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June 09, 2016

Is Philly's soda tax good for its fiscal health?

With City Council set to approve a tax for less than the mayor hoped, we asked councilmembers about the compromise

Late Wednesday night, City Council's committee of the whole approved a plan to tax soda and other sugary drinks – plus diet sodas, which weren't initially part of the deal – at a rate of 1.5-cents-per-ounce. 

Annually, the tax is expected to bring in $91 million, just shy of the projected annual $95 million that the mayor's initially proposed sugar-sweetened drink tax would have raised at a rate of three-cents-per-ounce. 

The tax is expected to be approved and turned over to the mayor to be signed into law sometime next week. 

The money is earmarked for a wealth of Mayor Jim Kenney's passion projects – universal pre-K, community schools, police body cameras and revitalization of civic spaces throughout the city – but Wednesday's decision came with a caveat. While the funds have long been touted as being necessary to protect and support the city's youngest residents, some councilmembers were surprised to find out, late in the game, they said, that some of the funding would go toward the city's general fund

In response Thursday, City Council approved a resolution to evaluate the "fiscal health of the City of Philadelphia" in the wake of Wednesday's vote. 

So was the resolution, introduced by City Council President Darrell Clarke, a reaction to the "surprise" announcement that soda tax revenues would go into the general fund? 

"Oh, absolutely," replied Clarke in an interview Thursday. "At the end of the day, we have some very dangerously low funding balances and we need to have strategies to address that, and, not last-minute attempts to put revenue on the table to deal with that."

Is Philly fiscally healthy? 

Clarke's resolution calls for hearings to be held this summer to discuss the "true financial health" of the city. According to the Pennsylvania Intergovernmental Cooperation Authority, in a report released at the end of last month, the city's general budget balance is projected at $70.2 million, which is almost $1 million more than what had been projected in Kenney's Five-Year Financial Plan, which is also set to be voted on by City Council next week. 

But in calling for the hearings, Clarke cited the five-year plan, saying that if no measures are taken, the balance could drop as low as $15 million by 2018 if no new revenue measures are enacted. 

"Utilizing kids as a shield... that's a disgrace. It was disingenuous and it set a really bad tone." – City Councilwoman Maria Quiñones-Sánchez

According to the mayor's five-year plan, the fund balance is projected to be at $38 million in 2018, but Kenney's administration has set a goal to bring that fund balance up to just over $200 million to ensure the city's fiscal health. 

Clarke worried that if this balance – which is the difference between the city's obligations and its assets – continues to drop, it would hurt the city's credit rating, making it more expensive to borrow funds in the future. 

In a statement announcing the summer hearings, Clarke said the first payment of $30 million in funding from the soda tax is expected to go toward the city's fund balance in 2018. 

But, he said, depending on how the summer hearings unfold, there could be many changes to how the city spends its money well before 2018. 

"[We're] going to be talking about a lot of things. We may have to talk about cutting back on expenditures. If we don't have the money, maybe we shouldn't spend the money that we don't have," he said. "As we move ahead, we are probably going to talk about zero-based budgeting in a significant way."

A 'zero-based budget'?

Zero-based budgeting is a method that views every city agency as starting at zero each year and having to justify every expense, instead of traditional budgeting that assumes each city agency rely on a baseline of funding from the year prior. Its a method that has been discussed for the city's budget, since at least last year

But if Clarke wants to re-evaluate the city's finances, why does he support council's initial approval of the new tax on sugar-sweetened drinks and diet sodas? 

It's because, Clarke said, he felt the tax plan that came out of committee on Wednesday was less of a compromise and more of a collaboration between council and Kenney's office. 

"It was a collaboration of the members and the administration working on achieving laudable goals of being able to do pre-K and to rebuild our infrastructure. I can say I would rather have seen the rate lower," said the council president. "You know, we got what we got, we need to move ahead. We need to ensure that the programs function in a way that it benefits all of the citizens of the City of Philadelphia.

Yet, according to Mike Dunn, deputy communications director for the City of Philadelphia  the fund balance issue is nothing Councilmembers should be surprised about. Not only was it part of the initial plan presented in March, but the money was always intended to go to the general fund before being doled out to the mayor's intended initiatives. 

Dunn blamed confusion over the issue on information coming from the anti-sugary drinks tax camp. 

"The soda lobby is twisting a normal, fiscally responsible practice into something nefarious," said Dunn in a statement.  "It’s really this simple: over the next five years, the proposed soda tax does go to pay for a $300 [million] investment pre-k, community schools and improvements to parks, rec centers and libraries – as the mayor has always said."

Because implementing these programs will take time in the very early years of the tax, Dunn said that the fund balance raises slightly more than those programs cost and the excess revenue is designated toward the fund balance. 

This is the case with nearly all government programs during the implementation phase, he said. 

"When you allocate money to fund a new program, you plan for what you need to fully fund it, not what it’s going to cost in the early implementation phases," Dunn said. "Once pre-k, community schools and [community infrastructure] rebuild are fully implemented in 2020, the tax goes to those programs and no revenue goes toward the fund balance from the soda tax ever again."

Councilmembers react to sugar-sweetened drink tax

Other councilmembers said they had similar feelings about the new tax; some of the most vocal opponents said they could see some some positives in the 1.5-cent-per-ounce proposal.

City Councilwoman Maria Quiñones-Sánchez (D, 7th District) said that she liked the mayor's goals, but felt decisions about how money soda tax revenues would be spent merit "further council scrutiny." 

She said that while the funds raised by the tax are intended to be used for laudable programs, the mayor's office was "disingenuous" by not detailing, in the first place, how some of the money would be used for the fund balance. 

"Utilizing kids as a shield... that's a disgrace," she said. "It was disingenuous and it set a really bad tone." 

Republican Councilman-at-Large Al Taubenberger, who attended an anti-soda tax rally with Quiñones-Sánchez and Jannie Blackwell (D, 3rd District), said he voted against the reduced rate soda tax on Wednesday.

Even still, he feels it could provide some good to the city. 

"I'm still concerned... We need jobs and, as I've said all along, we are putting this tax all on one industry," said the councilman in an interview. "But, on the other hand, the mayor has a fabulous plan." 

He also agreed with Quinones-Sánchez, saying the mayor's office should have been more upfront about the fund balance. 

"We weren't happy about that," said Taubenberger. "It should have been talked about before." 

But Councilman Bobby Henon (D, 6th District), long a proponent of the mayor's sugar-sweetened drinks tax proposal, said the fund balance issue was indeed discussed in the past. 

And, he's correct. The mayor's budget proposal, from March, included discussion of the fund balance. 

"This wasn't a surprise to me," Henon said. "It was part of the budget hearing." 

Yet, if it was, Taubenberger didn't hear it. 

"I can't remember it being talked about," he said, when told the balance was part of the mayor's initial budget. "That's a big thing to miss. I don't think I did." 

Asked just how he felt about the revised sugar-sweetened drinks tax, now that it has passed through committee, Henon said he still supports the plan, saying Kenney's "good leadership" will help bring much-needed programs and revitalization efforts for the city and its residents. 

"I think this is absolutely the right decision for our city," said Henon. 

This story has been updated with comment from city spokesperson Mike Dunn