Mayor Nutter said yesterday that the city faces a second $1 billion budget deficit, a fiscal gap so huge it seems certain to lead to layoffs, tax increases, and further spending cuts of 10 to 30 percent in most if not all city departments.

The latest five-year deficit estimate comes on top of the $1 billion budget gap announced just three months ago. The two deficits combined top $2 billion, and budget officials warned yesterday that the city still may not have hit bottom. It is now possible for Philadelphia to finish its current fiscal year, which ends June 30, in the red.

The city's fiscal condition, Nutter said, was "grave and worsening."

He attributed the fresh $1 billion hole to weak tax collections and the collapsing stock market, which has wreaked havoc with the city pension fund. The new pension costs alone total $498.5 million.

The current crisis ranks among the worst in city history if the administration's budget predictions are correct.

For instance, the $2 billion hole that has opened in Nutter's five-year plan over the last three months is slightly larger as a percentage than the deficit that former Mayor Ed Rendell confronted when he took office in 1992.

And, as in 1992, the crisis appears to be setting the stage for a battle between the mayor and the city's municipal unions, all of which have contracts that expire this year.

"I'm calling on our four municipal union leaders, whom I respect greatly, and all of our public employees to be prepared to share in the pain and sacrifice as we move forward," Nutter said.

"We must change how we run this city government. . . . For too long, we've had practices and policies that make us inefficient, that require too many people to do certain tasks, and that support operations that we may no longer need."

The comments were Nutter's most pointed public challenge yet to the labor unions.

Brian McBride, president of the firefighters union, dismissed Nutter's remarks and his latest deficit projections as a bargaining ploy.

"We do have a serious situation, but I think their numbers are way out of line. Another billion dollars? Come on. It hasn't changed that much since November," McBride said. "They're doing this to rape us on the contracts, to cut the workforce, and to cut city services. That's been Nutter's agenda all along."

The mayor, however, said repeatedly that economic forces well beyond his control had hijacked the budget.

"Let me be very clear about this: We did not create the global recession, which apparently has no known end in sight," Nutter said.

Unlike the announcement of the first deficit - which was accompanied by a laundry list of spending reductions, fee hikes, and tax-cut freezes - Nutter said the city had not yet mapped out its response to the latest crisis.

Instead, the city will not close the gap until after what Nutter described as a "very public, open exercise," designed to solicit extensive input from residents before the budget is presented to City Council on March 19. That marks a major departure from the last round of cuts, when town hall meetings did not take place until the decisions had already been made.

Without citing any specifics, however, Nutter did try yesterday to prepare Philadelphians for the sacrifices ahead.

He said all departments would be required to compile three draft budgets assuming cuts of 10 percent, 20 percent and 30 percent.

Police Commissioner Charles H. Ramsey said cuts of 30 percent would lead to "some reductions in service, and it would affect personnel." Already, he said, a class of 40 police recruits slated to begin this month had been postponed indefinitely.

Asked specifically about taxes, the mayor and his budget aides repeatedly said that all options were on the table but declined to say which taxes might be raised or by how much.

Of the $1 billion, budget officials say $663 million is attributable to known losses, and $378 million has been set aside for contingencies, such as further declines in the stock market.

City Finance Director Rob Dubow said the estimates were based on projections that assume a weak economy through 2010, followed by modest growth in 2011-14.

On the tax side, the city's five-year assumptions now include: $180 million less in property-tax collections due to slower-than-expected increases in property assessments; a $158 million reduction in the real estate transfer tax due to dramatically lower home-sales volume; and a $119 million contingency reduction in anticipated business-tax collections due to concerns that the recession will further slow business activity.

Projected losses are equally grim on the pension side.

When the city came up with its initial $1 billion deficit in November, the pension fund had lost about 8 percent of its total value. Since then, the loss has plunged to 22 percent, and city officials expect it will eventually decline a total of 30 percent.

Covering those losses will cost the city $359 million, according to new projections.

Pension-fund performance has such a profound impact on Philadelphia's budget because the city is obligated to cover the share of annual payments to city retirees that cannot be covered by the pension fund alone.

Further, because of the poor market conditions, the city has indefinitely tabled its plan to issue a bond that would have been poured into the pension fund, a move that was budgeted to save the city $140 million over the next five years.

Councilman Bill Green, who has emerged in recent months as one of Nutter's most vocal critics, questioned the new budget assumptions, suggesting they were overly conservative. Green, who last year had castigated Nutter's team for being too optimistic in its budgeting, said he now believed the new deficit likely would be no higher than $500 million.

"We've solved the significant piece of the problem with the earlier cuts, and now we have to solve for the rest of it," Green said. "We were overly aggressive with our revenue estimates before, and now we're being extremely conservative with respect to our revenue estimates."

Asked to detail which estimates he considered unduly pessimistic, Green cited the contingency assumption that business taxes would decline so sharply.

But some city budget veterans said they could easily see how a new $1 billion deficit developed in the last three months, given the national economy.

"I don't think anybody anticipated the economy becoming so rancid so quickly. Things were bad in November. Well, three months later, everyone knows they're worse," said Ben Hayllar, who served as finance director in Rendell's administration.

Throughout the unfolding fiscal crisis, Nutter has refused to back away from the ambitious goals he established for himself when he took office a year ago. He reiterated that sentiment yesterday, but he also acknowledged the "fiscal roadblocks that may delay our ability to get where we want to go."

Hayllar, who now works for the New Jersey Turnpike Commission, said he sympathized with Nutter.

"The economy goes south and everybody thinks you're a flaming idiot. The national economy grows and you're a genius," Hayllar said. "When you're mayor, your boat is always floating on bigger waters."

Meanwhile, in Harrisburg. . .

Gov. Rendell yesterday boosted his estimate of Pennsylvania's 2008-09 budget shortfall to as high as $1.9 billion, as the national recession continues to take its toll on state tax collections.

In a speech at the Pennsylvania Farm Show in Harrisburg, Rendell promised to advance proposals soon for plugging the latest budgetary hole, but provided no immediate details.

"There are no sacred cows," he said afterward.

Rendell said last month that his administration was projecting a $1.6 billion deficit by the end of the fiscal year in June. Yesterday, he said the administration now projected the deficit would be between $1.6 billion and $1.9 billion, and he repeated his warning that the state's efforts to close the deficit would inflict pain.

"Everyone has to understand that what has happened leaves us no option," Rendell said. "We're   going to have to cut virtually every program that there is."

As of Dec. 31, the fiscal year's halfway point, state revenues were $815 million shy of projections.

SOURCE: Associated Press

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Contact staff writer Patrick Kerkstra at 215-854-2827 or pkerkstra@phillynews.com.
Inquirer staff writer Marcia Gelbart contributed to this article.