The city's residency rule has long been credited with helping neighborhoods stay intact, keeping government workers and their middle-class incomes from leaving Philadelphia.

Now that rule stands to be eroded, with a new police contract awarded yesterday that for the first time in 50 years will allow officers to live somewhere other than within the city limits.

City Council last year took a step toward weakening the rule by removing a long-standing one-year residency requirement for city job applicants. Instead, workers now have six months to move into the city.

But the new police contract, written by an independent panel of arbitrators, goes significantly further - and unleashed a mix of opinions about what may happen to those stable neighborhoods.

Specifically, the arbitration panel ruled that as of July 1, those officers enrolled, or eligible to enroll, in the city's early-retirement program could move outside the city - potentially giving more than 2,000 of Philadelphia's 6,550-member police department the ability to leave, as long as they live somewhere in Pennsylvania. (The Deferred Retirement Option Plan, known as DROP, allows workers to pick a retirement date four years in the future, freeze their pension benefit at that point, and begin to accrue payments as if they had already retired.)

Moreover, the panel also declared that any officer working for the city for at least five years as of Jan. 1, 2012, could live elsewhere in the state - authorizing 6,053 police personnel, almost the entire department, to consider making their home outside Philadelphia.

City Controller Alan Butkovitz predicted "an immediate downward effect" on real estate prices. "It could be a real serious loss for the city," he said, adding that police and firefighters have been "the backbone" of strong city neighborhoods like Parkwood Manor, Somerton, Roxborough, and Manayunk.

"That actually affects the whole social fabric of the city," St. Joseph's University history professor Randall Miller said. "Other cities have survived the loss of the residency requirement," he said, "but survival is not the same thing as health."

The residency rule, in place for most of the city's 22,000 employees, was established by the Home Rule Charter in 1953.

In a news conference, Mayor Nutter lamented the arbitration panel's decision. "I believe there is immense value in having police officers live in the city where they work. They better understand their fellow residents, and their very presence in neighborhoods sustains a safer quality of life," he said.

At the same time, Nutter noted that of the 20 largest U.S. cities, only Chicago and Milwaukee now also require officers to live within city limits.

City Solicitor Shelley Smith said the administration could not appeal the residency part of the ruling; Nutter did not rule out an appeal of the rest. She cited a case involving Wilkes-Barre in which the ruling of an arbitration panel trumped that city's home-rule charter, which similarly contained residency requirements.

Not everyone, however, expressed deep concern about the withering of the residency rule, at least as far as police. "I don't think it's an issue of mass exodus. I think it's an issue of freedom of choice, like other cities around the country, with some exceptions," said Councilman Brian J. O'Neill, whose 10th District includes such neighborhoods as Somerton and Bustleton that are well populated by police.

O'Neill predicted that most officers would stay put, at the same time saying the flexibility to move was "good for the rank and file, and for morale."

He added: "Anyone that would begrudge police officers' getting anything in light of the number of police killed in the line of duty in recent years ought to be moving out of the city themselves."

At-large Councilman Frank Rizzo said he, too, believed that police who lived in Northeast Philadelphia's stable neighborhoods would stay put. "But I do think the officer who lives in Germantown or Mount Airy who was waiting to move to Bustleton or Somerton will now skip that move and go to the suburbs," he said.

Some political observers predicted that firefighters would also see the residency rule weakened for them in a new contract that was being weighed by another arbitration panel. (In contrast, the city's two other municipal unions, District Council 47 and District Council 33, negotiate directly with the city, which is unlikely to cede ground on the rule.) "I can't imagine that only the police are going to be allowed to live where they want to live," former Managing Director Phil Goldsmith said. "It's going to be falling dominoes on residency requirements."

In its initial proposal to the city, the police union, Lodge 5 of the Fraternal Order of Police, proposed eliminating the residency rule. "It has been an issue that has come up in every interest arbitration for the 20 years I've been a cop," said union president John McNesby.

At the same time, he said, "you're not going to see people move quickly out of the city. It's just not going to happen."

Contact staff writer Marcia Gelbart at 215-854-2338 or mgelbart@phillynews.com.