City's finances: Little talk, but lots of concern

Candidates avoid detailed discussions of fiscal issues, topped by soaring pension and health-benefit costs.

It isn't the favorite topic of any of the Philadelphia mayoral candidates. And who can blame them? Talk of financial doom and gloom does little to stir voters' hearts.

But whoever wins City Hall will be forced to wrestle with a fiscal future so bleak that experts describe it with metaphors such as "the blob" and the "boa constrictor."

And don't even ask about "Level D."

Squaring that reality with the promises the candidates in the May 15 Democratic primary are making - more police, more programs, more money for schools - could prove impossible. It will at least require inspired leadership and a lot of luck.

Consider:

Before the next mayor's first term ends, $1 of every $4 Philadelphia spends will go to city workers' pensions and health benefits. Unless the city gets a handle on these costs - which have more than doubled in Mayor Street's tenure - the next mayor will have little or no cash left for new initiatives.

Alone among big U.S. cities, Philadelphia has committed itself to substantive, long-term tax cuts. The reductions may be essential if the city is to scale down its notorious tax burden and compete for commerce, but that does not erase the fact that the cuts will take $1.45 billion out of the next four annual budgets.

The city's very foundation - its public buildings, roads, jails - is crumbling after years of underinvestment. Massive borrowing is needed to repair it, but the city is close to its debt ceiling and already spends nearly $200 million a year on debt service, up 50 percent since 2001.

There's more. Prisons costs are soaring, PGW is wobbly, and SEPTA and the schools are likely to need extra cash from the city in the next four years.

Philadelphia finds itself in this precarious position despite the Center City boom, surging property values and a leveling-off of job and population loss.

In other words, these are the good times and city government is still barely getting by.

And the five major Democratic candidates know it.

Businessman Tom Knox calls the budget outlook "bleak." Former City Councilman Michael Nutter calls it "daunting." U.S. Rep. Chaka Fattah says it's "fragile." State Rep. Dwight Evans says it's "worse than what Ed Rendell faced in 1991." And U.S. Rep. Bob Brady said nothing. He did not answer The Inquirer's repeated requests during the last two weeks for comments for this story.

None of the candidates, though, tells the city's financial story in as chilling a fashion as Rob Dubow, the overlord of Philadelphia's budget. His tour through the fiscal pitfalls awaiting the next mayor would depress anyone, especially when he gets to the biggest budget bogeyman of all: the swelling cost of health benefits for the city's 23,000 employees and pension payments for its 33,500 retirees - the aforementioned blob.

"It just keeps consuming more and more and more," Dubow said, "and eventually you will find everything's gone, the town's been eaten and destroyed."

Dubow's title is a mouthful: executive director of the Pennsylvania Intergovernmental Cooperation Authority, or PICA, the state board created to help the city stave off bankruptcy in the early 1990s, and charged with vetting Philadelphia's finances ever since.

And as Dubow says, the city should actually be spending much more on pensions. The fund is about $3.8 billion short of being fully funded, and the city is making no progress in closing that gap, paying the minimum amount to the fund permitted by state law.

Within six months of taking office, the next mayor will sit down with city unions to negotiate contracts, an occasion Dubow calls "the defining financial moment of the first term."

PICA and others, including a Pew Charitable Trusts report issued in February, are urging that the city seek major concessions from its unions, such as a shift away from pensions and toward 401(k)-type retirement plans, and a new management structure for the workers' health plans, which are now controlled by the unions.

Such proposals are anathema to union leaders - "dead in the water," said Thomas Paine Cronin, head of AFSCME District Council 47, which represents the city's white-collar workers.

For the most part, the candidates are not talking tough on contracts.

Knox, who angered unions with his cost-cutting efforts in 1992 and 1993 as Rendell's insurance czar, said: "The last thing I'm going to do is tinker with employee health insurance." Instead, he vows to improve the pension fund's investment strategy. Knox would have to convince the pension board of this, and it is unclear how much better the fund can do. It has outperformed most other public pension funds in recent years, according to the city Finance Department.

Fattah said, "We need to examine all possibilities concerning health and pension costs." But he said labor peace is key; he wants to "create a level of labor-management cooperation unseen before in city history."

Nutter said he would be "fair and firm" in bargaining with the unions. His "Honest Budget" policy paper floats ideas such as a voluntary 401(k) plan and higher worker payments into the pension fund.

Evans says the city needs to consider changing its charter to do away with some of its costly, independently elected row offices. These include such posts as sheriff, register of wills, and clerk of quarter sessions - though Evans would not say which he would like to eliminate.

He said the ultimate solution for rising employee health costs was "to piggyback on what Gov. Rendell's trying to do" with controlling health costs statewide.

Brady would use his back-slapping skills to negotiate fair deals with the unions, said his campaign adviser, Lauri Kavulich, a former PICA chair.

Good luck, say veterans of budget wars. "We've gone into negotiations asking for changes, asking for [prescription] co-pay, tried to bring them in line with what goes on elsewhere in the universe," said Mayor Street's chief of staff, Joyce Wilkerson, "and have not been successful with it."

Nearly as daunting as health and pension costs is the gap between what the city ought to spend on capital projects - $185 million a year, the city Planning Commission reckons - and the $59 million it does spend.

The commission warns that "Level D" is within sight: "the widespread and highly visible deterioration of Philadelphia's public infrastructure."

The Street administration did not invest more because the city simply could not afford to, Wilkerson said. Debt payments for earlier capital improvements are already approaching $200 million; if that number goes up much more, down goes the city's bond rating.

Prison costs have grown even faster, up 52 percent to $218 million in 2008. Why? More prisoners, higher health-care costs.

Those items - benefits, pensions, prisons and debt - totaled 22 percent of the budget in 2001. By 2012, they are projected to consume more than a third of city spending.

Philadelphia isn't the only big old city facing rising costs and falling-down infrastructure. But few face as daunting a mix, experts say: a low tax base (hence, high taxes); one in four residents in poverty (and the government costs that come with it); and, unlike many cities, Philadelphia is its own county. Aside from the wage tax, it can't share the cost of jails, courts, health and welfare and other county services with its better-off suburbs.

The candidates have flirted with possible answers to these long-term problems. All agree on the importance of economic growth; all vow to lobby for more state and federal aid. Each says he can squeeze savings; Knox claims he can scare up $400 million by ending corruption and increasing efficiency. (Wilkerson calls this figure "beyond the pale.") Knox has yet to detail how he'd reach this lofty total; a list of ideas produced by his campaign totaled less than $100 million.

Nutter - the only candidate thus far to fully explain how he'd pay for his initiatives - predicts a modest $47 million in efficiency savings each year, plus $25 million annually from expanded recycling and energy conservation.

To old City Hall hands, the candidates sound a bit pie-in-the-sky.

"God bless 'em, but no, it's not realistic," says former managing director Phil Goldsmith, warning that union work rules, the city charter and the civil service system limit a mayor's options. "It's a way to balance their campaign promises, not a way to balance the budget."


Contact staff writer Patrick Kerkstra at 215-854-2827 or pkerkstra@phillynews.com.