The Bottom Line ... and Beyond: Financial Plans Guided Philadelphia and New Haven to Recovery

In 1992, Philadelphia had no cash to pay its bills. The city faced a $200 million deficit in a $2.4 billion budget, its credit rating had been reduced to "junk bond" status, and its suppliers had long gone unpaid. Philadelphia was deferring investments in infrastructure to fund day-to-day operations. One-time remedies to plug ever-expanding holes in the city?s budget were used up. Immediate triage was needed simply to stabilize the government?s operations.

Some 175 miles away, New Haven was in similar straits. Its general fund had had a deficit for four years in a row, and its credit rating stood one level above junk bond status. The city's budget imbalances and economic outlook kept New Haven from borrowing from capital markets at reasonable interest rates. A cash shortfall was delaying vendor payments, and assets that were supposed to be self-supporting were draining general fund dollars.

By 1999, Philadelphia had a budget surplus of $205.7 million. Fitch IBCA rated the city's credit at a solid BBB+. That same year New Haven had a surplus of more than $17 million and credit ratings of BBB+/A(3). Both cities had invested in infrastructure, expanded services, and cut taxes.

How did it happen?

Three Steps to Financial Recovery

The recovery of both Philadelphia and New Haven began with a strategic financial and management plan. The plan defined the size and causes of the fiscal problem, set recovery goals, and identified specific solutions, while establishing each city's credibility and taking the policy initiative.

Next, leaders in both cities cut costs and increased non-tax revenue according to strategies laid out in their respective financial plans. They saved millions of dollars through improved revenue collection. They opened certain services to competition with private providers. They put in place work force initiatives that brought costs in line with revenues while maintaining fair compensation. And they managed their debt, cash, and risk more effectively.

Finally, city leaders focused on strengthening their cities' competitiveness to stimulate their economies. Rather than raising tax rates and cutting services?measures that can balance budgets in the short term but ultimately erode a city's underlying economic base?they took advantage of fiscal stability to reduce taxes and improve basic services, as well as pursuing well-targeted development projects in areas of comparative advantage, such as culture and entertainment.