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In Philadelphia, a massive sigh of relief

The Senate passed an 8% sales tax and pension changes just one day before feared layoffs and closings.

After months of agonizing delays, state lawmakers yesterday gave Philadelphia the temporary sales-tax hike and two-year reprieve from pension payments Mayor Nutter had sought to plug the remaining $700 million hole in a multiyear deficit that once stood at $2.4 billion.

The legislation, approved by a 32-17 vote in the Senate, finally brings Philadelphia's budget and five-year plan into balance, ending a political and fiscal drama that had consumed City Hall for more than a year. Gov. Rendell is expected to sign the bill soon.

"Plan C is terminated," an emotional Nutter told senior city managers in a conference call from Harrisburg moments after the vote.

Plan C was Nutter's fallback plan, the budget he would have put in place had Harrisburg not come through. As many as 3,000 city workers would have been laid off and basic services such as sanitation and police and fire protection sharply reduced. Those cuts would have come on top of $1.7 billion in spending reductions and rescinded tax cuts that Nutter has already made since last fall.

Layoff notices were scheduled to be delivered today. With the Senate vote, those workers' jobs have been preserved - at least for now - and the libraries, recreation centers, courts, and other facilities that they staff will remain open.

The legislation raises the sales tax in Philadelphia from 7 cents on the dollar to 8 cents for five years. The rate will be 2 percentage points higher than that in every other Pennsylvania municipality except Pittsburgh, where it is 7 cents. It will take at least a few weeks for the increase to show up on most receipts as merchants update their cash registers.

The other crucial pieces of the bill are pension-related. One addresses the city's immediate cash-flow crunch, permitting it to defer payments for the next two years. Those deferrals have to be paid back, with interest, beginning in 2013.

Another key pension provision extends the amortization period from 20 years to 30 years, in effect spreading the city's pension burden over a longer period.

Unlike earlier versions of the bill, the legislation passed yesterday does not include any statewide pension changes or cap or cut back retirement benefits for current or future Philadelphia employees.

Labor leaders had campaigned vigorously against those provisions and persuaded the House to delete them from the bill.

In his quest to get the bill passed, Nutter made 15 trips to Harrisburg beginning in May, meeting with dozens of representatives and senators. Even so, the legislation's path was tortuous, delayed at first by the state budget impasse and then the debate over broader pension overhauls.

There were days when it seemed the bill might never win approval, and the delay ended up costing the city more than $20 million in uncollected sales-tax revenue.

"This was a heavy lift for the City of Philadelphia, but we told our mayor that we had his back," said Rep. Jewell Williams (D., Phila), who sponsored the bill.

As critical as the legislation is to short-term needs, it does nothing to address the city's systemic long-term problems, such as an underfunded pension system, fast-growing health-care costs, a large debt load, and an anemic tax base.

"While this is positive news in that we were able to avoid the layoff of 3,000 employees, there's also the reality that we've just passed off some of our pension debt down the line to future years," said Bill Rubin, who represents District Council 33, the municipal blue-collar union, on the city pension board.

Nutter will now likely turn his attention to labor-union contracts, in which he hopes to address at least some of the city's long-term vulnerabilities. He is seeking $25 million a year in pension and health-care savings, and has proposed no salary increases in the next contract.

"Now the city can get back to union contracts. That's the issue that will have biggest short-term and long-term impact on the city's fiscal health," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, the agency that oversees Philadelphia's financial planning.

Yesterday, though, senior members of the Nutter administration were simply exhaling, reveling in the end of an exhausting yearlong ordeal to pull the city through the national economic collapse.

Morale has been low throughout much of city government in recent weeks, particularly in the mayor's office.

"You've done a tremendous job under very, very difficult circumstances, and I'm very, very proud of all of you," Nutter said on the conference call to his senior managers.

As he spoke, Nutter appeared overcome with emotion, a seeming mix of relief, exhaustion, and exuberance. Asked about it by reporters after he hung up, Nutter acknowledged that he was indeed choked up.

"When you think of the magnitude of what could have happened tomorrow . . . the magnitude of it is astounding, and I think quite honestly that's why so many people seem to have difficultly grasping what Plan C was all about," Nutter said.

At the other end of the conference call in Philadelphia, the relief was palpable.

"I don't even want to think about what would have happened had this gone through," said Police Commissioner Charles H. Ramsey, whose department would have lost up to 1,000 officers and civilian personnel if Plan C had been enacted.

As the meeting ended, administration officials exchanged hugs and handshakes.

"I think there's a lot of pent-up energy to move ahead, to do the work we were elected to do," said Nutter's chief of staff, Clay Armbrister.