Nutter, Council agree on budget

NOTE: THIS STORY HAS BEEN CORRECTED

CAVING UNDER political pressure, Mayor Nutter yesterday announced a revised budget deal with City Council that puts an end to his controversial proposal to increase property taxes.

Instead, the city will deal with a $1.4 billion five-year financial hole by extending a proposed temporary 1-cent sales-tax hike from three to five years. And to ease immediate financial pressures, officials plan to defer some payments into the city pension fund for two years and pay back the fund later. "This budget agreement reflects the reality of the legislative process. And I've seen if from both sides," Nutter, a former councilman, said at a City Hall news conference at which he was flanked by 10 Council members. "We're not talking about winners or losers."

The sales-tax hike and the deferred pension payments require approval from state lawmakers. If the city doesn't get approval - which may not be known until July - it will be forced to go to a draconian "Plan B" with more service cuts and tax hikes.

Council President Anna Verna said that the city would fight to get the deal approved in Harrisburg.

"We will go to Harrisburg with one voice," she said. "We are unified."

But Erik Arneson, a spokesman for state Senate Majority Leader Dominic Pileggi, said that the sales-tax increase doesn't face an easy path to state approval.

"It was a difficult sell when the temporary sales-tax increase was for three years, so obviously extending that to five years makes that more difficult," said Arneson, who noted that Nutter called yesterday to explain the new plan.

The revised deal marks a major political loss for Nutter, who had insisted that a temporary two-year property-tax boost, coupled with a temporary three-year sales-tax increase, was the responsible way to close the budget gap without substantially cutting services.

The sales tax in the city is now 7 cents on the dollar, with 6 cents going to the state and 1 cent to the city.

Nutter had proposed increasing the property tax by 19 percent in July and then dropping the increase to 14.5 percent in July 2010. Instead of that proposal, the city will defer $230 million in pension payments over the next two fiscal years. That's about 30 percent of the $845 million in planned payments over those years.

Nutter said that the city would pay back the fund within the five-year plan. His revised plan still contains a provision to extend pension payments. The city wants to spread the payments over 30 years instead of the current 20. They had originally proposed extending the payments over 40 years. That move requires state approval.

Nutter will be deferring and extending payments into an already underfunded pension fund. By the end of 2008, the city pension plan had enough assets to support 55 percent of its liabilities. And Nutter said that the plan lost value last year in the stock-market decline.

But Nutter said he did not think payment deferral would damage the city's financial standing.

"We have talked with financial advisers and other authorities, and we think we'll be fine," Nutter said.

The compromise is similar to a budget plan that Council members sent to the mayor two weeks ago. Council suggested that the city extend the temporary penny sales-tax hike from three to five years and borrow $200 million against the anticipated proceeds in the later years to help balance the budget in the first two years.

But Finance Director Rob Dubow told Council that borrowing to pay city operating expenses could raise an issue with financial-rating agencies. He also said that the city estimated that the interest costs of borrowing $200 million to cover expenses could be $75 million to $100 million.

The negotiated agreement does not rely on borrowing the money from banks, and instead frees up cash by delaying payments into the pension fund.

Nutter was forced to compromise on his plan after he couldn't muster the support for it. Seven of 17 Council members publicly stated last week that they would not support a property-tax hike.

Nutter's pitch was also weakened by the recent release of a set of "actual value" assessments that would change most homeowners' taxes, and by an investigation by the Inquirer into the Board of Revision of Taxes, which sets city property taxes. The stories revealed longstanding mismanagement, political patronage and inaccurate assessments.

To pass the budget by the end of May, as required by the city Home Rule Charter, Council needed to introduce a plan by this Thursday. *

CORRECTION: A story in yesterday's paper reported the city proposes extending payments into the city pension fund over 40 years, instead of the current 20 years. While that was the city's original plan, the proposal has been changed. The city now plans to seek state approval to spread the payments over 30 years, instead of 20.