What's in store for Philly's 2013 finances

In each of the last four years, Mayor Nutter and City Council have turned to tax hikes to raise money for Philadelphia and its schools.

First, they secured the state's permission to boost the sales tax from 7 percent to 8 percent and then, from 2010 to 2012, raised property taxes a total of 18 percent.

Last month, Nutter drew a line in the sand, pledging not to seek another property-tax hike this spring, when the city planned to adopt a new and already-controversial property-tax system.

But the city and the schools are still facing the kind of economic realities that in years past have sent leaders scrambling for taxes to raise and services to chop.

With unresolved labor contracts that could involve crippling costs, with a school district whose needs will not abate, and with a pension system that threatens to crowd out other needs, those tasked with monitoring city finances are questioning how Nutter and Council's 2013-14 budget can work without new revenue or cuts.

Three of the city's four major unions - firefighters and the two AFSCME councils that cover most other nonuniformed employees - have been working without a contract since 2009.

City officials say the most recent firefighters arbitration award, which Nutter appealed, would cost more than $200 million over five years.

City Controller Alan Butkovitz said the firefighter award "inevitably has to be paid" and may create a "huge deficit."

The administration also has to decide this month whether to challenge an arbitration ruling giving 3 percent raises to police officers in the final two years of their contract. That would result in a 15 percent raise over five years, and Nutter has not yet released figures on how much that would cost.

Sam Katz, chairman of the city's state-appointed fiscal overseer, the Pennsylvania Intergovernmental Cooperation Authority, long has questioned the city's assumption that labor costs would not go up in the next five years.

"All these years without having a contract does not represent sound financial planning," Katz said last week.

Last year, he gave the Nutter administration an ultimatum to make labor peace in 2013 with AFSCME District Councils 33 and 47, the blue- and white-collar unions that represent 13,000 nonuniformed municipal employees.

The administration's position is that pay raises have to be offset with savings in pension and benefits - but anything short of that would be yet another hit. And negotiations have gone nowhere since 2009.

The Nutter administration insists that any deal must put the city on a path toward resolving its underfunded pension system.

According to the pension board's latest report, the system is just under 50 percent funded, with $4.7 billion in assets and twice that in liabilities.

The city expects this year to write another enormous check to cover the pension-system shortfall - more than $661 million, or about 18 percent of a $3.6 billion budget.

Katz said Nutter was now in the best political position to make a sound deal with D.C. 47 and D.C. 33 - because he was just reelected without much labor support and he cannot seek another term.

The question is whether contracts can be done without breaking the bank. In September, Nutter gave 5,500 nonunion and supervisory employees the kind of deal he wanted from the unions - salary increases coupled with benefit concessions.

Union leaders blasted the package as a net loss for employees. "It is not something we would negotiate," said D.C. 47 president Cathy Scott. "It is not something we would accept."

Also not going away: the school problem.

The School District has come to the city for the last two years to help close its own huge deficits, and was still forced in 2012 to borrow $300 million. The schools face a $1 billion deficit over the next five years, and most observers say the district has limited room to cut.

New Superintendent William R. Hite Jr. has made financial stability a priority, and the district is trying to save by closing schools, but the money troubles are far from over.

"I think this is something that will continue to hemorrhage," Butkovitz said.

Last year, Nutter was eyeing the Actual Value Initiative - his plan to modernize the property-tax system - to raise more revenue from historically undervalued properties. But he said he would not seek this year to collect more property taxes.

Can Nutter realistically make such a promise with all these fiscal land mines laid before him?

The person in charge of the city's books, Finance Director Rob Dubow, said it was too soon to know what to expect. The mayor will not deliver his budget address until March. "We will present, as we always do, a balanced budget and five-year plan," Dubow said. "It's early for us to know what that will look like."

Phil Goldsmith, a former managing director, said the mayor might simply be trying a new political tactic.

Last year, Nutter proposed a $94 million tax hike for the schools, and Council gave him less than half that. He has twice proposed a "soda tax" that Council soundly rejected. In his first term, Council members fought off his plan to save money by closing libraries.

"He's probably putting the impetus on Council to make the hard decisions" this year, Goldsmith said. "It seems everything he's tried has been knocked down."

Goldsmith also noted that revenue could increase simply through economic recovery. Quarterly reports show modest growth, and the city's year-end fund balance - $147 million - was higher than expected.

Councilman W. Wilson Goode Jr., who heads the Appropriations Committee, said he believed the firefighters' contract could be funded through the budget surplus and other measures. He also said the city could give more to the schools without raising taxes.

Council President Darrell L. Clarke also has discussed raising money by allowing advertising on public property and selling some assets, while Nutter has been exploring a sale of the Philadelphia Gas Works, with proceeds likely to be fed into the pension system.

at 215-854-2730 or tgraham@phillynews.com.