Phila.'s crunch could worsen

Even in the best of times, there is little wiggle room in Philadelphia's lean and unforgiving municipal budget.

And these are not the best of times.

Two weeks ago, the administration estimated that the sluggish economy had already put a $450 million hole in Mayor Nutter's five-year financial plan, and that was before the federal government felt it had to rescue some of the nation's biggest financial institutions.

Experts say it is hard to predict how big an effect the market meltdown and faltering economy will have on City Hall's revenue, but most expect it will be more than enough to require substantial service cuts and possibly a rollback on planned tax reductions.

Consider:

Struggling Philadelphia businesses paid the city $34.6 million less in taxes last fiscal year, an 8 percent decline. Analysts fear the drop-off could be even steeper in 2009.

The city's $4.4 billion pension fund lost money on its investments last year. Given the turmoil on Wall Street, there is little reason to expect the fund will do better in 2009, which will eventually take a toll on the city's general fund.

The Nutter administration's bold and risky plan to issue $3 billion in bonds to shore up the pension fund is dead, at least until the market improves dramatically. The mayor had hoped the bond would free up $50 million to $60 million a year for his agenda.

Inflation and high fuel prices are also putting pressure on the city budget. Potentially even more troubling is the prospect of high natural-gas prices and a colder-than-normal winter, a combination that could leave low-income residents unable to pay their Philadelphia Gas Works bills. The city, which owns the utility, is responsible for its fiscal health.

"Since we started talking about all this last Thursday, the financial world has only gotten worse," said city Finance Director Rob Dubow, warning that the $450 million gap would likely grow.

"If the markets keep retreating, and if the economy in general gets slower, that could have a really big impact."

The administration has already given city departments budget-cutting targets ranging from 1 percent to 10 percent, and it is considering rolling back tax cuts next year.

It is too soon to say whether further steps will be needed, Dubow said.

But some analysts, including veterans of City Hall, are urging the city not to overreact to what could be temporary market conditions.

The "$450 million over the next five years is a relatively small amount of money when you've got a budget of $4 billion a year," said Stephen Mullin, a senior vice president at Econsult, who served as city commerce director when Gov. Rendell was mayor in the 1990s.

"You don't go home to your family and say, 'We have a 2 percent reduction in income, so it's time to drink the cyanide-laced Kool-Aid and fling ourselves out the window.' "

Certainly Philadelphia, with a diverse economy anchored by education, medicine and tourism, is likely to fare better in this downturn than cities that are heavily dependent on banking and finance.

"New York is just devastated right now, with the financial-service industry getting blown apart," said Uri Z. Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's long-term financial planning.

"We're not going to be as bad off as them."

But Philadelphia's budget is on a fundamentally weaker footing than that of virtually any other big city in the nation, which makes it more susceptible to recessions than many other municipalities.

The city's poverty rate and weak tax base are largely to blame for that. But so are Philadelphia's unusually high costs for pensions and benefits, which could consume 25 percent of the budget by the end of Nutter's first term.

For instance, Baltimore is the only big city in the country where employees contribute less to their own pension plans. And City Hall spent $13,000 per employee on health-care benefits last year, nearly 50 percent more than the national average for municipal and state workers, according to the city's five-year financial plan.

The only way to bring those costs down is through negotiations with the four big municipal unions. Nutter ducked that challenge this summer and instead inked status-quo one-year deals with three of the four unions.

Nutter and Dubow did try tackling another fundamental budget problem - the pension fund's $4 billion unfunded pension liability - but had to abandon that effort temporarily when the markets tanked.

Now that liability stands to grow as the pension fund's investments falter.

"First of all we have a pension fund that is woefully underfunded, so everything hits us harder," Monson said. "The other thing is that the city is already paying the minimum on pensions that the law allows, so you can't scale that back. We put ourselves in a bind."

Outside analysts praised Nutter and Dubow for moving quickly to redraw their 2009 budget and five-year financial plan. They also noted that tough economic times can help a mayor hammer out a multiyear deal with unions.

"In general, it is in some ways easier to manage in bad times because everyone knows you have to make choices," said Katherine Barrett, who cowrote the Pew Charitable Trusts study that called the city's employee benefits costs a "quiet crisis."

It is also possible, of course, that the economy will recover, Wall Street will rebound, and the city's finances will emerge relatively strong after a single rough year.

"Everybody's got the conceit of the present. Our current problems are greater then any problem anyone has ever faced or ever will face," Mullin said. "It's a cycle. It will cycle back."