Amid Pa. stalemate, Phila. suspends vendor payments

The city has suspended payments to many of its vendors to avoid running out of cash while the state drifts along without a budget in place, Mayor Nutter said yesterday.

The city must temporarily withhold about $120 million in July and August to conserve cash, Finance Director Rob Dubow said. Payments to contractors stopped Wednesday.

The city will cover its payroll, benefits, debt service, and "emergency" contracts, Nutter said, but what qualifies as an emergency remains unclear. 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, Dubow said.

New capital projects will also be under "stringent review," Nutter said.

He said he hoped vendors would "understand where we are."

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

Companies and organizations with city contracts were unsure how it would affect them. James Anderson, associate director of Episcopal Community Services, which is paid about $250,000 a month to run foster-care services and a homeless shelter, said he had not gotten word from the city.

At the same time, he said, payments at the beginning of a new fiscal year in July and August are often delayed while contracts are finalized.

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 - for such needs as child-welfare services and juvenile detention - that have been frozen until a new budget passes.

Second, the city is asking the legislature to approve a one-cent increase in the sales tax, which is expected to generate about $9 million a month, beginning Aug. 1.

Gov. Rendell said yesterday that he did not think the tax-increase bill would even get a vote until a budget was in place.

Third, the city had planned, as it does every year, to take out a $275 million, short-term "tax-revenue-anticipation note," which municipalities use to provide cash to cover expenses until their tax revenue is collected.

Without the expected state payments and sales-tax revenue coming in, and without state-authorized changes to the pension fund that would lower the city's annual payments in the short term, borrowing the $275 million would be prohibitively expensive, Dubow said.

Passage of the state budget would immediately solve part of the problem by freeing up state revenue to the city.

But the decision by Nutter and City Council to depend on Harrisburg to balance the city's 2010 budget - with state approval needed for the sales-tax and pension changes to save the city $250 million this year alone - is having a direct impact.

"It's unfortunate that, with all the other issues the city is dealing with, and fiscal challenges, this is not one of their own creation," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city budget process. PICA was created in 1991 to provide financial assistance to Philadelphia the last time the city reached a financial crisis of such proportions. At that time, department heads under Mayor W. Wilson Goode and, later, Mayor Ed Rendell would meet each week to decide which bills got paid.

Even by suspending contract payments, the city's cash on hand would dip to $111 million by the end of August and to less than $77 million by the end of September. Budget Director Stephen Agostini said that anything less than $150 million presents a potential problem.

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

"It's my hope that the state will do at least the 1 percent temporary increase in the Philadelphia sales tax. I stress temporary, and I think the citizens can believe the mayor when he says temporary," Rendell said.

Asked whether the city's predicament added 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 cannot be what motivates me."

State Sen. Dominic Pileggi (R., Delaware), said of the city's plight, "That's unfortunate and I'm certainly sorry to hear that, but we are a long way from even having a resolution between the governor's position and that of a majority of the Senate."

Shelly Yanoff, executive director of Public Citizens for Children and Youth, said the Department of Human Services has many contracts with small child-care providers that would have a difficult time waiting out the city.

"We don't have many of them that have savings they could rely on," said Yanoff, whose advocacy organization does not contract with the city. "We have to urge everybody to tell their legislators that it is not fun and games, it's serious, and this stalemate at the budget level is very bad for children and families."

Others wondered whether the delay would discourage vendors, who already deal with a city notoriously slow in paying and that puts strict political-contribution restrictions on city contractors. Fewer vendors means higher prices in the short and long term.

"Now they know that the city isn't stable, why would they bid?" said lobbyist Maurice Floyd, a veteran of city politics, whose clients have included city contractors. "The issue now becomes, what's going to happen now with the new contracts or future contracts?"