase in nominal
spending. Adding people to the payroll

BOX

ADJUSTING FOR RISING PRICES
The impact of rising prices for labor and materials can be approximated through a price
deflator. A deflator compares one year’s price for certain goods and services with their price in
another year— the base year. For the City, price deflator calculations suggest that what could be
bought for $100 in base year 1970 cost $156 in 1976. What cost the School District $100 in 1970
cost $145 in 1976. A deflator can capture price increases caused by inflationary forces beyond
local control as well as increases caused by, for example, local wage adjustments.
Dividing current or nominal dollar figures by a price deflator gives real or constant-dollar
estimates with reference to the base year. In this study, separate deflators were calculated for
each of the City and School District expenditure elements. See Appendix II for details on the
construction and application of deflators.
Overall deflators can be calculated by weighting price indexes for the several appropriation
groups according to their share of total City or School District expenditures.

CITY PRICE INCREASES
Source

Appropriation Group

Actual Wage
Settlements

Wages and Employee
Benefits
Policemen and Firemen
Nonuniformed Employees

1976
Price Index
(1970 = 100)

1976 Weight
(percentage
of total
expenditures)

163.4
157.6

23.5
37.8

National Income
^
Accounts deflators
for state and local
Purchase of Services
government purchases > Materials and Supplies
of services, nonEquipment
durable goods, and
durable goods

149.2
163.6
142.7

24.5
3.7
0.4

Philadelphia Con­
sumer Price Index

148.0

i

Debt Service

10.1
100.0

Overall City Deflator




155.9

9

MARCH/APRIL 1977

BUSINESS REVIEW

BOX (Continued)

S C H O O L D IS T R IC T P R IC E IN C R E A S E S

Source

Appropriation Group

Actual Wage
Settlements
National Income
Accounts deflators
for state and local
government purchases
of services and non­
durable goods

1976 Weight
(percentage
of total
expenditures)

Wages and
Employee Benefits

f

Philadelphia Con­
sumer Price Index

141.7

73.4

Purchases of Services
Materials and Supplies

149.2
163.6

8.2
6.3

Debt Service
Advance Funding
Payback

148.0

12.1
100.0

Overall School District Deflator
SOURCE:

1976
Price Index
(1970 = 100)

144.8

See Appendix II.

more services available, but they may not
improve a locality’s net fiscal condition.
The City. Although each fiscal year has
its own unique story, a 6-year review can
highlight some longer term patterns. From
1970 to 1976, the smallest percentage in­
crease in nominal outlays was for Debt
Service. The current level of Debt Service
payments is determined by past decisions
about construction and borrowing, the
price of construction, and patterns of
market interest rates. But higher levels
of interest rates are pushing up the cost
of new borrowing, as the 1977 jump in Debt
Service payments shows.
The Police and Fire departments regis­
tered two of the smallest increases in real
expenditures over this period. It appears
that appropriations to these departments
were raised primarily to cover the higher
cost of buying the established level of
services, not to underwrite increases.
Police and Fire faced rapidly rising costs,

accounted for about one-third of the
increase in the City’s price-adjusted expen­
ditures and almost half of the increase in the
School District’s real outlays.7
The growth pattern of expenditures in
the 1970s has been influenced by both ris­
ing prices and intergovernmental funding.
The rising price of labor and material puts
upward pressure on spending but restricts
the increase in what higher spending buys.
Revenues from the Federal and state gov­
ernments add to local income without in­
creasing local taxes, but much of this
income is absorbed by spending increases
for designated programs. Thus programs
develop where the money is. They can make

7The impact of an expanded staff on each element of
real expenditures was estimated by multiplying the
change in employment from 1970 to 1976 by the aver­
age 1970 wage expenditure per worker.




10

FEDERAL RESERVE BANK OF PHILADELPHIA
bargaining power. Average uniformed employee
wages rose 63 percent from 1970 to 1976 compared
with 58 percent for nonuniformed City workers and 48
percent for the local cost-of-living index.
A small percentage increase in real expenditures can
cost a lot in local taxes. The Police Department alone
accounted for $64 million (14 percent) of the increase in
nominal City expenditures from 1970 to 1976. Further,
in 1976, over 96 cents of every dollar spent by the
Police Department came from local revenue sources—
in contrast to, say, only 36 cents for General Govern­
ment. Thus, although the absolute increase in General
Government expenditures was over twice as high,
increases in Police budgets cost more in local taxes
than increases in any other expenditure element over
the period 1970-76.

but they had smaller shares of intergovern­
mental funding than any other departments
(Figure 5) and registered among the lowest
percentage increases in real expendi­
tures.8
"These high deflators can be traced to a large labor
bill and a high wage index. The Police Department and
Fire Department are heavily labor-intensive: about 95
percent of their appropriations are budgeted for wages
and salaries (see Figure II.1 for their personal services
weights). Because of the critical nature of their ser­
vices and the monopoly power of public employees in
providing them, the Police and Fire unions have strong

FIGURE 5
INTERGOVERNMENTAL REVENUES SUPPORT
SOME EXPENDITURE ELEMENTS MORE HEAVILY THAN OTHERS
Expenditures (percent)

Pensions
and
Employee
Benefits

Debt
Service

Recreation
and
Culture

Health

General
Urban
Government Development

SOURCES: City of Philadelphia, 1975-76 Annual Report of the Director of Finance, Schedule I-A-2C-1, pp. 23-25
and Schedule I-A-22b, pp. 121-123. See also Figure 1.1, note *, and Appendix It.




11

MARCH/APRIL 1977

BUSINESS REVIEW

Since 1970, heavy intergovernmental
funding has helped four City expenditure
elements—General Government, Courts,
Flealth, and Welfare—to sustain real ex­
penditure increases above the City-wide
average of 23 percent. And intergovern­
mental support has made a difference even
in those elements whose growth has been
below the City’s average—such as Recrea­
tion and Culture, which was up about 20
percent.10 But departments that depend
largely on local financing, such as Fire and
Police, have had much lower growth rates
— of about 5 percent and 7 percent, re­
spectively, in real terms (Figure 6).
Thus while the City nearly doubled its
nominal spending from 1970 to 1976, much
of this increase can be traced to rising
prices. Only expenditure elements sup­
ported by higher intergovernmental grants
have registered above-average growth.
The School District. Despite a more mod­
est percentage increase in current-dollar
outlays than the City’s, the School District
has been able to buy more with its money
because of smaller price increases. Since
1970, the number of students has declined
in every program except Senior High and
Technical Education, because of demo­
graphic trends. A tradition of spending
more money per pupil in the higher grades,
which now have larger percentages of stu­
dents, have helped real per-pupil expendi­
tures to rise by a greater extent (39 percent)
than School District spending overall (29
percent). But real expenditures and the
number of staff per pupil have risen across

The Streets function was able to support
a higher percentage growth rate in real
expenditures (including higher employ­
ment) than either the Police Department or
the Fire Department. Despite a slightly
lower percentage growth in current-dollar
expenditures, Streets was able to expand
its services because its costs rose less
rapidly than those of Fire and Police.
Comparing 1976 to 1970, the Pensions
and Employee Benefits element appears to
have grown at the average rate for the City
budget as a whole. But this simple com­
parison masks the unusually high pay­
ments that were required in 1973 and will
be required in 1977 in response to regular
actuarial reviews of the City pension pro­
gram. The level of contributions required
for adequate financing of the Pension Fund
and other Employee Benefits is influenced
in part by currently controllable factors—
the level of current wages and promised
benefits, and the number of employees.
But it is influenced also by some factors
outside the City’s immediate control. For
example, growth in the City’s Social S e­
curity contribution, beyond what would
have been expected from a general rise
in wages and employment, was an out­
come of increases in the contribution rate
and in the maximum taxable earnings ceil­
ing. And as a result of the Dombrowski
and Bogen court decisions,9 the City is
required to make higher payments to the
Pension Fund to compensate for inade­
quate past contributions, thereby limit­
ing this component of the unfunded lia­
bility. Now the City must pay interest on
the unfunded portion of the liabilities in­
curred prior to 1972 as well as the esti­
mated normal c o s t s a s s o c i a t e d with
adequately financing current liabilities.

10The Federally financed Urban Development pro­
gram, which continued to spend at 1970 levels, is an
exception. From 1970 to 1974, Federal funds for Urban
Development came through the Model Cities and Eco­
nomic Opportunity programs and the Redevelopment
Authority (Figure I.I., notes *, **). Since 1975 they
have come from a series of three Community Develop­
ment Block Grants, affecting five fiscal years through
1979, when the current programs end. Urban Devel­
opment expenditures are expected to peak at $57
million in 1977 and fall to about $20 million in 1978 and
1979.

9For details of these two court decisions see Dom­
browski v. City of Philadelphia, 431 Pa. 199, 245 A.2d
238 (1968) and 57 Pa. D. & C.2d (1971), as well as the
opinion rendered in Bogen v. City of Philadelphia, 63
Pa. D. & C.2d 306 (1973).




12

FEDERAL RESERVE BANK OF PHILADELPHIA

FIGURE 6
Percentage Increase
1970-1976

150

HIGHER PRICES EAT AW AY THE PURCHASING POWER
OF LARGER DOLLAR OUTLAYS BY THE CITY

^ Jl9 7 0 -1 9 7 6 Current-dollar Expenditure Change

-

1970-1976 Real Expenditure Change

100

50

Courts

General
Government

SOURCES:

Health

Welfare

Pensions
& Employee
Benefits

Recreation and
Culture

Police

Streets

Debt
Service

See Figures II.3, 5.

an above-average rate of increase in total
expenditures, is unusual in being financed
by Federal as well as by state and local
taxes. The Federal portion is received as a
categorical grant which is kept separate
from the General Fund. But Early Child­
hood still has an impact on the General
Fund, because the General Fund supplies
the required local matching dollars.
Rising fuel bills and an enlarged staff
have driven up the costs of Plant Opera­
tion and Maintenance, which had the larg­
est increase in nominal expenditures of
any expenditure element ($39 million).
Even with higher costs consuming over
half of the additional spending, real ex-

the board.
Three expenditure elements had aboveaverage increases in spending—Special
Education, Plant Operations and Mainte­
nance, and Employee Benefits. The dou­
bling of Special Education expenditures
since 1970 was funded entirely through
state revenue. Of the $16-million increase,
about half can be accounted for by price
increases and half by an expanded staff.
While the level of enrollment in Special
Education remained quite constant, real
expenditures per pupil and the number of
staff per pupil climbed impressively.
Early Childhood, one of two other pro­
grams in the education element to register




13

BUSINESS REVIEW

Percentage
Increase
1970-1976

MARCH/APRIL 1977
FIGURE 7

SCHOOL DISTRICT PURCHASING POWER IS
REDUCED BY HIGHER PRICES

180

135

90

45

0

Employee
Benefits

SOURCES:

Plant
Operations

Administration

Debt
Service

Special
Education

Senior
High

Elementary

Junior
High

See Figures II.6, 8.

penditures still grew by 62 percent from
1970 to 1976.1
1
School District employees settled for
lower wage adjustments than their coun­
terparts in the City. The 6-year wage in­
crease for School District employees
overall was 42 percent compared with 58
percent for nonuniformed City workers
and 63 percent for uniformed City work­
ers. Thus the School District was able to

increase employment by 18 percent over the
six years, compared with under 12 percent
for the City, and still register a lower rate of
nominal expenditure growth. Of the total
increase in School District employment
(3,953 over the six years), 31 percent went
to overhead services, 43 percent to the four
basic education functions, and 26 percent to
Special Education (Appendix III).
The lower rate of wage growth was offset
in part by the School District’s Employee
Benefits bill. Its growth rate was twice
that of the City’s. Of the $33-million ad­
ditional Employee Benefits contributions,
about half reflects the impact of higher
wages. Nonetheless, there was a doubling
of real Employee Benefits expenditures,
reflecting an increase in payments to

’ ’Part of this apparent large increase in real expendi­
tures can be traced to the use of a deflator that under­
states the rate of increase in wages for maintenance
employees. Custodial and secretarial employees, heav­
ily represented in the overhead departments, received
higher average wage increases than classroom
workers. The wage deflator used represents an average
across these groups (see Appendix II, note 3).




Early
Childhood
Education

14

FEDERAL RESERVE BANK OF PHILADELPHIA

the state retirement system and Social
Security, an extension of the benefits
package, and a rise in the number of em­
ployees (Figure 7).
School District workers have traded
off higher wage increases for increased
benefits and improved working condi­
tions— smaller class sizes and more class
preparation time— in recent contract settle­
ments. The outcome is reflected in a de­
crease in the number of pupils per staff
member. With almost two-thirds of every
dollar spent subsidized by Federal or
state allocations, the School District
has continued to increase its staff and
its real expenditures despite declining
enrollment.

FIGURE 8
PRICE INCREASES OUTPACE THE GROWTH
OF PHILADELPHIA’S MAIN TA X BASES*
Index

Summary. Philadelphia, just as many
other large cities in the United States,
watched its expenditures grow more
rapidly than its local revenues over the
period 1970-76. Comparing City and School
District price indexes with trends in the
local tax bases shows that the cost of buy­
ing a constant volume of materials and
labor outpaced the growth of Philadel­
phia’s two main local tax bases—the
property tax assessment rolls and taxable
wages and earnings (Figure 8). In other
words, by 1976, Philadelphia couldn’t even
support its 1970 level of purchases with­
out more general revenue from either local
tax increases or intergovernmental trans­
fers. Moreover, the City and School Dis­
trict continued to buy a higher volume of
goods and services and to make larger
real expenditures in every expenditure ele­
ment. But through mid-1976, tax rate hikes
were held to about 10 percent. And cate­
gorical grants from Washington and
Harrisburg, though they financed the ex­
pansion of selected program expenditures,
didn’t eliminate the overall budget deficits.
In short, sluggish revenues and rising
expenditures have left Philadelphia with
a large cumulative deficit and the fiscal
pressures that go with it.




1970

1973

1974

1975

1976

*A11 1970 values are 100. Values not computed for
1971 and 1972.
SOURCES: Price indexes from Figures II.4, 7. Tax­
able wages and earnings equal actual revenues divided
by tax rate. Assessed value of real property supplied by
the City of Philadelphia, Board of Revision of Taxes.

HOW PHILADELPHIA COPED
WITH ITS BUDGET CRUNCH
In response to these fiscal pressures,
local officials periodically used the tradi­
tional policy levers, cutting expenditures
and changing tax rates. To keep the cumu­
lative budget position from deteriorating,
15

MARCH/APRIL 1977

BUSINESS REVIEW

they also made some changes in accounting
practices. These changes have forestalled
the counting of some expenditures and
moved up the counting of some revenue,
thus alleviating the constraints of a cash
budget. At the same time, the City and
School District have become more depen­
dent on credit sources. And to relieve the
pressure of borrowing in short-term
money markets, City officials have made
use of long-term fund sources— namely, the
Capital Improvement Accounts—to supply
operating credits.
In another vein, up until the 1970s, the
City put off paying part of its annual labor
costs: it deferred paying the full cost of
annual pension liabilities. And recent cal­
culations of unfunded pension liabilities—
which are equivalent to long-term borrow­
ings against the future—suggest that
these liabilities are heavier than previ­
ously thought.
But these efforts haven’t gotten Philadel­
phia out of its deficits. While budgets for
the current year do show an improved pic­

ture for the City itself and for the City and
School District combined, the School Dis­
trict sinks deeper into deficit.1 And even
2
such promising signs as there are must be
taken with caution, since they are based on
estimates, and only actual results count.
TRADITIONAL POLICY LEVERS
Philadelphia officials are constrained by
law to approve balanced operating bud­
gets— budgets that match planned current
expenditures and retirement of past oper­
ating deficits to projected revenue. But
even if they succeed in this venture, they
still have to live within their budget. And
both tasks have proved difficult (Figure 9).
Philadelphia’s cumulative fund position

'"This analysis of the (T ty’s budget position is
focused on the Principal Operating Funds, which
include the Aviation Fund, Bicentennial Fund, County
Liquid Fuels T ax Fund, General Fund, Parking Fund,
Pier Maintenance Fund, Sewer Fund, Special Gasoline
T ax Fund, and Water Fund. The analysis of the School
District’s position is based on the General Fund.

FIGURE 9
PHILADELPHIA HAS SEEN CUMULATIVE DEFICITS BEFORE
(Millions of Dollars)

Year
1969
1970
1971
1972
1973
1974
1975
1976

City
Principal Operating Fund
Condition*

School District
General Fund Condition

$25.6
27.1
(28.7)
12.4
17.9
19.4
11.4
(73.3)

$(28.3)
(2.9)
(5.9)
(36.2)
1.5
0.7
(7.5)
(15.3)

Combined City
and School District
Fund Condition
$(2.7)
24.2
(34.6)
(23.8)
19.4
20.1
3.9
(88.6)

*City data reflect accrual of some intergovernmental revenues starting in 1975. For further detail on the
effects of this change on 1972-74 data, see 1974-1975 Annual Report of the Director of Financeof the City of
Philadelphia, pp. 1-35.
SO URCES: Prospectus for City of Philadelphia Water and Sewer Revenue Bonds, September 2, 1976, and
annual financial reports and proposed 1977 budget of the School District of Philadelphia.




16

FEDERAL RESERVE BANK OF PHILADELPHIA

has been in deficit several times over the
past decade. (The cumulative fund posi­
tion is the current operating position plus
the carryover from the previous year). Defi­
cits have recurred despite initiatives that
cut real expenditures, raised taxes, and
redistributed revenue.
Holding the Line on Expenditures. Local
expenditures have been cut twice since
1970. In 1973, with help from a strikeshortened school year, the School Dis­
trict shaved 10 percent off its budgeted
expenditure figures.1 In 1974, the City
3
cut 6 percent from its real spending. But
on average, expenditures adjusted for
price increases were rising at an annual
rate of 4.8 percent for the School Dis­
trict and 3.8 percent for the City from 1970
to 1976.
Given the size of the 1976 deficit, one
might have expected large expenditure cuts
in 1977, and there has been some tighten­
ing-up here and there. But overall, real
expenditures are budgeted to rise at higher
rates than last year.14 The City’s planned
reductions in Health, Welfare, Streets, and
Recreation are more than offset by in­
creased payments for Pension and Debt
Service and by higher spending on Urban
Development and General Government—
13For an estimate of these expenditure savings see
William A. Cozzens, “Philadelphia’s Budgets: Past,
Present, Future,” Business Review, Federal Reserve
Bank of Philadelphia, April 1974, p. 11, Chart 14.
14Figure 10 compares budgeted with estimated or
actual outcome data from a year earlier on the assump­
tion that inflation will raise 1977 prices by 2.3 percent
for the City and School District. The budgeted funds
have not gone through their final allocation and there
still is uncertainty about whether some of them will be
received. For example, three large grants (LEAA, Pro­
vision for Other Grants, and Community Development
Block Grant) totalling $88 million were assumed to be
allocated among departments for purposes of this
study, but the amounts received as well as their alloca­
tion surely will differ from our estimates. See Appen­
dix II (City Budget Data) for further discussion of this
problem. Recent information for the City is contained
in Finance Release 77-6, February 18, 1977 and other
Finance Releases.




17

two elements heavily supported by Federal
funding. And School District plans show
rises in Employee Benefits payments that
more than offset reductions in other over­
head departments and lower growth in
some education units (Figure 10).
Adjusting Local Tax Rates. Besides cut­
ting expenditures, officials sometimes
have found it necessary to raise taxes.
Except for a one-percentage-point rise
in the wage tax in 1969, Philadelphia’s
taxes remained stable throughout the later
1960s. The tax rate on wages, earnings,
and net profits was adjusted upward again
in 1972 to 3.3125 percent, where it remained
until 1977. The combined property tax rate
remained at its 1966 level of 44.75 mills
until the 3-mill boost of 1975.
But in 1977, after these years of restraint,

FIGURE 10
SOME RESTRAINT HERE AND THERE;
BUT OVERALL, REAL EXPENDITURES
KEEP RISING
City

Expenditure
Element
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development
Debt Service
Pensions and Employee
Benefits
Total*

Percentage Change
1975-1976 1976-1977
11.7
-3.7
3.6
17.1
2.1
4.0
0
5.8
-24.2
3.9

38.7
7.7
-0.8
-9.0
-13.9
2.3
1.9
-2.0
82.8
26.5

-19.6
1.1

39.9
16.0

‘ Includes Special Payments in 1977 not shown
above.

SOURCE:

See Figure II.4.

BUSINESS REVIEW

MARCH/APRIL 1977

in revenue leaves the School District
with a rising operating deficit that has
to be dealt with—somehow.
Allocating Local Revenues. Even if the
combined revenues are sufficient to cover
the expenditures for schools and other
municipal services, the School District
still may come up short since it has to
rely mainly on the sluggish property tax.
In response to this difficulty, City officials
have made several attempts to allocate a
larger share of revenue to the School Dis­
trict since 1970. The first was a $12-million
direct payment in 1973. Second, in 1974, the
City reduced its own property tax millage
and increased the School District’s (Figure
11). Since the assessment rolls did not
grow sufficiently to offset the loss that
this transfer caused, City revenues from the
property tax actually fell. Even so, when
City Council raised the property tax rate in
1975, by 3 mills, the entire proceeds went to
the School District. This was the third
attempt. But of 1977’s 14-mill increase in the
property tax rate, only 1 mill is destined for
the School District. And deciding how to
allocate resources to the City and School
District may become even more difficult as
more claims are made on available resour­
ces.
Thus local officials have another arena
for policymaking—allocating revenue—
along with setting appropriate levels for
expenditures and local taxes.

FIGURE 10 (Cont’d)
School District

Expenditure
Element

Percentage Change
1975-1976 1976-1977

Education Elements
Early Childhood
Elementary
junior High & Middle
Senior High & Technical
Special Education
Total Education
Overhead Elements
Plant Operations &
Maintenance
Administration &
Support
Debt Service &
Insurance
Employee Benefits
Total Overhead*
Total

18.0
6.6
-3.8
11.0
10.2
6.3

-2.8
9.9
0.5
5.0
-1.4
2.0

9.1

-4.2

6.2

0.5

-18.4
15.4
2.7
4.3

-1.5
14.7
19.4
10.4

‘ Includes two items not shown above—Advance
Funding Payback and Undistributed Items & Refunds.
SOURCE:

See Figure II.7.

local tax rates rose sharply: the wage tax
rate went up 30 percent; the property tax
rate increased 14 mills or 29 percent; the
mercantile license tax rose 33 percent;
and a new tax was added on petroleum
processed within the City limits. The com­
bination of rate increases, a new tax, and
a slowly growing tax base adds up to a
projected 39-percent increase in local tax
revenues for the City. And its intergovern­
mental revenue is projected to increase 38
percent. For the School District, the rev­
enue changes are less dramatic. Local
sources are expected to produce 6 percent
more revenue, while intergovernmental
revenue is budgeted to increase only 4
percent. Given intended spending in­
creases, this comparatively slow growth




ACCOUNTING INNOVATIONS
Lowering spending levels and raising
more tax money are the standard methods
for coping with budget pressures, but
they are not the only ones local officials
have used in recent years. Chief among
these others have been changes in account­
ing practices that allowed the City and
School District to spend more money on
services than would have been allowed
under the old methods of counting rev­
enues and expenditures. These changes
have pushed Philadelphia to rely more
18

FEDERAL RESERVE BANK OF PHILADELPHIA

FIGURE 11
THE SCHOOL SHARE OF P RO PERTY T A X REVENUE
WAS ON THE R I S E —UNTIL 1 9 7 7

Nominal Millage
(Dollars per thousand)

School District Share
(percent)

Year

City
(1)

School District
(2)

Total
(3)

(2 )+ (3)

1970
1971
1972
1973
1974
1975
1976
1977

23.75
23.75
23.75
19.75
19.75
19.75
19.75
32.75

21.00
21.00
21.00
25.00
25.00
28.00
28.00
29.00

44.75
44.75
44.75
44.75
44.75
47.75
47.75
61.75

47.5
47.5
47.5
55.9
55.9
58.6
58.6
47.0

SOURCE:

Prospectus forCity ol Philadelphia Water and Sewer Revenue Bonds, September 2, 1976.

Switching Fiscal Year Dates. Changing
the dates of the fiscal year—in this case
from January-December to ]uly-June—can
alter the credit requirements within fiscal
years unless the flow of expenditures and
revenues is distributed evenly throughout
the year. In Philadelphia, revenue comes in
unevenly to both the City and the School
District, most of it arriving between Jan­
uary and June. For example, most of the
calendar-year property tax payments are
received between April and June.
The City used an 18-month interim bud­
get when it moved to a new fiscal year in
1968-69; the School District had opted for
a 6-month interim budget when it changed
its accounting year in 1966. The immediate
effect of these switches was to put tempo­
rary surpluses on the books, since big
calendar-year revenue flows [such as prop­
erty tax payments) occur mainly in the
January-June period, while expenditures
are spread fairly evenly throughout the
year. Establishing an interim budget
including first halves of two successive
calendar years (City) or only the first six

heavily on credit markets to pay bills,
though of course, when the City works
with a balanced cash budget, these debts
are repaid by the end of the fiscal year.
A change in the beginning and ending
dates of the fiscal year moved up the count­
ing of revenue but increased the require­
ment for short-term credit within the year;
deferring a semiannual debt installment in
1972 put off accounting for an expenditure
but didn’t reduce the ultimate cash out­
flow; and accruing revenue transfers from
other governmental units put more income
on the books at an earlier date but only at
the price of increased credit costs. As a
result of these changes, Philadelphia’s
budget numbers may have improved in the
short run, but it is not clear that any longer
term problems have been solved. In fact,
these innovations make it more difficult
even to diagnose changes in Philadelphia’s
fiscal health much less to correct them,
since a budget surplus today does not
mean precisely what it did ten years ago.
Expected future income has been used to
balance each year’s books.




19

BUSINESS REVIEW

MARCH/APRIL 1977

months of a calendar year (School District)
boosts revenues way above expenditures,
provided expenditures aren’t pushed be­
yond customary levels. Thus the fund bal­
ances over an interim budget show one-time
improvements.
During the interim budget periods, the
General Funds moved from roughly bal­
anced positions to surpluses—$15 million
for the City and $10 million for the School
District. The price of the initial improve­
ment was that succeeding years faced a
negative cash-flow configuration. Before
the switch, revenue received in the first
half of the year could be used to cover
spending in the second half. Now the posi­
tion is reversed. Even with a balanced
budget, expenditures exceed revenue in
the first six months (July-December) and
are overtaken only in the last six. So bud­
get officials have to borrow funds to cover
the cash-poor months and pay interest on
the funds needed to tide them over.
1972 Budget Covered Only One Debt Pay­
ment. Before 1972, the City counted two
Debt Service payments in its obligations
each year—the payment due in January and
the one due in July of the next fiscal year.
The second accounting change—budgeting
for only one payment in fiscal year 1972—
makes it hard to compare year-end budget
positions now with year-end budget posi­
tions before the change. It used to be that
the fund balance included the accounting
for a soon-to-follow debt payment, but this
$37-million obligation was left out for fis­
cal 1972. Because this change lowered obli­
gations on the books in one fiscal year and
did not raise a succeeding year’s obliga­
tions proportionately, the General Fund’s
cumulative balance got a shot in the arm.
On the surface, improvements in the fund
balance looked like progress in the battle
for financial stability. This deferral really
did not improve the City’s financial health,
however, as it neither decreased cash out­
flow nor increased inflow. The improved
fund balance was offset by the City’s new
requirements for short-term credit. Before




the deferral, the City’s revenue flow indi­
cated borrowing for only one of the two
payments. Since then, it has been neces­
sary to borrow to cover both payments,
because the payments come due before
most of the revenue comes in.15
Accruing Intergovernmental Revenues.
Philadelphia, like other large cities, has
been reimbursed for certain programs by
the state and the Federal government. But
because it may not be reimbursed for as
long as a year or two after it makes pro­
gram expenditures, these expenditures
have been able to pull part of its budget
temporarily into deficit. Or they could until
the City made the change to accrual of ap­
propriated program revenue.
In 1975, City officials decided to count
transfers from other governmental units
as soon as they had been appropriated and
qualified for—to put dollars on the books
before they were received. This accrual
decision gave the City a one-time advan­
tage in calculating its cumulative fund
position, because it gave 1975 an extra
dose of revenue from other governmental
units. The budget entry for intergovern­
mental revenue was swelled not only by
cash receipts from other governments but
also by $44.2 million in receivables—dol­
lars counted but not yet received in 1975
(Figure 12). As it accrues revenue, how­
ever, the City must borrow from the time
expenditures are incurred until cash
arrives.
What Does All This Mean? The changes
in accounting practice make it more diffi­
cult to judge changes in fiscal health. But
it’s clear at least that now, when the City
balances its budget, it borrows more than
it used to within the fiscal year and defers
one debt payment into the next fiscal year
—two things it didn’t do 10 years ago. In
short, when it made these changes, Phila-

I5With recent debt issues, attempts are being made to
ameliorate this problem by spacing the debt payments
to be more consistent with timing of cash flows.

20

FEDERAL RESERVE BANK OF PHILADELPHIA

FIGURE 12
THE CITY WAITS FOR MONEY
FROM OTHER GOVERNMENTS

difficulty with this internal procedure so
long as the Consolidated Cash Account has
enough money, owned by member operat­
ing funds, to cover the General Fund’s
short-term borrowing requirements. But
recently, for example, for three of five
consecutive quarters, the sum total of
liquid assets owned by the General Fund
and the other main operating funds was
in deficit (Figure 13). That is to say, pay­

Receivables
(millions of dollars)

FIGURE 13
LIQUID ASSETS DRY UP IN SOME CITY
OPERATING ACCOUNTS
(Thousands of Dollars)

SOURCE: Prospectus for City of Philadelphia Water
and Sewer Revenue Bonds, September 2, 1976.
Calendar Quarter

Second Quarter 1975
Third Quarter 1975
Fourth Quarter 1975
First Quarter 1976
Second Quarter 1976

delphia was coping with its annual budget
crunches by spending part of its future
income.

$37,669
(20,196)
(44,365)
(79,177)
1,166

$49,491
29,835
94,686
20,595
97,339

SOURCE. Prospectus for City of Philadelphia Water
anti Sewer Revenue Bonds, September 2, 1976.

LONG-TERM FUND SOURCES
To keep its operations going the City
tapped both ordinary short-term credit
sources and some unusual longer term
sources—mainly its Capital Improvement
Accounts. Until the beginning of this
decade, it also drew some short-term
benefits by deferring a portion of its
annual payments to pension funds.
Excess Balances in Capital Improve­
ment Accounts. The Capital Improve­
ment Accounts are drawn on indirectly.
To meet its in-year cash requirements,
the City’s General Fund borrows from the
Consolidated Cash Account—a common
cash drawer that includes excess balances
from several operating funds, including
the General Fund itself, and from the
Capital Improvement Accounts. There’s no




Liquid Asset
Liquid Asset
Holdings
Holdings
Consolidated
Consolidated
Over All
Over All
Member Funds
Member Funds
Including
Except Capital
Capital
Improvement Improvement
Accounts
Accounts

ments made from the common cash drawer
for General Fund purposes were greater
than the liquid assets owned by the Gen­
eral Fund and other principal operating
funds. So when checks were presented for
collection, the excess cash owned by
Capital Improvements was used to cover
them.
Borrowing from Capital Improvements
may go back as far as the 1920s, though
the Consolidated Cash Account wasn’t es­
tablished until 1960. What is new, how­
ever, is borrowing from Capital Improve­
ments to cover General Fund cash deficits
that run over from one fiscal year to the
next, as shown on the City’s books for
1975 and 1976.
21

BUSINESS REVIEW

MARCH/APRIL 1977

Higher Unfunded Pension Liabilities.
Workers are paid for their services by
wages and fringe benefits. If wages are
paid by current taxpayers, but increased
fringe benefits such as pensions are
charged to future taxpayers, then the full
cost of current services is not being paid
by the receivers of those services; part is
being shifted forward to future taxpayers.
Deferring increased pension fund liabili­
ties not only burdens future citizens who
may have their own uses for resources
when they take over. In addition, it may
make current citizens less sensitive to
inefficiency in government, and it could in­
cline them to accept some services that
they wouldn’t be willing to pay for just
because these services appear to be free.
The full cost of yet-to-be-fulfilled pension
promises is represented by the pension
fund liability figures, and the pension lia­
bilities already paid for by past and current
citizens are represented by the figures for
accumulated assets in the pension fund.1
8
The remainder is the unfunded pension lia­
bility.
Preliminary actuarial data were used to
compute the normal cost (the estimate of
annual accrued cost) of pensions in the
City’s 1977 budget.I!) It is estimated
that the City’s unfunded pension liabili­
ties have increased by 28 percent from $566

These Capital Improvement monies
themselves have been derived via long­
term borrowing to fund planned capital
improvements. The City’s officials built
up the Capital Improvement Accounts by
raising cash (selling bonds] well before
the cash was needed to pay construction
bills.1 This allowed-the City, through its
6
Capital Improvement Accounts, to be its
own supplier of short-term credit to its
operating funds— in a word, to be its own
banker. Excess balances by themselves do
not show that the City has mismanaged its
capital funding requirements. Perhaps the
City acted early to secure money at a favor­
able rate. But if bonds were issued earlier
than required solely to build cash for lend­
ing to operating funds (either within or
across fiscal years), what showed up on
the books as increased interest on long­
term debt might not indicate increased cap­
ital improvements. It would just be a sub­
stitution of long-term debt for short-term
instruments.
Since City officials plan to have the oper­
ating accounts pay back their loans from
the Capital Improvement Accounts within
the year, there is no clear justification for
arguing that the City is spending capital
monies to cover operating expenses.
Rather, for the time being, it is covering
some of its short-term financing require­
ments within the family. Whether this is
cost-effective, and whether long-term
lenders know that the City is using the
money it borrows to act as its own banker,
are issues requiring clarification.1
7

possibility of extending this type of segregation to
other types of revenue bonds already issued or under
consideration for issue by the City."
'"The calculation of pension fund liabilities is an
attempt to state the amount which would have to be
put aside today to cover the payments that will be
made in the future for all past and current workers.
Assumptions about future wage rates and future inter­
est rates are elements of this complex calculation. For
an easy-to-read presentation of pension issues, see
Pension P rim er fo r Philadelphians. Pennsylvania
Economy League Report No. 362, 1972.

,(iThis policy was outlined in comments by Lennox L.
Moak, the City’s Director of Finance, in The Future of
A m erican Cities (Philadelphia: Federal Reserve Bank
of Philadelphia, 1976), p. 50.
r In Finance Release 77-5, October 29, 1976, the City
announced a revised policy for its new issue of Gas
Revenue Bonds. Neither the ‘‘proceeds of the bond
issues nor the moneys destined for payment of debt
service on such bonds will be deposited or passed
through the Consolidated Cash A cc o u n t... . The Office
ol the Director ol Finance is presently studying the




'''These calculations were contained in preliminary
worksheets for an actuarial report prepared by Peat,
Marwick, Mitchell & Co., with data as of July 1, 1975.
According to the Annual Report of the D ire c to r of
Finance of the C ity of P hiladelphia. 1975-76, p. 269,
this report was to be completed in December 1976.

22

FEDERAL RESERVE BANK OF PHILADELPHIA

benefits—the unfunded amount is now a
debt for future citizens. But if officials paid
off all or part of it now or paid interest to
keep its value from rising, current tax­
payers would feel the pinch immediately,
and the relation of current costs to current
services would be distorted in another di­
rection. So the unfunded pension problem
is a difficult one to solve.
Pension funding in Philadelphia has
come a long way since 1950. The City is
using more realistic assumptions now to
calculate pension liabilities; and it is
paying in enough to cover each year’s nor­
mal cost of pensions. Further, where pen­
sion fund assets fall short of liabilities, it
is setting enough money aside to pay
interest on that difference.20 Thus the

million to $722 million since 1973. The
School District belongs to the Pennsyl­
vania Public School Employees’ Retire­
ment System, which itself has experienced
increased unfunded liabilities. Philadel­
phia’s portion of the Syst em’s unfunded
liabilities is estimated to have increased
by about $60 million since 1973 (Figure 14).
On the surface, it appears that the City
and the School District are asking future
citizens to pay an increasing amount for
the pensions of current workers. But that
isn’t quite right. Both the City and the
School District have attempted to pay the
full cost of currently accruing pension lia­
bilities. For the City, the probable increase
in unfunded liabilities comes about mainly
because of a change in assumptions about
future wage increases and therefore about
the size of future pension checks. For the
School District, the latest appraisal in­
cludes an enlarged benefit package granted
by the state legislature in 1975, and this
probably explains most of the increase in
unfunded liabilities. Whatever the reason
— more realistic assumptions or higher

-"To settle a payment promise of $1,050 next year,
the City would have to set aside a thousand dollars
today if it got interest at 5 percent. (This figuring
doesn't count the cost of administration.) If only $200
were set aside—that is, funded—the City would be left
with $800 of unfunded pension liability. If it got 5
percent interest on the funded portion, it would have

FIGURE 14
UNFUNDED PENSION LIABILITIES FLUCTUATE AS ACTUARIAL A S S U M P T IO N S CHANGE
(Millions of Dollars)

Dates*
January 1, 1967
July 1, 1971
July 1, 1972
July 1, 1973
July 1, 1974
July 1, 1975

Pennsylvania Public
School Employees’
Retirement System
$720.7

City
$496.6
918.5
541.6
566.1

—

1,720.3
1,656.6
2,331.7
—

—

722.2

School D istrict!
$54.0
—

140.5
118.8
178.8
—

*Dates of unfunded liabilities are valuation dates in periodic actuarial studies ofCity and Pennsylvania Public
School Employees' Retirement System. City figures nol available for 1974, state and School District figures not
available for 1971 and 1975.
t'l’he School District's unfunded liability is calculated by multiplying the state system’s unfunded liability by
Philadelphia's percentage of the total of wages and salaries in the plan, and dividing the product in half. The other
half is the state’s currently intended matching payment.
SOURCES: City of Philadelphia, Board of Pensions and Retirement; Commonwealth of Pennsylvania, Public
School Employees’ Retirement Board.




23

MARCH/APRIL 1977

BUSINESS REVIEW

Estimated improvements, however, are
elusive, and budget dollars sometimes are
different from actual dollars. City officials,
for example, overestimated revenues by
$94 million and underestimated expendi­
tures by $4 million in the 1976 budget.22

interest on funded and unfunded portions
of pension assets combined should be
keeping pace with growing pension liabili­
ties.
The School District is paying its normal
cost of pensions and is amortizing unfunded
liabilities over the next 20-25 years. And the
City could start amortizing its unfunded
pension liabilities—or at least any further
increases in unfunded pension liabilities.
Adjustments of this kind would bring on
higher annual payments but they would
bring pension promises and pension fund­
ing closer together in time.

FIGURE 15
PHILADELPHIA BUDGET PO SITIO N
EXPECTED TO IMPROVE

MORE DEFICITS AHEAD?
Over the last ten years, budget pressures
have caused local officials to cut expendi­
tures, increase tax rates, and change
accounting and financial practices. As a
result of the latest initiatives, fiscal 1977
was budgeted to be a year in which sizable
adjustments on the revenue side would
restore a cumulative surplus to the City’s
Principal Operating Funds—a surplus large
enough to cover last year’s deficit with
$10.2 million left over. In fact, at budget
submission time, many people believed that
the surplus would bring a tax cut in 1978.2
1
And although the School District’s full-year
budget was in deficit, the combined cumula­
tive deficit was expected to decrease. These
were encouraging signs, even though the
outlook remained mixed (Figure 15).

Budget
Caption
City: Principal
Operating Funds
Revenues
Previous year
surplus
(deficit)
Expenditures
Surplus
(deficit)
School District:
General Fund
Revenues
Previous year
surplus
(deficit)
Expenditures
Surplus
(deficit)
Combined City
and School
District
Revenues
Previous year
surplus
(deficit)
Expenditures
Surplus
(deficit)

$210 at year’s end and be $840 short of the $1,050
promised to the pensioner. Thus, in effect, the
unfunded portion of the liability would have increased
by the amount of interest lost during the year ($40).
The City could keep the gap between funded and
unfunded liabilities from widening by putting assets
equal in amount to the lost interest into the pension
fund every year, and it has begun to do this. But
drawing on revenue to prevent growth in the unfunded
pension liability may put a strain on other parts of the
budget and w ill nut reduce the size of the unfunded
liability.

Budget
Basis
1977
(millions of
dollars)

$821.1

$1,103.4

17.1
911.5
(73.3)

(73.3)
1,019.9
10.2

525.8

548.7

(7.9)
533.2

(15.3)
600.0

(15.3)

(66.6)

1,346.9

1,652.1

9.2
1,444.7

(88.6)
1,619.9

(88.6)

(56.4)

SOURCES: Prospectus for City of Philadelphia Water
and Sewer Revenue Bonds, September 2,1976, p. IV-13;
adopted full-year budget for the School District of
Philadelphia 1977, dated May 27, 1976.

21On May 27, 1976, City Council passed a resolution
of intent (Resolution No. 68) to cut taxes at the start of
fiscal 1978.




Estimated
Obligation
Basis
1976
(millions of
dollars)

24

FEDERAL RESERVE BANK OF PHILADELPHIA

deficits, and small deficits can turn into big
ones.
In short, the budgeted gains in the posi­
tion of the City and the School District com­
bined appear to be shrinking. The final re­
sult depends on whether the schools
remain open for the full year, whether
higher levels of government expand their
allocations, and whether the City is able to
hold the line at its budgeted expenditure
levels. And only the final result counts!
What can be done from this point forward?

These estimating errors, instead of offset­
ting one another as they frequently have in
the past, added up to the biggest combined
miscalculation in recent times (Figure 16).
Right now, the best guess is that Phila­
delphia will not make as much headway
against its cumulative deficits as it ex­
pected to this year. The City’s projected
1977 operating surplus appears to be
shrinking enough to keep it from covering
last year’s deficit. Arbitrated wage in­
creases for Police and Fire employees,
along with only partially realized savings
from overtime cuts, employee layoffs, and
other developments, have taken a big bite
out of the budgeted surplus. And a cumula­
tive deficit of at least $12 million appears
more likely than the budgeted $10-million
surplus for the City’s Principal Operating
Funds. Down the street, the School Board’s
alternative budget—the full-year budget—
generates an operating deficit of some $51
million, which, when combined with the
previous year’s deficit, sums to a cumula­
tive shortfall of $67 million. Thus projected
budget surpluses can turn into real-life

ALTERNATIVES FOR
PHILADELPHIA
Philadelphia won’t be able to maintain
balanced budgets over the long run unless
it raises more revenues or holds down
expenditures or does a little of each. In
order to raise more revenue, Philadelphia
would have to collect more taxes locally
itself or else depend on Federal and state
tax allocations. And citizens are showing
increased resistance to taxes, no matter
who collects them.
But cutting expenditures may reduce the
level of vital municipal services unless
productivity is increased. No doubt there
are places where increased City and School
D i s t ri c t e x p e n d i t u r e s have not been
matched by improved services, where

- T h e s e misestimates apparently have both technical
and political causes. See Moak, The Future of Ameri­
can Cities, pp. 49-50.

FIGURE 16
ESTIMATING ERRORS COMPOUND 1 9 7 6 BUDGET WOES
(Millions of Dollars)
Budget
Caption
Revenues
Obligations
Prior year surplus (deficit)
Closing surplus (deficit)

Estim ate
$800.2
780.8
(19.4)

0

Actual*
$706.0
785.1
(7.5)
(

86 . 6 )

‘ Preliminary figures.
SOURCE:

Prospectus forCity of Philadelphia Water and Sewer Revenue Bonds, September 2, 1976.




25

Effect
on Surplus
$-94.2
-4.3
+11.9
-

86.6

BUSINESS REVIEW

MARCH/APRIL 1977

to show much real growth.24 Although em­
ployment, the cornerstone of wage taxes, is
expected to rebound from its recessionary
setback, it is unlikely to surpass its 1970
level in the foreseeable future. Wages per
worker in the Philadelphia area are ex­
pected to continue the pattern of not grow­
ing much in excess of cost-of-living in­
creases. A major breakthrough in labor
productivity in the nonmanufacturing sec­
tor would be required to produce real wage
increases exceeding price changes, but this
sector just hasn’t seen large productivity
changes in the past. Nor is the inflationadjusted level of other local revenues
expected to increase much if population,
employment, and the level of business
transactions remain relatively constant.
So while Philadelphia’s local revenue
base may be expected to grow apace with
the cost of living (as reflected by the mar­
ket value of property, wages per worker,
and business sales), there probably won’t
be enough growth beyond that to generate
markedly higher revenues if current trends
continue.

some fat could be trimmed. Yet there may
be other departments where spending cuts
would jeopardize services. Each of the
alternatives outlined below has costs as
well as benefits. The challenge for Phila­
delphia is to come up with a workable com­
bination of these policy options to restore
long-run fiscal health.
RAISING REVENUES
If costs continue to rise, more revenues
will be needed just to pay for the same level
of service inputs. And if public demand for
local government services increases, even
more money will have to flow into public
treasuries.
The City and School District can look for
more revenue at home as well as in Harris­
burg and Washington. On the local level
they can try to increase the tax base, modi­
fy the tax structure, raise tax rates, levy
new taxes, and charge users for services.
On the state and Federal levels they can try
to influence the way funds are distributed
to municipalities.
Growth in the T ax Base. An expanding
tax base would generate more revenue even
if tax rates were left where they are.23 Can
Philadelphia anticipate such an expan­
sion?
Prudent urban renewal investments by
the City might encourage private rehabili­
tation of residential neighborhoods, as in
Society Hill, and investing in transporta­
tion and utility facilities might attract busi­
nesses into town, as in the Center City
redevelopment plan. In a built-up city like
Philadelphia, there’s little room for new
development of open land, and so growth
must come mainly from redevelopment and
rehabilitation— neither of which is proceed­
ing at a rapid pace.
Nor does the wage tax base seem likely

Modifying the Tax Structure (and Im­
proving Its Administration). A more
-'Through its broad-based income tax, the City of
Philadelphia has been able to tap some of the economic
development in neighboring counties. Over the period
1970-76, revenues from the earnings tax paid by
reverse commuters—individuals living in Philadel­
phia but working outside City boundaries—have con­
tributed on average 10 percent of total wage and
earnings tax revenues. In 1970, 29 percent of the people
working in Philadelphia lived in the surrounding sub­
urban counties. And these commuters generally earn
more than their coworkers who live in the city. A
weighted average of commuter and resident earnings
suggests that commuters in 1970 took home 39 percent
of wages earned in the city and contributed 35 percent
of wage and earnings tax revenues. This left the people
who both live and work in Philadelphia to shoulder
about 55 percent of the City income tax levy.
For the income and commuter data see U.S. Depart­
ment of Commerce, Bureau of the Census, Census of
Population: 1970. Subject Reports, Final Report PC(2J6D, Journey to Work (Washington: Government Print­
ing Office, 1973).

23But it also might encourage demand for public
services.




26

FEDERAL RESERVE BANK OF PHILADELPHIA

efficient property assessment system—
one which has assessments keeping up
with market values—would help capture
the nominal growth of the City’s taxable
base. Thirty-eight counties throughout the
U.S., including Montgomery County out­
side Philadelphia, have instituted com­
puter-aided appraisal procedures to facili­
tate annual reassessment.25 Such an
automated assessment system, by making
it easier to keep assessment ratios equal,
also might help ensure that the burden of
property taxes would be distributed
equitably.
Another way to enlarge the tax base is to
revoke tax exemptions or mitigate their
effects. In this time of fiscal pressure, it
may be appropriate for cities that are
impacted with nonprofit institutions and
Federal and state offices to press more
strongly for in l i eu payments from at least
some of these organizations.26 Further, the
City’s personal property tax exempts
stock in corporations that have facilities in
the state of Pennsylvania, and the School
District’s tax on unearned income exempts
interest on savings deposits and long-term
capital gains. These exemptions could be
dropped.
Different kinds of income and wealth are
taxed at different rates. For example, the
rate of the School District’s tax on un­
earned personal income remained steady at

2 percent from 1968 to 1976, while the
City’s wage rate rose to 3 5/16 percent.
These two income tax rates have been
equalized at 4 5/16 percent in 1977. A dis­
parity remains, however, in the wealth
taxes levied by the City. Housing—which
represents the principal kind of wealth for
low-income and moderate-income families
— already was taxed at an effective rate of
almost 18 mills in 1975, before the 1977 rate
increase.27 Financial investments, which
more frequently are held by high-income
families, are taxed by the City at only 4
mills. Taxing both forms of wealth at the
same or more nearly similar rates might
generate more revenue in the short run, but
it also might accelerate the exodus of
higher income people to surrounding com­
munities with more favorable tax struc­
tures.
Higher T ax Rates. A far less popular
method for increasing locally raised reve­
nue is raising the average individual’s tax
bill. Yet raising a tax rate is an attractive
move for administrators because it’s a
simple and often broad-based way of gener­
ating a sizable sum of additional revenue.
Philadelphia’s recent decision to increase
property and income tax rates by one-third,
for example, is expected to generate $162
million in additional revenue in 1977.
Many economists believe that busi­
nesses and residents are sensitive to
changes in the tax rates of neighboring
jurisdictions, especially if these differ­
ences are not associated with correspond­
ing variations in public service quality. If
the rate of tax on property, income, wealth,
and business rises more rapidly in Phila­
delphia than in surrounding areas, City
property values are likely to drop and
wealthy individuals and businesses will
tend to locate elsewhere. Thus intended

25For a description of the use of computerized multi­
ple regression analysis in property appraisal, see
George W. Gipe, “Understanding Multiple Regression
Analysis," Assessors Journal 10, 4 (December 1975),
pp. 1-13. It is reasonable to expect that the cost of
setting up such a system for Philadelphia would be
more than paid for in its first year of operation, espe­
cially if the first year saw high inflation. An increase in
assessments reflecting a rise in market value of 6
percent would yield additional property tax revenues
to the Gity and School District of over $15 million in
one year. This is well above the estimated cost of
installing a computerized mass appraisal program.

27This equals the nominal tax rate of 47.75 mills
times the 1975 average assessment ratio (36.9 percent)
for a sample of residential properties (Figure 2). See
Real Estate Tax, August 31, 1976, Exhibit IV.

26In 1976, the assessed value of tax-exempt property
was reported by the Board of Revision of Taxes at $2.3
billion or 41 percent of the value of taxable property.




27

BUSINESS REVIEW

MARCH/APRIL 1977

police, or emergency squad protection
would help cover the costs of providing
these services. Higher charges might tend,
however, to discourage use of these serv­
ices, even where, as in mass transportation,
increased use might be more appropriate.
Low user charges may be intended to sub­
sidize low-income users; but there may be
more efficient ways to provide subsidies.
Thus, like the other alternatives, increas­
ing user charges has its pros and cons.

gains in revenue from rate increases have to
be balanced against obstacles to growth in
the tax base over the long run.
New Taxes. Besides modifying its pres­
ent tax structure, Philadelphia probably
could raise money from new taxes on
enterprises that'can’t pull out. In the past,
the City has done this with parking lots
and amusements, and the City’s 1977 bud­
get imposes a 1-year tax on petroleum
processing.
Each of these nuisance taxes generates
only a small amount of revenue and may
be expensive to administer; but all to­
gether, business activity taxes contrib­
uted $87 million (or 6 percent) of the 1976
combined City and School District rev­
enues.
Some cities other than Philadelphia have
taxes on general sales and tobacco prod­
ucts as well as on motor vehicle fuel, regis­
tration, and licenses. Any or all of these
might be considered for Philadelphia, too—
though some of them would require state
legislative approval.

Intergovernmental Funding. To the
extent that some services were provided
previously and funded by the locality,
intergovernmental
financing of these
activities can mean considerable relief
from local taxes—though maybe not for the
state and Federal taxes of City taxpayers.
Economists agree that it’s appropriate
for a level of government higher than the
municipality to finance some services—
for example, where the benefits accruing
from a service spill over to people who live
outside the taxing jurisdiction. On these
grounds the Federal government has
stepped into urban renewal, law enforce­
ment, and pollution control, and state
allocations are used to finance public
health care programs, court costs, and
education.
Another case for financial assistance by
a higher level of government has to do with
services that are redistributive in nature,
transferring income from some individuals
to others to ensure equity in the delivery of
services. If these expenditures were
financed at a local level, higher income
individuals would have a strong incentive
to move to avoid the! related tax and would
be able to do so. The Federal government
finances health care for the poor, and the
state of Pennsylvania allocates direct wel­
fare payments to the poor. There may be a
case for more state and Federal financing of
education, social services (including health
and welfare), environmental programs and
facilities, and law enforcement (including
courts and prisons).

User Charges. Another way to generate
revenue locally is to charge users of ser­
vices. The idea here is to charge people
who use a service for at least part of the
cost of providing that service and not to
charge those who do not use it. Charging
for services tends to discourage people
from accepting a service if they don’t value
the service at least as much as the charge
for it. The City of Philadelphia already
raises considerable revenues through
such charges. There are charges for
stadium, dock, and airport rentals, li­
censes, admission to some cultural and
recreational facilities, court costs, traffic
violations, and health care.
More charges could be instituted, and
current fees could be raised. Higher tui­
tion at the Community College, higher bus
fares, higher parking charges, more charges
for recreation facilities, income-graduated
health care fees, and charges for special fire,




28

FEDERAL RESERVE BANK OF PHILADELPHIA

portation systems, pollution control pro­
jects and water systems, solid waste dispo­
sal and sewage treatment, recreation facili­
ties, land use planning, and law
enforcement. But organizing and enforcing
financial contributions by benefiting neigh­
bor jurisdictions may be the most difficult
of all the revenue-raising alternatives sug­
gested, since legal barriers are hard to over­
come.
Summary. Without large real growth in
the wage and property tax base or without
an expanded flow of aid from the Federal
and state levels, Philadelphia will have to
reform and extend its local tax system to
generate more revenue. Reforms and rate
increases on the broad-based property
and wage taxes are likely to yield the
greatest increases in revenues. New taxes
and user charges designed to have busi­
nesses and individuals pay more directly
for some of the services they receive are
likely to contribute only a small fraction of
total revenue but may provide a pricing
incentive for the more efficient production
of public services and allocation of public
resources.
Higher rates and new taxes would
produce larger tax bills. The results of a
study of 30 cities show that Philadel­
phians paid lower state and local taxes in
1974 than their counterparts in up to 10
other big cities of the U.S. But its state and
local tax structure puts Philadelphia at a
competitive disadvantage with at least 19
of the 29 other cities, many of which are
small, still-developing cities in the South
and West. Subsequent tax increases in
Philadelphia may have worsened its posi­
tion further. More taxes would aggravate
this disadvantage (see Appendix IV).

More responsiveness to rising costs on
the part of Federal and state governments
would help alleviate the fiscal pressure on
local governments in an inflationary pe­
riod. While the state’s instructional sub­
sidy program has grown somewhat to
cover the increasing cost faced by the
School District, the Federal Revenue Shar­
ing program for the City has not risen with
inflation.28 Amending the unrestricted rev­
enue sharing program to include an infla­
tionary component would help maintain
the real contribution of Federal relief. Fur­
ther adjusting the program to include a
countercyclical component would help
local governments weather periods when
local revenues lag because of economic
recession.29 And prompter payments of
grants by higher levels of government
would mitigate the need for short-term
borrowing by local governments which
now operate their budgets on an accrual
basis.
When the spillover effects of certain ser­
vices are limited geographically, regional
financing may be the most suitable kind of
intergovernmental funding. Regional fi­
nancing has been used for public trans­

28The state instructional subsidy does not have an
explicit inflationary or countercyclical component. But
the density component is related directly to the actual
instruction expense per pupil and this rises with
expenditures. The poverty component is based on the
number of children whose families are on welfare. To
the extent that this number reflects unemployment, the
poverty component is sensitive to the business cycle.
290 n September 30, 1977, the total national Federal
Revenue Sharing program is expected to increase from
its annual level of $6.65 billion to $6.85 billion—or
about 3 percent. A 3-percent increase in Philadelphia’s
revenue sharing receipts would mean only an addi­
tional $1.5 million.

CONTROLLING EXPENDITURES
When taxpayer resistance grows and
additional financial assistance is not
forthcoming from higher levels of govern­
ment, the alternative for achieving a bal­
anced budget in the face of rising cost

Recent antirecessionary relief has come in thfe form
of a public works job bill (S3201 signed by President
Ford on October 12, 1976) which authorizes a total of
$3.95 billion through September 30,1977. This is a one­
time program with no provisions for future economic
downturns.




29

MARCH/APRIL 1977

BUSINESS REVIEW

services that some regard as luxuries.
From this point of view, the beautification
of parks, shopping areas, and public
buildings, the provision of extracurricular
programs for public school students, and
tax support for community colleges are on
the list to be reviewed for the appro­
priateness or urgency of public support.
Choices become harder to make as revenue
limitations become more acute. In select­
ing which services to maintain and which
to cut, people have to weigh the tax sav­
ings that would come from dropping a
service as well as the relative importance of
different services.

pressures is to restrain the growth of total
expenditures. Two main paths are avail­
able. One is cutting back certain functions.
The other is reducing the cost of providing
the same level of service through im­
proved productivity.
Fewer People, Fewer Expenses. P h i l a ­
d elphia, like m an y o th e r large c itie s in the
N o rth e a st, has fe w e r re s id e n ts , few er
w o rk e rs, and fe w e r sc h o o l s tu d e n ts than it
did in 1970. W h ile total e x p e n d itu r e s h ave
g ro w n by 91 pe rce n t for the C ity and 86
percent for the S c h o o l D is t r ic t sin c e 1970,
e x p e n d itu re s per re sid en t and per pupil
have g ro w n even f a s te r . S o m e w ould argue
that a d eclin e in p o p u la tio n c a lls for a
re d u ctio n in se r v ic e v o lu m e and th at e x p e n ­
d itu re s should be cut a c c o rd in g ly a c r o s s the
bo ard . T h i s a p p r o a c h w o uld p a s s the s a v ­
ings b a c k to the t a x p a y e r s r a th e r than
spen din g the freed re s o u r c e s on e x t r a s e r v ­
ices for th o se w ho rem ain .

Increased Productivity. When increas­
ing costs threaten to drive the price of a
product out of the market, private pro­
ducers have a strong incentive to examine
their method of production to cut costs.
Taxpayer resistance and the movement of
households and firms out of a jurisdiction
which has high taxes and poor services
offer analogous pressures for publicsector managers and officials.
Government activity and the private
service sector of the economy have not re­
ceived the same intensive analysis of
production methods and efficiency as the
manufacturing sector.30 But rising public
expenditures without any perceptible im­
provement in services, along with a fiscal
pinch intensified by sluggish revenue
growth, have focused attention on im­
proved productivity as the most promis­
ing long-term solution for public budget
woes. P r o d u c t i v i t y s t udi es could be
undertaken at the local level either directly
by the City itself or by hired consultants.
Government budgetmakers could assist
productivity analysis by tying input costs
to output measures. Management could

In practice, however, the link of produc­
tion costs to the level of population may
not be proportional. How much should air
and water port services and museum oper­
ations be cut back to reflect a declining
City population? The solution may be
more straightforward for schools, transit,
and garbage collection. While trimming
services in line with a declining popula­
tion may not be appropriate for every de­
partment, there is room for some cost
saving through flexible service delivery
systems and responsive budgeting.
Eliminate Functions. Some would argue
that the public sector has overextended
itself in trying to provide services. This
reasoning suggests that the private sector
could accommodate the demand for many
of the services now performed by govern­
ment. Garbage collection, security patrol,
and recreational facilities are services for
which private purchase has been pro­
posed. The New York crisis has made
many people believe that a financially
strapped city cannot afford to provide




;,0An exception is Personnel Administration in the
City of Philadelphia: A 'Performance Report' on
Selected Aspects of the Work of the Civil Service
Commission and Personnel Department, Pennsylvania
Economy League Report No. 386, 1976.

30

FEDERAL RESERVE BANK OF PHILADELPHIA

contribute by rewarding changes in per­
sonnel and procedures that lead to greater
efficiency.
Restraining the growth of the labor bill
may be the most cost-effective policy to
turn to, since producing local government
services is a labor-intensive activity. Over
63 percent of the City of Philadelphia’s 1976
General Fund expenditures and 73 percent
of the School District’s went to wages and
employee benefits.
What can be done in this area? The City
and School District might be able to hold
the line with unions—insisting on produc­
tivity increases in exchange for increases
in compensation.:il They might institute
incentives for improved management and
worker efficiency or use high-priced labor
more effectively by allocating some tasks
to less trained, lower paid workers (po­
lice trained for patrol are not necessary to
do office work, give parking tickets, or di­
rect traffic]. More paraprofessionals could
be used in the health, legal, and educational
functions.
Improved technology can assist workers
and perhaps reduce personnel numbers.
Some municipalities collect garbage by
means of trucks which lift a standard­
sized container. This collection system
allows one truck driver to do the job that
otherwise requires several garbage col­
lectors. More sophisticated telecommuni­
cations may make police patrols more effec­
tive. Computers can assist property asses­
sors, recordkeepers, and school teachers.
Studies of other cities indicate that signifi­
cant cost savings are possible over the long
run from modernizing the methods of pro­
ducing public services.1 Why not Philadel­
2
phia?

Making a good choice among these al­
ternatives will require that people be clear
about what they want. Public expenditures
are undertaken not for their own sake but
to achieve some aim. Efficiency in achiev­
ing the aim, rather than past practice or
traditional departmental responsibility,
should guide the selection of programs.
In the effort to reduce crime, for example,
improved street lighting and youth employ­
ment programs might accomplish more
than adding to the police force.
In many areas, also, citizens can help
hold public spending down by assuming
volunteer responsibilities. In some neigh­
borhoods even now, for example, citizen
cooperation in reporting suspicious inci­
dents is raising the level of public safety
for less money than it would cost to expand
professional police activities.
These two lines of attack—choosing
public programs to fit public aims and pro­
moting good citizenship instead of just
spending more—could add a new dimen­
sion to the public service picture.

31See Anthony M. Rufolo, “Local Government Wages
and Services: How Much Should Citizens Pay?” Busi­
ness Review. Federal Reserve Bank of Philadelphia,
January/February 1977.

Recent deficits for Philadelphia’s City
and School District have their origins in
past spending, taxing, and financing deci­
sions. The City has adjusted by raising
local taxes and holding the line on real
expenditures in departments that don’t

Summary. Government expenditure sav­
ings may be in the offing in response to
declines in population or if some City
functions are returned to the private sec­
tor. But increased productivity probably
offers the most hopeful long-run solution
for trimming local government expenses.
It is an agreeable alternative to the tra­
ditional unpleasant seesaw of higher taxes
and reduced services. Its success, how­
ever, depends upon the insistence of tax­
payers and the incentives for cooperation
offered to public employees and managers.

CONCLUSIONS

:i2For a summary of studies on New York City, see
Year 4: A Report to the People of the City of New York
(New York: Rand Institute, 1974).




31

MARCH/APRIL 1977

BUSINESS REVIEW

income residents—remain. But there are
options available to raise revenues and
control expenditures. The fiscal health of
this city requires progress on many fronts.
A mix of higher tax rates, new taxes, and
more user charges would add to Philadel­
phia’s locally raised revenues. And other
levels of government could be pushed to
share more of their revenue with the City or
to assume financial responsibility for cur­
rent local programs. To cut expenditures,
officials could turn some services back to
the private sector and cut back, where pos­
sible, in response to a reduced population.
But most attractive of all is the reduction of
costs through innovative methods to
improve worker productivity.

receive funding from intergovernmental
sources. These actions have returned the
City’s 1977 budget to surplus, though the
surplus will not cover the large deficits
from previous years. But the fiscal 1977
budget for the School District gets only a
minimal boost on the revenue side from tax
increases. Thus, despite spending re­
straint in some departments, the School
District deficit continues to grow. Only
severe expenditure cutting or increased
contributions by the Commonwealth or
City can bring balance to the current School
District budget.
For the longer run, the underlying deficit
pressures — sluggish local revenue sources,
rising costs, and a high density of low-




32




BUSINESS REVIEW

MARCH/APRIL 1977

A P P E N D IX I
P H IL A D E L P H IA C IT Y A N D S C H O O L D IS T R IC T R E V E N U E S

FIGURE 1.1
CITY OF PHILADELPHIA
Selected Fund Revenues*
(Millions of Dollars)
Revenue Source
Local
Property Tax|
Personal Income T a x J
Business Activity Taxes§
Local Nontax Revenue1
'
Total Local
Intergovernmental^
Federal
Revenue Sharing
Other Federal**
Common w ealthtf
OtherJJ
Total Intergovernmental
Total

1970

1973

1974

1975

1976

1977

$112.3
196.7
44.9
71.0
424.9

$124.7
257.2
51.0
93.8
526.7

$108.6
286.2
52.7
105.2
552.7

$107.9
285.1
54.5
107.7
555.2

$110.1
296.5
57.0
114.8
578.4

$180.5
407.8
82.3
135.0
805.6

35.2
35.5
2.0
70.7
495.6

67.9
80.5
97.8
3.3
249.5
776.2

51.1
90.3
84.2
1.8
227.4
780.1

52.2
116.7
112.3
4.3
285.5
840.7

51.1
129.8
119.1
2.2
302.2
880.6

51.1
228.2
134.4
3.9
417.6
1,223.2

‘ Selected funds include the General Fund, County Liq­
uid Fuels Tax Fund, Pier Maintenance Fund, and Special
Gasoline Tax Fund for all years. Other selected funds are:
in 1970 the Model CitieS~Program Fund, Neighborhood
Development Fund, and Office of Economic Opportunity
Fund; in 1973 and thereafter the Grants Revenue Fund; in
1974 and thereafter the Aviation Fund; in 1976 and 1977
the Bicentennial Fund, Community Development Fund,
and the Traffic Court share of the Parking Facilities Fund.
Excluded in all years are the Enterprise Funds, Sewer
Fund, and Water Fund.
fReal estate tax and personal property tax.
fWage tax and earnings tax.
SMercantile license tax, net profits tax, real property
transfer tax, miscellaneous taxes such as those on amuse­
ments, auctions, bowling alleys, and parking lots.
I Licenses, fines, service charges, other revenues;
I
revenue from City-owned leased utilities; reimbursement
for debt service; park, civic center, and sports stadium
revenues; Aviation Fund revenues; Pier Maintenance
Fund revenues; adjustment for interfund transfers; and
Traffic Court share of Parking Facilities Fund (1976 and
1977 only).




H Received through the County Liquid Fuels Tax Fund,
General Fund, Grants Revenue Fund, Special Gasoline
Tax Fund; and the Bicentennial Fund anil Community
Development Fund (1976 and 1977 only).
“ Redevelopment Authority funds in 1970 ($16.1 mil­
lion), 1973 ($20.4 million), 1974 ($22.0 million), 1975
($21.7 million) added for comparability with 1976 and
1977; in 1970 $13.4 million from Model Cities Fund,
Neighborhood Development Fund, and Office of Economic
Opportunity Fund. These last three funds, though special
funds rather than operating funds, are included here
because large portions of these revenues were shifted to
the Grants Revenue Fund beginning in 1972.
ttCommonwealth grants and combined U.S. and Com­
monwealth grants.
^Payments from other government agencies such as
Philadelphia Housing Authority and Philadelphia Rede­
velopment Authority.
SOURCES: Annual Report of the Director of Finance of
the City of Philadelphia 1970, 1973, 1974, 1975, 1976; City
of Philadelphia, Mayor's Fiscal 1977 Operating Budget
and Programs; U.S. Bureau of the Census, City Govern­
ment Finances, 1969-70, 1972-73, 1973-74, 1974-75.

34

FEDERAL RESERVE BANK OF PHILADELPHIA

FIGURE 1.2
SCHOOL DISTRICT OF PHILADELPHIA
General Fund Revenues*
(Millions of Dollars)
Revenue Source
Local
Property Tax|
Personal Income T a x J
Business Activity Taxes§
Local Nontax Revenue1
1
Special Payments^
Total Local
Intergovernmental**
Federal
Commonweal th tt
Total Intergovernmental
Total

1970

1973

1974

1975

1976

1977

$95.2
7.5
28.8
1.7
—
133.2

$105.1
8.3
29.2
7.4
12.0
162.0

$127.8
8.4
28.7
8.1
—
173.0

$144.9
8.7
29.6
5.1
5.4
193.7

$149.7
8.5
29.5
5.1
7.5
200.3

$158.2
12.3
29.6
4.0
8.0
212.0

6.0
140.0
146.0
279.2

5.0
210.7
215.7
377.7

5.0
214.5
219.5
392.5

4.7
263.5
268.2
461.9

9.6
314.6
324.2
524.5

9.6
327.1
336.7
548.7

*Since 1974 includes Intermediate Unit.
tCurrent and delinquent real estate taxes.
JNonbusiness income tax and pari-mutuel taxes.
§General business tax, corporate net income tax, and
rental occupancy tax.
I Payments in lieu of taxes, public utilities tax, interest
I
on temporary investments, personal property tax, and
miscellaneous revenues.

1 Grant from City in 1973; payment from Cafeteria
1
Fund in 1975 and thereafter.




**Kederal grants
directly as well as
Unit. Act 194 and
Categorical Grants

and funds from the Commonwealth
indirectly through the Intermediate
195 nonpublic school programs and
Fund excluded in all years.

ttSince 1974 includes Intermediate Unit funds listed
separately.
School District of Philadelphia, Summary of
Budget for fiscal years beginning
July 1, 1971, 1974, 1975, and 1976; adopted operating
budget for 1977 dated May 27, 1976.
SOURCES:

the Proposed Operating

35

BUSINESS REVIEW

MARCH/APRIL 1977

A P P E N D I X II
P H IL A D E L P H IA C IT Y A N D S C H O O L D IS T R IC T
E X P E N D IT U R E S :
N O M IN A L A N D R E A L D O L L A R S

+ (Materials Weight x Materials Index)
+ (Equipment Weight x Equipment Index).
The value of a price index or deflator may be
interpreted as a percentage with the base value
in the series (in this case the 1970 value) equal to
100 percent. An index with a 1976 value of 150
with a base of 1970 = 100 says that what used to
cost $100 in 1970 costs $150 in 1976. See Figure
II.3 for the City deflators and Figure II.6 for the
School District deflators by expenditure ele­
ment.

THE DEFLATOR LINKS NOMINAL TO REAL
DOLLARS
Nominal or current-dollar measures of expen­
ditures balance or break the budget in any given
fiscal year, but it is useful to be able to compare
expenditures across time discounting the impact
of price changes. A common method of adjusting
for price changes is dividing current-dollar fig­
ures by a price deflator. These price-adjusted
expenditure figures—real expenditures or constant-dollar expenditures—are expressed with
reference to the price level in a base year. In this
study, the base year is 1970.
Figures II.2, 3, and 4 present three views of
expenditures for the City of Philadelphia: nomi­
nal dollars, deflators, and real dollars. Figures
II.5, 6, and 7 present the nominal expenditures,
deflators, and real expenditures for the School
District of Philadelphia. The data are presented
by major expenditure elements for six fiscal
years, 1970 and 1973 through 1977.

DEFINITIONS
INDEXES

SOURCES

OF PRICE

The individual price indexes used for the
appropriation groups and the other special
expenditure elements come from a variety of
sources.
Overall Deflators. The overall deflators for the
City and School District budgets are calculated
by dividing the total nominal expenditures by
the sum of the real expenditure estimates for the
individual expenditure elements.1
Wage and Employee Benefits Deflators.2Aver­
age salaries were calculated for each year, 1973
through 1976. Unless otherwise noted, the wage
indexes for 1976 were used for 1977, consistent
with the assumption, incorporated into the pub­
lished budgets, that wages would not be

METHOD OF CONSTRUCTING DEFLATORS
A product’s price deflator is the weighted
average of the price changes for the inputs
required to produce it—labor, goods, and ser­
vices. In constructing deflators for the City and
School District, the budgets of the major expen­
diture elements are divided into three appropria­
tion groups: wages and employee benefits, pur­
chases of goods and services, and payments to
debt service. Indexes of price change are esti­
mated for all three appropriation groups, and
weighted averages are calculated for their
indexes: each index is multiplied by the fraction
of expenditures its appropriation represents in
an expenditure element, and these products are
summed. See Figure II.1 for expenditure element
weights and the Box in the text for corresponding
price indexes.
The basic formula for calculating the deflator
is:
Deflator = (Wage Weight x Wage Index)
+ (Services Weight x Services Index)




AND

‘The overall school expenditure index for 1973 was used as
the deflator for the City’s Special Payment to the School
District in that year (Figure It.6).
The School District’s Undistributed Items and Refunds
deflator was calculated for each year by taking the sum of
nominal expenditures for the five education elements, plant
operations and maintenance, and administration and support,
and dividing it by the sum of real expenditures for these seven
elements.
^Bureau of Labor Statistcs, Mideast Region, Philadelphia
Municipal Employees, Compensation Chronology, 1953-1971,
Regional Report No. 3, November 1971; Philadelphia Munici­
pal Employees, Compensation Chronology (Supplement No.
2), Report No. 15, November 1974.

36

FEDERAL RESERVE BANK OF PHILADELPHIA

taken as price intlexes for purchase of services,
materials and supplies, and equipment, respec­
tively. Quarterly series were used to calculate
indexes for each year 1973 through 1976.4 Fol­
lowing the projections of price increases by the
major econometric models of the U.S. economy,
the 1976 indexes were increased by 6 percent to
provide estimates for 1977.
Philadelphia Consumer Price Index. The
Philadelphia CPI provides a measure of the
overall trend in costs in the local economy. It was
used as the deflator for the City’s Debt Service
and its Special Payment to the Parking Fund
(1977).r For the School District, the local CPI was
>
used to deflate Debt Service and Insurance and
the Advance Funding Payback.

increased. All salary series were indexed to their
1970 base values. The wage and salary indexes
were used for the personal services component
found in the individual expenditure elements
shown in Figure II.1. They were used also in
deflating the Pensions and Employee Benefits
elements whose expenditure requirements often
are proportional to wages.
Two wage indexes were used for the City—one
for uniformed workers (police and firemen) and
one for nonuniformed workers. The City
Employee Benefits deflator is a weighted aver­
age of these two indexes. The price index for
uniformed City employees is the average of the
maximum and minimum pay for a police patrol­
man. The same index is used for both police and
firemen, whose salaries are negotiated together.
T h e pri ce index for no nuni fo rme d City
employees is based on a weighted average of the
1976 average salaries for District Councils 33
and 47, the two unions that negotiate for the
City’s nonuniformed workers. The correspond­
ing salaries for earlier years were derived from
the standard negotiated wage increases for each
union.
A single wage index was generated for the
School District. An average salary for school
employees was derived for each year by weight­
ing the salaries for five typical positions by their
shares of 1976 School District employment.3 If a
raise took effect in the course of the school year, a
weighted average of the two salary levels was
used. For 1977, the only raises incorporated into
the budget, and consequently into the wage
index, were the provisions for the second yearof
the custodial workers' 2-year contract.
Deflators of Goods and Services. The deflators
used in the national income accounts for state
and local government purchases of services,
nondurable goods, and durable goods, were

CITY BUDGET DATA
City data for 1977 are not strictly comparable
with data for earlier years for two reasons: (1)
The budget includes maximum expected receipts
and expenditures from grants from other govern­
mental units to ensure that the Director of
Finance will not have to ask Council to raise the
budgeted ceiling on expenditures during the
year. (2) A large proportion of the Grants
Revenue Fund and Community Development
Fund is budgeted to administrative offices which
apportion it among the various City departments
during the year; these expenditures then appear
under the spending agencies in the Finance
Director’s report. The most important example of
this is the CETA (Comprehensive Employment
and Training Act) funds which were included in
the proposed budget for the Commerce Depart­
ment through 1976 and for the Managing Direc­
tor in 1977. Actual expenditure figures in pre­
vious Finance Director’s reports suggest that, in
practice, these funds will be spent by many
different agencies.

- Survey of Current Business, 56,1, Part II (January 1976), pp.
“
65ff., updated by the Department of Commerce by telephone.
5U.S, Department of Labor, Bureau of Labor Statistics,
Mideast Regional Office, “The Consumer Price Index for
Urban Wage Earners and Clerical Workers,” issues for January
1970-September 1976.

3The positions used were (1) Secretary II, twelve month,
Step 7 (previously Step 5); (2) Principal, Class 5, Step 5; (3)
Nonteaching Assistant I, ten month, Step 5; (4) Custodial
Worker, pay grade 119, twelve month, Step 2; and (5) Teacher,
bachelor’s degree, Step 10.




37

BUSINESS REVIEW

MARCH/APRIL 1977

FIGURE II.l
WEIGHTS USED IN CALCULATING DEFLATORS FOR 1976*
Fraction of 1976 Expenditures Going to
Expenditure
Element
City
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development
School District
Early Childhood
Elementary
junior High & Middle
Senior High & Technical
Special Education
Plant Operation
& Maintenance
Administration
& Support

Personal
Services
(Wages)

Purchase of
Services

Materials
& Supplies

Equipment

.418
.944
.511
.429
.738
.789
.962
.792
.141

.540
.011
.425
.520
.186
.189
.002
.107
.856

.035
.042
.060
.051
.072
.016
.022
.092
.003

.006
.003
.004
—
.004
.005
.014
.008
—

.699
.964
.962
.940
.584

.272
.003
.008
.017
.391

.029
.033
.030
.043
.026

—
—
—
—

.633

.068

.298

.651

.164

.186

—

*The City and School District budgets both have eight rather than the total of expenditures listed in the budget,
appropriation classes. In the present study, only the four
largest City classes are considered in calculating
weights—personal services (wages and salaries), pur- SOURCES: City weights for 1973-76 based on Annual
chase of services (from business firms or other govern- Report of the Director of Finance of the City of Philadelmental units), materials and supplies, and equipment. For phia for each year; weights for 1977 based on City of
the School District, only the first three classes are consid- Philadelphia, Supporting Detail for Fiscal 1977 Operating
ered here. Contracted services for the School District Budget. School District weights for 1973-75 based on data
include scholarships and the local share of Federal pro- from School District of Philadelphia, Summary of the
grams; materials and supplies include equipment as well Proposed Operating Budget for fiscal years beginning July
as books. The expenditure figure used as the base for the 1, 1971, 1974, 1975, and 1976. Weights for 1976 and 1977
percentage calculations is the sum of only these four based on data from the adopted operating budget for 1977,
(City) or three (School District) appropriation classes dated May 27, 1976.




38

FEDERAL RESERVE BANK OF PHILADELPHIA

Police: Police.
Health: Public Health, Philadelphia
General Hospital, Advance for Hospi­
tal Authority.
Welfare: Public Welfare, Philadelphia
Prisons, Riverview, Youth Study Cen­
ter.
Streets: Streets, Water.
Courts: Clerk of Quarter Sessions,
Register of Wills, District Attorney,
Sheriff, Traffic Court, Common Pleas
and Municipal Courts, Common­
wealth Court, Supreme and Superior
Courts, Defender Association.
Fire: Fire.
Recreation and Cultural Services:
Recreation, Fairmount Park, Atwater
Kent Museum, Camp William Penn,
Philadelphia Free Library, American
Flag House and Betsy Ross Memorial,
Community College.
Urban Development: Philadelphia
Anti-Poverty Action Commission,
Model Cities, Philadelphia Redevelop­
ment Authority, Urban Homestead.
Debt Service: Capital Budget Financ­
ing, Sinking Fund Commission.
Pensions and Employee Benefits: Em­
ployees’ Disability Benefits and Work­
m e n ’s C omp en sa t i on P ayme n t s,
Employees’ Welfare Plan, Board of
Pensions and Retirement, Social
Security.

DEFINITION OF CITY EXPENDITURE ELE­
MENTS
The City budget agencies (as used in the
annual reports of the Director of Finance)
included in each of the Federal Reserve’s expen­
diture elements are listed below. Not all of these
agencies appear in every financial report.
General Government: Council, May­
or’s Office, Managing Director, Public
Property, Art Commission, Licenses
and Inspections, Board of Licenses and
Inspections Review, Board of Building
Standards, Zoning Board of Adjust­
ment, Records, Philadelphia Histori­
cal Commission, Office of Director of
Finance, Bicentennial, Revenue (for­
merly Collections), Procurement, Tax
Review Board, City Treasurer, City
Representative, Commerce, Philadel­
phia Civic Center, Law, City Planning
Commission, Committee on Human
Relations, Civil Service, Personnel
Director, Auditing, Board of Revision
of Taxes, City Commissioners, Fair
Housing, Emergency Snow Removal,
Fire Loss, Hero Award, Scholarships,
I n de m n it i es , Wage and Wel f are
Adjustment, Information and Com­
plaints, Office of Civil Defense, Eco­
nomic Development LJnit, Develop­
ment Coordinator.




39

BUSINESS REVIEW

MARCH/APRIL 1977

NOMINAL h DEFLATOR
h
FIGURE II.2

1

CITY OF PHILADELPHIA
Selected Fund
Nominal Expenditures*
(Millions of Dollars)
Expenditure
Element
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development^
Debt Service
Pensions and Employee
Benefits
Special Payments§
Total

1970
$08.6
85.2f
45.2
41.0
47.8
23.3
30.0
29.2
29.8
59.4

1973
$97.8
126.7
79.8
56.2
66.1
44.6
39.9
39.5
43.4
80.0

1974
$106.6
130.7
78.1
57.3
60.6
48.4
41.4
39.7
37.5
83.3

1975
$147.2
143.3
86.3
62.7
72.3
52.9
47.8
46.6
37.0
84.9

1976
$178.3
149.0
97.7
79.8
81.9
61.1
51.6
54.9
29.8
93.8

1977
$255.9
161.0
99.8
75.2
71.7
63.3
52.6
54.5
57.3
125.8

42.2
—
501.7

84.8
12.0
770.8

85.6
—
769.2

90.6

80.8

113.1
7.1
1,137.3

—

—

871.6

958.7

FIGURE II.3
CITY OF PHILADELPHIA
Deflators
(1970 = 100)
Expenditure
Element
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development
Debt Service
Pensions and Employee
Benefits
Special Payments
Total




1973
125.6
132.1
125.2
124.8
126.2
127.1
132.5
126.8
123.2
114.3

1974
132.5
138.8
132.5
132.3
132.8
133.3
139.1
133.3
131.7
125.4

1975
141.1
151.1
141.2
141.3
140.8
140.3
151.1
141.3
141.1
139.2

1976
153.1
163.2
154.3
153.5
156.4
156.0
163.1
157.1
150.4
148.0

1977
158.4
163.8
158.9
158.9
159.1
158.0
163.6
159.5
158.2
156.9

129.9
117.1
126.0

136.0

144.0

159.7

159.7
156.9
159.4

—

133.4

40

—

143.3

—

155.9

FEDERAL RESERVE BANK OF PHILADELPHIA

= REAL
FIGURE II.4
CITY OF PHILADELPHIA
Selected Fund
Real Expenditures
(Millions of Dollars)
t

r

Expenditure
Element
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development
Debt Service
Pensions and Employee
Benefits
Special Payments
Total

1970
$68.6
85.2
45.2
41.0
47.8
23.3
30.0
29.2
29.8
59.4

1973
$77.9
95.9
63.7
45.0
52.4
35.1
30.1
31.2
35.2
70.0

1974
$80.5
94.2
58.9
43.3
45.6
36.3
29.8
29.8
28.5
66.4

42.2
—
501.7

65.3
10.2
612.0

62.9

*For a list of the funds used in compiling these data, see
Figure 1.1, note *.
Certain interfund obligation transactions have been
subtracted from obligations to avoid double counting.
These are the instances in which the Grants Revenue,
Aviation, County Liquid Fuels, or Special Gasoline Tax
funds were charged for service and the General Fund was
credited with revenue.
tFairmount Park Patrol expenditures of $5.3 million
have been shifted from Recreation (under the Fairmount
Park Commission) to Police in order to make 1970 compar­
able with succeeding years.
JSee Figure 1.1, note ** for details on adjustments




—

576.2

1975
$104.3
94.8
61.1
44.4
51.3
37.7
31.6
33.0
26.2
61.0
62.9
—

608.3

1976
$116.5
91.3
63.3
52.0
52.4
39.2
31.6
34.9
19.8
63.4

1977
$161.6
98.3
62.8
47.3
45.1
40.1
32.2
34.2
36.2
80.2

50.6

70.8
4.5
713.3

—

615.0

required by the exclusion of Redevelopment Authority
funds in 1970, 1973, 1974, and 1975 and special funds in
1970. Amounts equal to those added to Other Federal
revenues have been added to Urban Development.
§In 1973, a payment was made to the School District. For
1977, a payment is budgeted from the General Fund to the
Parking Fund.
SOURCES: Data for 1970, 1973, 1974, 1975, and 1976 are
from the Annual Report of the Director of Finance of the
City of Philadelphia for each of those years. Data for 1977
are from City of Philadelphia, The Mayor's Fiscal 1977
Operating Budget and Programs. Figures calculated by
Federal Reserve Bank of Philadelphia.

41

BUSINESS REVIEW

MARCH/APRIL 1977

NOiy

FIGURE II.5
SCHOOL DISTRICT OF PHILADELPHIA
General Fund
Nominal Expenditures
(Millions of Dollars)

Expenditure
Element
Education
Early Childhood
Elementary
Junior High & Middle
Senior High & Technical
Special Education!
Education total
Overhead
Plant Operations & Maintenance!
Administration & Support§
Debt Service & Insurance
Advance Funding P ay b ac k 1
1
Employee Benefits!!
Undistributed Items
& Refunds
Overhead total
Total

1970

1973

1974

1975

1976

1977*

$6.0
66.6
37.3
47.7
13.4
171.0

$7.5
69.2
38.8
45.3
15.0
175.8

$7.8
78.4
49.6
59.3
20.6
215.7

$8.2
92.0
51.7
66.4
25.4
243.7

$10.4
105.2
53.4
79.3
29.5
277.8

$10.3
108.9
54.6
84.6
29.6
288.0

28.1
34.7
29.5

39.9
37.1
56.0

45.6
42.6
56.4

67.5
65.1
48.0
15.9
52.2

66.4
66.4
50.0
57.7
60.7

0.4
249.1
526.5

5.7
306.9
594.9

18.9

27.0

32.6

57.6
57.1
55.3
14.4
42.1

0
111.2
282.3

4.4
164.4
340.1

0.6
177.8
393.0

0.4
226.9
470.7

—

—

—

FIGURE II.6
SCHOOL DISTRICT OF PHILADELPHIA
Deflators
(1970 = 1 0 0 )
Education
Element
Education Elements
Early Childhood
Elementary
Junior High & Middle
Senior High & Technical
Special Education
Education total
Overhead
Plant Operations & Maintenance
Administration & Support
Debt Service & Insurance
Advance Funding Payback
Employee Benefits
Undistributed Items
& Refunds
Overhead total
Total




1973

1974

1975

1976

1977

119.3
117.7
117.8
117.8
118.2
117.8

128.6
125.4
125.4
125.4
125.7
125.4

133.9
132.7
132.7
132.8
136.1
133.1

144.4
142.4
142.4
142.8
145.3
142.7

148.0
144.7
144.8
145.2
145.4
145.0

117.0
117.9
114.3

134.2
125.8
125.4

138.3
137.0
139.2

148.6
147.1
148.0

117.9

125.2

131.9

141.7

152.8
149.1
156.9
156.9
143.7

117.1
116.3
117.1

126.3
127.5
126.2

134.9
137.1
134.9

144.5
146.6
144.8

147.2
151.3
148.2

—

—

42

—

—

FEDERAL RESERVE BANK OF PHILADELPHIA

[NAL ^ DEFLATOR G REAL
FIGURE II.7
SCHOOL DISTRICT OF PHILADELPHIA
General Fund
Real Expenditures
(Millions of Dollars)

r

■4

Expenditure
Element
Education
Early Childhood
Elementary
Junior High & Middle
Senior High & Technical
Special Education
Education total
Overhead
Plant Operations & Maintenance
Administration & Support
Debt Service & Insurance
Advance Funding & Payback
Employee Benefits
Undistributed Items
& Refunds
Overhead total
Total

1970

1973

1974

1975

1976

1977

$6.0
66.6
37.3
47.7
13.4
171.0

$6.3
58.8
32.9
38.5
12.7
149.2

$6.1
62.5
39.6
47.3
16.4
171.9

$6.1
69.3
39.0
50.0
18.7
183.1

$7.2
73.9
37.5
55.5
20.6
194.7

$7.0
75.3
37.7
58.3
20.3
198.6

28.1
34.7
29.5
—
18.9

34.1
31.5
49.0
—
22.9

34.0
33.9
45.0
—
26.0

41.6
41.7
39.7
10.3
31.9

45.4
44.3
32.4
10.7
36.8

43.5
44.5
31.9
36.8
42.2

111.2
282.3

3.8
141.3
290.5

0.5
139.4
311.3

0.3
165.5
348.6

0.3
169.9
363.6

3.9
202.8
401.4

*Budget for full-year operation.
tAdministrative costs of special education deducted
and assigned to administration and support.
{Plant operation and maintenance has been reported as
school facilities since 1974.
gField operations, school services, career education,
instructional services (curriculum and instruction),
transportation, superintendent, administrative services,
municipal services, services for other funds, subsidy to
the cafeteria fund, and administration of special educa­
tion.
I Owed to Commonwealth in repayment of advance
I

funding for Special Education and, for 1977, Vocational
Education as well.
1 All employee benefits expenditures generally distrib­
1
uted by the separate functions in the School District
budget, including payments to the Pennsylvania
Employees Retirement System and to Social Security as
well as other employee benefits.
SOURCES: School District of Philadelphia Summary of
tile Proposed Operating Budget for fiscal years beginning
July 1, 1971, 1974, 1975, 1976; adopted operating budget
for 1977 dated May 27, 1976. Figures calculated by Fed­
eral Reserve Bank of Philadelphia.

>




43

MARCH/APRIL 1977

BUSINESS REVIEW

A P P E N D I X III
C IT Y A N D S C H O O L D IS T R IC T O F P H IL A D E L P H IA
EM PLO YM EN T PATTERN S

FIG U R E III.l

CITY OF PHILADELPHIA
Number of Full-Time Employees by Expenditure Element*
Expenditure
Element
General Government
Police
Health
Welfare
Streets
Courts
Fire
Recreation and Culture
Urban Development
Debt Service
Pensions and Employee
Benefits
Total

January 31,
1970
4,616
8,187
3,966
1,858
4,107
2,410
3,064
2,431
t
1

June 29,
1973
4,734
8,981
3,931
2,129
4,549
3,376
3,058
2,501
325
1

March 22,
1974
4,480
9,200
3,795
2,078
3,972
3,403
2,939
2,329
324
1

June 22,
1975
4,848
9,264
3,777
2,445
4,855
3,429
3,236
2,562
319
1

January 18,
1976
4,885
9,089
3,726
2,410
4,702
3,447
3,138
2,508
319
1

22
30,662f

21
33,606

20
32,541

20
34,756

21
34,246

*Full-time employees include permanent and interim
employees for 1975 and 1976. For 1970, only permanent
employees paid by the General Fund are included; for 1973
and 1974, permanent employees paid by the General Fund,
Aviation Fund, Parking Facilities Fund, Regulation 32,
and Capital and Print Shop Fund are included, along with
"interim full-time filled positions under full funding
grants.”
tFigures not available for 1970 employment expendi­
tures by Model Cities Fund, Neighborhood Development
Fund, Office of Economic Opportunity Fund, and noncapi­
tal portion of Redevelopment Authority funds. These




omissions affect both Urban Development and total calcu­
lation.
SOURCES: Trend of Philadelphia Municipal Employ­
ment .... Pennsylvania Economy League Report No. 356,
April 1970; City of Philadelphia, Office of the Director of
Finance, “Trends in Full-Time Permanent Employment,
Selected Years 1956-1974," May 1975; Office of the Direc­
tor of Finance, "Summary of Filled Positions of Employ­
ment of the City of Philadelphia for Payroll Periods
Ending December 26, 1971, June 22, 1975 and January 18,
1976 by Fund," March 1, 1976.

44

FEDERAL R ESER V E BANK OF PHILADELPHIA

FIGURE III.2
SCHOOL DISTRICT OF PHILADELPHIA
Pupils and S taff by Education Element*
Education Element
Early Childhood
Pupils
Stall
Pupils per Staff
Elementary
Pupils
S taff
Pupils per Staff
junior High & Middle
Pupils
S taff
Pupils per Staff
Senior High & Technical
Pupils
S taff
Pupils per S taff
Special Education
Pupils
S taff
Pupils per S taff
All Education
Pupils
S taff
Pupils per staff

1970

1973

1974

1975

1976

1977

25,200
514
49

23,300
434
54

22,600
429
53

22,500
554
41

22,300
546
41

22,000
539
41

126,100
6,385
20

119,900
5,634
21

114,200
5,802
20

109,100
6,637
16

112,000
7,322
15

108,200
7,229
15

59,700
3,654
16

62,600
3,845
16

59,900
3,656
16

58,800
3,665
16

51,900
3,521
15

50,500
3,451
15

62,300
3,702
17

63,100
3,761
17

64,400
3.947
16

65,500
4,189
16

66,300
4,573
14

66,800
4,690
14

10,800
1,314
8

10,500
1,405
7

10,800
1,892
6

10,600
1,851
6

10,600
2,340
5

11,100
3,021
4

284,100
15,569
18

279,400
15,079
19

272,900
15,726
17

267,500
16,896
16

263,100
18,302
14

258,700
18,930
14

*Pupils enrolled in November of the fiscal year to
nearest hundred and School District teaching and nonteaching staff allocated by education element.

SOURCES: Budget Office, School District of Philadelphia; Proposed Operating Budget for each succeeding
year.

FIGURE III.3
SCHOOL D IST R IC T OF PHILADELPHIA
REAL E XPE N D IT U RE S PER PUPIL
BY PROGRAM
SOURCE:
phia.

Budget Office, School District of Philadel­




1970 1973 1974 1975 1976 1977

45

MARCH/APRIL 1977

BUSINESS REVIEW

A P P E N D I X IV
H O W P H IL A D E L P H IA T A X E S C O M P A R E

The feasibility of raising tax rates in one city depends in part on the size of the tax burden in other
cities. The Finance Department of the City of Washington has estimated the 1974 combined state and
local tax burdens of hypothetical families in the nation’s 30 largest cities.1 According to these
estimates, a Philadelphia family of four with an annual income of $15,000 paid less tax than
comparable families in seven other cities.2 Such a family paid approximately 10.4 percent of its income
to the major state and local taxes— property, income, sales, and auto.3
While the Philadelphia 1974 tax burden was well above that in Denver, Houston, and Jacksonville,
among others, it was only slightly above the 30-city average reflected by Pittsburgh. It was below the
average for such other large cities as Boston, New York, and Los Angeles. Rate increases for 1977 raise
this Philadelphia family’s tax bill from $1,555 to $1,871, or from 10.4 to 12.5 percent of its income.4 If
taxes elsewhere had remained unchanged, Philadelphia’s 1977 tax bills still would be below those of
Boston, Milwaukee, New York, and Buffalo.
The composition of Philadelphia’s revenues is not typical. According to the Washington study,
Philadelphians pay relatively low property taxes—much less than the 30-city average and about as
little as the residents of Denver and Houston; even at this, the Washington study may have overesti­
mated the property tax bite on Philadelphians.3 Further, sales and auto taxes are lower in Penn­
sylvania than in any of the other states represented. And, finally, the combined state and City income
taxes paid by Philadelphia residents are the highest of all the cities sampled. They were more than
twice the 30-city average even at the 1974 tax rates. For Philadelphians, then, lower property taxes
appear to have been offset by higher income taxes (Figure IV.1).

'Tax Burdens in W ashington. I). C. Compared with Those in
the Nation's Thirty Largest Cities. 1974. District of Columbia,

differences. The division of state and local responsibilities for
the financing of certain services, however, may vary across
states.
including increases in property taxes of $150, in income
taxes of $160, and in auto taxes of $16.
5The Washington study estimated property taxes at $511 for
a Philadelphia family with an annual income of $15,000 and a
house valued at $18,240. But this estimate may not reflect the
relatively low values of houses in Philadelphia, where a family
with a $15,000 annual income may own a $17,000 house or a
$16,000 house and thus have a lower property tax bill. Further,
the Washington study based its calculation on an assumption
made by Pennsylvania’s State Tax Equalization Board that
assessment ratios would be set at 62.5 percent, but the ratio in
Philadelphia stands at only 41.6 percent. This lower ratio also
reduces the tax bill estimate. Nevertheless, the Washington
study's figure for Philadelphia has not been adjusted here,
since the conditions that make for an overestimate of Philadel­
phia's tax bills may operate just as strongly elsewhere in
Pennsylvania and across the nation.

Department of Finance and Revenue, February 1976.
2Tax Burdens in Washington, Table A, p. 24. For the $15,000
income example, Philadelphia ranked eighth behind Boston,
Milwaukee, New York, Buffalo, Los Angeles, Chicago, and
Baltimore. The $15,000 case was selected from among several
examples as being the closest to the estimate of Philadelphia’s
median family income in 1974.
Philadelphia's ranking drops to ninth for the $20,000 case
and to eleventh for the $30,000 and $40,000 examples. It rises
to sixth and seventh for the $10,000 and $5,000 cases, respec­
tively. This suggests that the state and local property tax
system in Philadelphia is slightly more regressive than in other
places with closely comparable tax burdens. (A regressive tax
system is one in which taxes take a larger fraction from lower
incomes than from higher ones.) Among all 30 cities, however,
Philadelphia ranked as having the thirteenth most progressive
tax system. See Tax Burdens in Washington, Table I, p.33.
"Federal taxes are assumed to be levied equally throughout
the country and consequently do not affect the analysis of tax




46

FIGURE IV.l

Dollars

MAIN STATE AND LOCAL TA XES FOR A FAMILY OF FOUR EARNING $ 1 5 ,0 0 0 IN 1 9 7 4 :
EIGHT CITIES AND A 3 0 -CITY AVERAGE
Percent

3.000—
2,800—
2,600—
2.400—
2 , 200 —
2 .0 0 0 —

1,800—
1,600—
1.400—
1 , 200 —
1 , 000 —

800—
600—
400—
200 —
0

—




47