City suspends payment of contracts

Running out of cash because of the state budget deadlock, the City of Philadelphia has stopped paying many of its bills until the impasse is resolved, City Finance Director Rob Dubow said this morning.

The city must temporarily withhold about $120 million in July and August to avoid running out of cash completely, Dubow said. Payments to contractors stopped Wednesday. Dubow, Budget Director Stephen Agostini and Treasurer Rebecca Rhynhart said that the city will pay its payroll, benefits, debt service and "emergency" contracts. The $4 million a month paid to foster parents, for instance, is considered an emergency, and other contracts will be considered on a case-by-case basis.

In a noon press conference, Mayor Nutter said the city would ask vendors to "understand where we are."

"We're asking them to work with us through this crisis," Nutter said.

The city is suffering for a number of reasons, all related to the state budget, city officials said.

First, the city anticipated receiving nearly $100 million in state payments in July and August that are frozen until a new budget passes. Second, the city is asking the legislature to approve a 1-cent increase in the sales tax, which would generate about $9 million a month, beginning Aug. 1. Third, the city had planned, as it does every year, to take out a $275 million, short-term "tax revenue anticipation note" or TRAN, which municipalities use to provide cash to cover expenses until their tax revenues are collected.

Without the expected state payments and sales tax revenues coming in, borrowing the $275 million would be prohibitively expensive, Dubow said.

"I have made repeated trips to Harrisburg over the last several weeks and I know that lawmakers are working hard to pass a fair and balanced budget," Nutter said in a press release. "That said, the delay in the State budget process is severely impacting the City's cash flow and we have no option but to take these difficult steps."

Passage of the state budget would immediately solve part of the problem, though the city is also dependent on separate legislation to allow a sales-tax increase, and approvals to changes in the pension plan are needed before the city can borrow the $275 million with the TRAN, Dubow said.

Nutter said that "all new capital projects will be under stringent review."

"Over the next few days the City will review every capital project and will determine which can proceed in the absence of the passage of the State budget and the passage of legislation authorizing the City to raise the sales tax by 1% and make changes to its pension payments," Nutter's press release stated.

Even by suspending contract payments, the city cash on hand would dip to $111 million at the end of August. Agostini said anything under $150 million presents a potential problem for the city.

At a news conference outside his Harrisburg office, Rendell urged lawmakers to approve the 1-cent sales tax increase the city is asking for.

"It's my hope that the state will do at least the one percent temporary increase in the Philadelphia sales tax. I stress temporary, and I think the citizens can believe the mayor when he says temporary," said Rendell who nevertheless predicted it won't happen until after the state budget is done.

Asked whether the city's predicament adds urgency to getting the state budget done, Rendell said: "I don't think that can be the tail that wags the dog. I am concerned about it, just as I am concerned about our ability to meet our vendor bills. But look, this is so important to the state's future…that we have got to get this right. As much as those short-term exigencies concern me, they can not be what motivates me."

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