Back Channels: The opportunity for Phila.'s economy

The $819 billion Federal Bailout Express chugs along, killing any incentive for states and municipalities hurt by the recession to reform their finances.

One exception might be Philadelphia. There's no guarantee of change, but at least the city is going to have a discussion about reform. Two reasons:

One is Mayor Nutter, who sounds serious about facing Philadelphia's long-term budget woes.

The other is Al Schmidt, executive director of the Republican City Committee, who is talking about running for controller this year.

Start with the mayor. Agreed, the library kerfuffle wasn't a profile in decisiveness. And while there could have been more community meetings dealing with the first billion-dollar deficit, Nutter is more than making up for that in outreach efforts to address the second billion.

His cuts so far have been on the discretionary-spending side - about 40 percent of the budget. Next up is the nondiscretionary part.

For any savings there, the mayor will have to convince the city's unions of the seriousness of the financial situation. It won't be easy. Nutter's opening bid was dismissed as "insulting" by John J. McNesby, president of the city's Fraternal Order of Police local.

Among the changes the mayor seeks, as posted on the FOP's Web site: no pay raises over the four years of the contract; more flexibility on overtime rules; eight paid holidays instead of 12 (losing Columbus Day, Presidents Day, Veterans Day and employee birthdays); and higher employee contributions to pensions, increased from 5 percent to 8 percent. Nutter also wants unspecified reforms of health benefits.

The mayor is on the right track, especially in seeking savings in health and pension benefits. Last year, a report titled "Philadelphia's Quiet Crisis," by the Pew Charitable Trusts and the Economy League of Greater Philadelphia, detailed the need to address the cost of employee benefits. Among the findings:

The number of pension recipients exceeds the number of city workers (33,907 vs. 28,701 in 2006).

The growth of pension costs will eventually outpace that of city revenues. (Pensions cost $252 million in 1998; they are expected to cost $613 million in 2012.)

City employees contribute less to their pension funds than their counterparts in other cities.

Three of the four city unions don't require employee contributions to health insurance.

The city pays $10,271 to $17,328 per employee for health benefits, depending on the union. The national average for government employees is $9,082; for private-sector workers, it's $4,292.

The city pays an agreed-upon per-employee cost for health benefits to the unions. If health care ends up costing less, the savings go to the unions, not the city.

Even if Nutter and the unions can't agree, the discussion will continue.

Schmidt is ready to pound home the problems and solutions outlined in "Quiet Crisis." He says the benefits issue demonstrates why Philadelphia's economic situation can't be blamed on the recession alone.

"The finances of this city were run with us holding onto a cliff by our fingernails," he said. "It didn't take much to push us off."

A city finance official makes a similar point in "Quiet Crisis": "If the economy stays healthy, we're OK. If there's a recession, we're dead."

The recession is here. So now what?

To start, Philadelphia needs two viable political parties, says Schmidt, who was a senior auditor with the nonpartisan U.S. Government Accountability Office for five years.

"One-party rule is always bad, always corrupt, and, with no checks and balances, is always inefficient," Schmidt said. He cited his own party's rule in Washington from 2001 to 2006, as well as the Democrats' 60-year dominance in Philadelphia.

"Without a two-party system," he said, "you don't have oversight. You have ward leader [and City Controller] Alan Butkovitz auditing ward leader Nutter, and all the other ward leaders in the Democratic Party with their own fiefdoms in city government."

While Schmidt would focus on pension and health-care costs, he insists savings could be achieved without sacrificing benefits. And he believes more regular audits of city agencies would reveal needless expenses that could be trimmed. That would spare core services such as police, fire and libraries from across-the-board budget cuts, which Schmidt called "a crude, blunt instrument."

He'd also rather see the city get its financial act together than use stimulus money to paper over long-standing problems.

"Borrowing more money is not the solution," Schmidt said. "The solution is better, responsible government that's accountable and reliable."

That's a tall order for Philadelphia, where corruption and poor service are too often the norm. But, in their own ways, Nutter and Schmidt are raising a good question: Why keep settling for less?