Rebuild Initiative’s launch slowed by financial puzzle, hinging on soda tax

The gargantuan, highly anticipated city project known as Rebuild — Mayor Jim Kenney’s $500-million investment in parks, recreation centers, and libraries — is beginning to resemble an elaborate domino setup. As more and more pieces of the project are hashed out and set in place, Rebuild can’t be fully set in motion until a court nudges the first tile over. That crucial domino is the soda tax.

If you’re tired of hearing about the controversial soda tax, buck up, because there’s still a ways to go. The state’s appellate court will hear arguments in early April as part of a lawsuit challenging the 1.5-cents-per-ounce tax. Although Court of Common Pleas* Judge Gary Glazer dismissed the suit in its entirety in December, both the city and plaintiffs are bracing for an elongated appeals process with the lawsuit, which is expected to end up in the Supreme Court of Pennsylvania and potentially drag out into the fall. At that time, any dislodging of the soda tax by a judicial decision would cause chaos throughout City Hall. (Imagine the prospect of the city having to pay back tens of millions of dollars in tax revenue to Philadelphians?)

Even more challenging for the Kenney administration would be the bottom falling out of Mayor Kenney’s promise to show that “every neighborhood matters,” a slogan he ran on as a candidate and invoked in his victory speech in 2015. The soda tax is the glue holding together his pledge to add 6,500 pre-K seats, mostly for low-income Philadelphians, by 2021. It also provides a small but critical fraction of the money that will be needed to pay for Rebuild.

Of the $92 million that the city expects to pull in from the soda tax each year, roughly 12 percent has been allocated for Rebuild (an additional 3 percent will go towards Parks and Recreation), which might seem like a drop in the bucket for a $500-million infrastructure project. But that money is a prerequisite for borrowing $300 million in city-issued bonds, which would be the bulk of Rebuild’s funding. The soda-tax money will pay for the “debt service” on the bonds — essentially, an interest payment — and the city claims that it doesn’t have a contingency plan for finding that chunk of money anywhere else. “As we have said from the time the Mayor proposed the tax last year, no other revenue sources exist for any of the critical programs that are being funded by the tax,” writes David Gould, Deputy Director of Community Engagement and Communications for Rebuild, in an emailed statement.

In other words, the estimated $11 million annual boost from the soda tax is the lynchpin holding up the financial infrastructure of Rebuild. The protracted challenge to the soda tax has done more than delay the issuing of bonds. The William Penn Foundation’s $100 million grant toward Rebuild won’t be released until the tax clears the courts.

Nobody working on Rebuild has been fretting over doomsday scenarios right now — at least not publicly; the city has repeatedly asserted its belief that the tax will be upheld — but the specter of a soda-tax repeal has had real consequences in terms of delays.

Rebuild isn’t exactly stuck in suspended animation, but the project team has been impeded from going full throttle. Gould said that by mid-2017, regardless of the status of the lawsuit, the Rebuild team expects to announce an initial round of sites across the city. Those very first projects, however, will likely not be splashy, given the limited funding available for Rebuild at this time: Mayor Kenney’s budget has reserved $8 million annually from the capital budget, which will go only toward capital project costs, and there’s a $4.8 million start-up grant from the William Penn Foundation, which can be put toward planning, administration, and capital improvements.

“It’s too early to say exactly how it will affect the projects selected, but we will be limited in what we can do given the resources we have available,” said Gould. Beyond the first round of projects, members of City Council and the administration will mutually decide upon an additional set of sites for when the full funding becomes available. One of the stated goals of site selection in Rebuild is promoting equitable investments throughout the city, along with spurring economic development. “We want to be ready with another round of projects to announce as soon as possible if the litigation is fully resolved in the City’s favor.”

Earlier this month, the City Councilwoman Cindy Bass and Council President Darrell Clarke sponsored legislation to authorize the bond issue. Even if City Council authorizes the bonds, the city has said it won’t actually issue the bonds until the soda tax winds its way through the courts. Assuming both happen, there will be a relatively little time before the Philadelphia Authority for Industrial Development (PAID), the public authority that issues bonds on behalf of the City of Philadelphia, completes the process. All in all, it will take about three months, Gould said.

Critics of Rebuild who have called the soda tax “regressive” have questioned whether the city truly has no alternative funding streams to pay for Rebuild and pre-K. More than a dozen state senators recently filed a brief with the Commonwealth Court, saying the tax is “not constitutional.” That cohort includes Philadelphia Sen. Anthony Hardy Williams, who told the Inquirer that the city should look beyond the tax for a funding mechanism. Last year, before the tax passed in City Council, Councilwoman Maria Quinoñes-Sánchez — the only Democrat in City Council who would vote “no” on the soda-tax legislation — suggested that the city might find the money through improving property-tax collection. After all, the city would need to find a new way to pay for the debt service on the bonds (not the entire $300 million) if it wasn’t able to use the soda-tax proceeds. While finance director Rob Dubow wouldn’t speculate on how much the interest rates on the bond would cost the city each year, the city has projected the total amount of debt service will cost $75 million over time.

As for the City Council members PlanPhilly reached, none had any desire to consider a funding source for the bond service outside the soda tax at this time. “We are still waiting on the decision from the Commonwealth Court. It would be irresponsible, inappropriate, and quite premature for us to make any projections or decisions before the judicial branch of government has an opportunity to fully and carefully review this unprecedented case,” wrote Councilwoman Blondell Reynolds Brown in a statement. Adds Councilman Squilla, “I support Rebuild but, absent soda tax revenue, I would need to know the origin of the replacement funding before committing to it.”

Rebuild is not only being billed as an infrastructure initiative, but also a project that will bring long-needed diversity in the city’s building trades, accelerate the development of small businesses who are contracted to work on Rebuild sites and repair frayed relationships between the city and neighborhoods. All of that progress has been slowed by the court challenge. However, Gould said that the city would like to have its plans for diversity and inclusion in place before the first round of projects is announced in the coming months.

For now, the Rebuild team will continue haggling with City Council over how the funds will be distributed, how projects will be managed, and how exactly sites will be selected. That all of these details are getting teased out before the prospect of issuing the bonds looms large could be seen as a silver lining. But that’s not how Gould sees it. “There are no advantages to this delay. The bottom line is these communities are long overdue for this investment and it’s not fair to make them wait,” said Gould. “If we could, we would be operating at full scale as soon as possible.”

*Note: An earlier version of this article incorrectly stated that Commonwealth Court, not the Court of Common Pleas, dismissed the lawsuit. PlanPhilly regrets the error.