Harrisburg's plan for Philadelphia has merit

Mayor Nutter went to Harrisburg seeking help to balance the city budget and came home with what looks like an even better deal for Philadelphia residents.

After some wrangling and delay, the state Senate approved Nutter’s request to raise the sales tax in the city by 14 percent for five years, and defer payments to its pension fund for two years.

Mayor Michael Nutter has had to spend a lot of time lobbying state legislators to get the tax and pension changes Philadelphia needs to get through rough fiscal times.

If approved by the full legislature, the measures will enable the city to fill a projected budget gap of $700 million over five years. Nutter said both measures were needed to avoid major layoffs and deep service cuts.

Nutter and City Council must keep their promise to make the sales-tax hike temporary. Sales taxes are the most regressive levy, impacting poor people more than other taxpayers, and adding to an overall tax burden in the city that is already the highest in the country.

With wages flat or falling, and other costs growing for Philadelphians, Nutter should have looked harder for more cuts before turning to any tax hike. Even with this assist from the state, he needs to implement more efficiencies in city government.

Credit Senate Majority Leader Dominic Pileggi (R., Delaware) for using Philadelphia’s budget crisis to come up with a long-term solution to the city’s growing pension costs, instead of another a short-term patch.

In addition to the measures sought by Nutter, the Senate bill calls for the city to cap retirement benefits for existing city workers at current levels, and develop a separate pension plan for new hires that would cut benefit costs by 20 percent or more.

The House approved an earlier version, but must sign off on these provisions from the Senate. Gov. Rendell supports the Senate bill; the House should as well.

In the long run, this should help ease Philadelphia’s budget woes by addressing an intractable pension problem that previous mayors have sometimes tried but almost always failed to tackle. In taking office last year, Nutter pointed to the ballooning pensions costs as a growing crisis.

He has been negotiating with the four municipal unions for pension changes, but with little success. The unions obviously don’t want to grant any concessions. But the reality is the city workers have a gold-plated pension plan that is unsustainable.

Without cutting employee costs, the other alternatives are to eliminate city jobs, cut services or the more likely route: keep raising taxes. Such moves will only make the city a less attractive place to live, work and visit.

About 60 percent of the city’s $4 billion annual budget goes to cover salaries, health benefits and pension costs for employees. (Health benefits are another soaring cost that Nutter wants and needs to reduce.)

The city’s annual payment to the pension fund has jumped from $150 million in 2003 to $350 million last year. Meanwhile, employee pension contributions equaling 5 percent of their salary are below the rate of most other cities. At the same time, the city has more retirees collecting pensions (about 37,000) than city employees (about 28,000).

Under the state plan, city workers will keep their current pension benefits. The savings will come from future hires that will go into a 401(k) plans rather than the existing guaranteed plan.

That seems both fair and reasonable given the economic realities that confront Philadelphia.