Slowed economy likely puts crimp in Nutter's budget

The crowd-pleasing $4 billion budget that Mayor Nutter proposed in February - packed with tax cuts and spending initiatives - will likely have to be scaled back, Nutter told City Council at a budget briefing yesterday.

The economy is partly to blame. The sluggish housing market has put a crimp in city revenue, forcing budget officials to revise downward their income projections for next fiscal year. The School District is also likely to seek extra cash from the city in the weeks ahead, putting further pressure on the budget, which Council must approve by May 31. And there is no telling whether the city has set aside enough to pay for yet-to-be-negotiated labor contracts.

But the biggest single wound to Nutter's 2008-09 spending plan is self-inflicted: a $50 million gap, caused by the administration's decision to delay recognized savings from an ambitious effort to strengthen the city's dangerously underfunded pension plan. The city has not changed its plans to issue the bonds by the end of the calendar year.

It is unclear exactly what the net effect of these developments will be, but Nutter warned Council that officials would have to look at "both sides" of the ledger, suggesting that some trims to the proposed budget were likely. Another distinct possibility - clearly favored by some on Council - is a slowing of Nutter's proposed cuts in wage and business taxes.

"There are some concerns," Nutter told Council, "and we're going to need, obviously, your continued help and partnership."

Nutter made his remarks at a briefing he intended to keep closed to the public. Reporters learned of the session, however, and insisted that they be allowed to stay, citing the fact that a quorum of Council was present, making it a public meeting.

Nutter yielded, but said it was his understanding that informational briefings were permitted under the state's Sunshine Law. He said he "reserved the right" to hold similar closed meetings in the future.

Whether done publicly or privately, the administration certainly has negotiations with Council ahead.

"We are talking about some big numbers. We were all extremely positive about the mayor's first budget presentation. Now reality is setting in," said Councilwoman Maria Quiñones Sánchez, who favors slowing or rolling back tax cuts to get the city through the economic downturn.

"There's not a lot of room to work with in the budget, unless you're going to cut police or fire, and no one is going to touch that," she said.

The administration has not shown any willingness to slow its proposed tax cuts, and Nutter has long argued that tax cuts are needed to create jobs and slow the city's population loss.

The Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's five-year financial plan, is watching the situation closely.

"Stuff changes in just about every budget, and you expect that. There's funny money in every budget that's ever been done," said Uri Monson, the authority's acting executive director.

Not all the budget news is bad. The city's pension fund earnings for this fiscal year have been strong, about $30 million more than anticipated. That, Monson said, would help offset the loss of revenue from the delayed pension obligation bond issue.

Initially, Nutter proposed floating a $4.5 billion bond issue to shrink the pension fund's unfunded liability. But the administration now says it will seek to borrow at least $1 billion less.

The smaller borrowing results from the administration's recent decision to forgo the refunding of a $1.25 billion pension bond issue from 1999.

"Looking at how it would really work, we don't think we would get the savings out of it that we thought," Finance Director Rob Dubow said. As a result, the debt service on that bond issue will continue to grow until it is paid off in 2029, a yearly expense that officials had hoped to cut significantly.

Administration officials had also anticipated that their pension proposal would be far enough along by now to count on $50 million in savings in the city's annual pension costs.

Yesterday, they conceded that was not the case.

"We didn't think it was fair to Council to expect them to take action in the next two or three weeks," Dubow said. "We still plan to issue the bonds this year, and we still plan to realize the savings, but now that won't happen until 2010."

For now, the administration is no longer including the freed-up $50 million in next year's budget - shifting course from what was proposed in February.

The administration does plan to proceed with selling the proposed taxable bonds - now estimated at between $3 billion and $3.5 billion - believing that is among the best ways to increase the pension fund so that it is 95 percent funded.

Currently funded at 54 percent, Philadelphia's pension obligations are among the lowest-funded in the country. As employee-benefit costs consume bigger portions of the budget each year, controlling pension costs has become Philadelphia's most daunting financial problem.

In a move to restore the pension fund to health, the administration hired two financial advisers last week. One, Public Resources Advisory Group of New York, played a major role in helping Connecticut issue a $2 billion pension obligation bond a few weeks ago.

The other, Phoenix Capital Partners, is a minority-owned company based in Philadelphia.

Even at $3 billion or $3.5 billion, the administration's proposed pension deal stands to be the nation's second-largest pension obligation bond sale ever.

The largest issuance was for $10 billion by Illinois in 2003.

Nutter's plan is "a legitimate proposal," Monson said. But, he added, "it is difficult for us to do the level of analysis we want to do because too many details have not been determined yet."