Calling it “the people’s budget,” Philadelphia Mayor Michael Nutter yesterday released a $3.8 billion spending plan that includes temporary sales tax and property tax increases and reduces pension contributions by extending the city’s payment period.

Boosting Philadelphia’s sales tax to 8% from 7% and spreading out the city’s pension obligations over 40 years from the current 20-year timeframe will require approval from the Pennsylvania legislature.

City finance director Rob Dubow said the administration would increase real estate taxes further and implement deeper spending cuts and layoffs if state lawmakers fail to pass the two proposals.

Nutter proposes to cut expenditures and reduce payroll, raise the sales tax by 1% during the next three years, and increase property taxes in fiscal 2010 and fiscal 2011 to retain essential services and keep public libraries, health clinics, and pools open. During numerous town-hall budget hearings, residents insisted that those services remain intact, the mayor said.

Along with those budget changes, the plan closes a $1.4 billion, five-year deficit — including a $170 million shortfall for fiscal 2010 — via anticipated yearly reductions of $25 million in labor-contract agreements. Philadelphia’s four major labor contracts will expire on June 30.

“We face really tough choices,” Nutter said before the City Council. “There is no easy way out. I will not sugarcoat this. Now more than ever, leadership demands an honest accounting of our situation and a responsible solution. There’s no magic that can transform our situation into something other than what it is — a time for shared sacrifice dedicated to a vision of a brighter future for our city. This is the time for all of us to either stand up and be counted or sit down and be quiet.”

Nutter’s $3.8 billion budget proposal is $100 million less than the current $3.9 billion budget for fiscal 2009, which ends June 30. Debt service costs total $216 million in fiscal 2010.

The proposed sales tax hike would generate $341 million over three years while the two-year property tax increases would give the city’s coffers an additional $271 million. Pushing out Philadelphia’s pension liability over 40 years, an initiative that Nutter and city Controller Alan Butkovitz announced in mid-February, would generate $331 million in savings.

Pension and health care benefit costs account for roughly 22% of the fiscal 2010 budget and is expected take up 25% of the city’s fiscal 2013 spending plan, the mayor said. Philadelphia’s retirement program is 55% funded.

“The fund’s condition is of such concern that we will submit an application to the Pennsylvania Employee Retirement Commission, asking that the Philadelphia pension fund be declared 'severely distressed’ — the highest level of distress as defined by state law,” Nutter said in his address. “Under the terms of the law, we will be required to make significant changes to the pension fund to reduce our employee costs.”

In addition, Philadelphia officials released a city-funded $76.7 million fiscal 2010 capital budget that will include $63 million of general obligation borrowing — $13 million more than the current fiscal year — $6.5 million of Pennsylvania Intergovernmental Cooperation Authority funds, and $7.2 million of previously authorized capital funds. The capital plan is smaller than the $120 million version in fiscal 2009, when PICA and prior capital funds totaled $70.1 million. The city will also gain additional state and federal funds for public works projects.

Major infrastructure developments include recreational facility upgrades and improvements to prisons, the city’s riverfront, Fairmount Park, city hall’s exterior, and a new fire department facility, among other capital plans.

Fitch Ratings rates the city BBB-plus. Moody’s Investors Service and Standard & Poor’s rate Philadelphia Baa1 and BBB, respectively.

Separately, city officials continue to evaluate what to do about $271.4 million of Philadelphia Gas Works variable-rate demand bonds the city sold in 2006 after a standby bond purchase agreement with JPMorgan expired in late January.

Tentative plans include obtaining a letter of credit on a third of the debt and refinancing the remaining bonds into fixed-rate mode to avoid a $30 million acceleration payment set for July 26, according to city Treasurer Rebecca Rhynhart.

As of late February, the termination cost on a floating-to-fixed-rate swap attached to the variable-rate bonds dropped to $40 million from $50.2 million, Rhynhart said.


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