Focus turns to the city's cash reserves

City Council's 2010-11 budget deal, reached last week, will force Mayor Nutter into service cuts to avoid the kind of cash crunch the city encountered last summer, according to political observers and the mayor himself.

The meager cash reserves projected in the $3.9 billion budget, which Council is scheduled to vote on Thursday, present "a big problem," City Controller Alan Butkovitz said.

Council gave preliminary approval Thursday to a plan that includes a 9.9 percent increase in the property tax; a new tax on cigars, tobacco, and smokeless-tobacco products; and a $300 trash fee for commercial properties.

Council rejected Nutter's proposal for a tax on sugar-sweetened beverages, instead choosing to reduce the city's projected budget surplus. Mayors use the surplus as a cushion against unexpected expenses, such as snowstorms and state budget cuts. The city also has unresolved contracts with three of its four employee unions.

The national Government Finance Officers Association recommends that at least 5 percent of a budget be held in cash reserves - about $200 million for a budget the size of Philadelphia's. Nutter's five-year plan projected a surplus of that size in the 2012-13 budget.

"They're not even heading in the direction of the 5 percent surplus, and I don't think there are very good odds that they're going to be lucky every year," Butkovitz said.

In the last two years, the city fell well short of its projected fund balance. With no room for economic downturns, bad weather, or a potentially costly arbitration award next month on the city firefighters' contract, Nutter may quickly be looking at cuts.

The way to avoid that is to delay filling jobs, said Phil Goldsmith, managing director under former Mayor John F. Street. Nutter could declare a hiring freeze the minute a budget is passed, Goldsmith said.

But Nutter said a hiring freeze would be the equivalent of service cuts as the city failed to replace people in critical areas. "Our services are provided by people," he said in an interview Friday. "If we don't have the funds to provide core services, then there will be some negative impact on services. . . . Council's constituents, who are my constituents as well, will begin to feel the effects of these actions."

Nutter, however, has not always viewed the fund balance as an untouchable asset. When Street left office two years ago, he left Nutter with a $182 million reserve. Even before the fiscal crisis struck, Nutter had planned to burn through much of that, offering up a budget shortly after taking office that anticipated spending $120 million of the $182 million.

Since then, tough economic times have forced Nutter to scale back. He has reduced spending on city services a combined $188 million over the last two years, according to an Inquirer analysis of the city budget. The city payroll has about 22,500 employees, about 800 fewer than last year and about 2,700 fewer than 20 years ago.

Rob Dubow, the city finance director, has warned that the city could run out of cash, as it nearly did last summer while state legislators and Gov. Rendell dithered for three months over their budget. Nutter had to suspend payments to vendors, among them writ servers and day-care operators.

"The last thing a mayor wants is to have to deal with a cash-flow issue, because that's when things get serious," Goldsmith said.

Council's majority whip, Darrell L. Clarke, discounted the cash-flow concern.

"The reality is a government will not run out of money," he said. "To suggest that we should run out of money and not be able to pay vendors, frankly speaking, is something I just don't see."

Nutter warned that after-school programs, summer meal programs that replace school lunches, and staffing at recreation centers would be among the first to go.

Nutter's view is that a low balance - particularly a low balance that stretches over several years - is too risky given all the uncertainties city government faces.

"We're two or three snowstorms and a bad court judgment from having no money," he said.

Where Nutter called for a $64.4 million fund balance next year that would grow to $197 million by 2013, Council's plan would put the city on course for a $42.5 million balance in 2011 and an estimated $58 million in 2013 - a difference of nearly $140 million from Nutter's plan, Butkovitz pointed out.

The Pennsylvania Intergovernmental Cooperation Authority, the state authority that must approve Philadelphia's five-year plan, has long complained about City Hall's tendency to drain the fund balance in hard times.

"An adequate fund balance is important, and it's something we've urged the city to address. It's a prudent thing to do, and a declining fund balance would be an area of concern for us," said Jim Eisenhower, PICA chairman.

The Nutter administration has also warned that a lower fund balance could threaten the city's bond rating, which would make borrowing money more expensive.

But while there is little doubt that the bond-rating agencies like cities to have robust reserves, it is not at all clear that the lower fund balance called for in Council's budget would lead to a lower rating.

"Certainly we would like to see a government with much more of a cushion when it comes to the fund balance - the higher the better - but we also realize the reality of the economic environment," said Christopher Hessenthaler, a municipal analyst with Fitch Ratings Inc.

In December, Fitch reduced the city's rating from BBB+ to BBB. That lower rating, prompted by the city's fiscal struggles, already incorporates the possibility of low fund balances in the near future, Hessenthaler said.

Last month, Fitch and other rating agencies did a "recalibration" of all municipal-bond ratings, which boosted the city's rating to A-. That should help lower the costs of borrowing, but Hessenthaler noted that all municipal bonds got similar improvements, and that the uptick did not reflect any change in the city's real credit quality since December.

Nutter's solution to better cushion the fund balance is the tax on sugar-sweetened beverages, which would raise $9 million to $14 million for 2010-11, at the rate of either half a cent or three-quarters of a cent per ounce that Nutter and Council were discussing last week. Nutter originally proposed a 2-cents-per-ounce tax as a way to get people to switch to healthier drinks while raising money.

The sweet-drink tax is still on the table, though its odds appear longer by the day. Council members seemed taken Thursday with the beverage industry's offer to channel $10 million through the Pew Charitable Trusts to fund programs, including education and recreation, that would promote health and combat obesity.

A public hearing on the bill before Thursday's Council session is probably the last chance for the administration to pass a sweet-drink tax out of committee for this budget.

Councilman William K. Greenlee, who has opposed the tax from the beginning, said Council's budget was sound.

"We were trying to keep the amount as low as possible [that was] going into people's pockets," Greenlee said. "We think we're passing a responsible budget - a responsible budget in a difficult time."