Philadelphia Thursday received long-awaited state relief as the Pennsylvania legislature passed a bill that will balance the city’s budget and avoid drastic layoffs and service reductions.

The Senate approved House amendments to HB 1828 in a vote of 32 to 17. The vote will prevent 3,000 layoff notices that the city was poised to send out today absent final passage of the bill. Gov. Edward Rendell Thursday said he would sign the measure into law.

“I think there’s a feeling of relief within the city administration and probably the city as a whole,” said finance director Rob Dubow. “If this had not passed, we would have had to do horrible things that we really didn’t want to have to do. And now we don’t have to do them.”

HB 1828 boosts Philadelphia’s sales tax to 8% from 7% for five years and allows the city to postpone $235 million of pension payments in fiscal 2010 and fiscal 2011. The bill avoids a workforce reduction of 3,000, the closing of various recreational centers, and reducing garbage collection to every other week.

“This is a great win for the citizens of Philadelphia,” said Mayor Michael Nutter. “I am so proud of how we have weathered this storm as a city, with a typical fighting Philly spirit. Just think of what we can achieve together when we turn that resilience, that determination, that teamwork towards the tremendous opportunities and endless possibilities that lie ahead.”

Last week, Philadelphia’s fiscal monitor, the Pennsylvania Intergovernmental Cooperative Authority, approved a revised fiscal 2010 budget for the city, pending legislative passage of HB 1828. That approved budget, called Plan B, includes more than 20 layoffs that the city has already implemented and $20 million of spending cuts to offset the delay of the sales-tax increase. That hike was set to kick in on Aug. 1 but will now begin in 20 days, Dubow said.

The state’s own fiscal 2010 budget impasse and pension reform amendments to HB 1828 stalled the measure’s progress in the legislature for more than two months. During that time, Philadelphia has lost $20 million of additional sales tax revenue.

Fitch Ratings in mid-July placed Philadelphia on negative watch due to lawmakers’ delay in approving HB 1828, and the state budget impasse, which postpones an estimated $120 million of state aid to the city. Fitch rates the city BBB-plus.

“This certainly gets us closer to resolving our rating watch,” said Fitch analyst Chris Hessenthaler. “But I think that without the state passing its budget, that we’re still not quite there yet. We still want to see how this plays out at the state level and that will give us all of the information we need to respond accordingly.”

Moody’s Investors Service assigns a Baa1 rating and negative outlook to the city. Standard & Poor’s rates the credit BBB-plus with a stable outlook.

Moody’s spokesman John Cline said the agency did not have an immediate comment regarding the passage of HB 1828. Standard & Poor’s analyst Karl Jacob said the credit agency will need to review the impact of the bill’s passage in light of the delayed start of the sales tax increase.

“We’ll talk to the city, but the rating’s triple-B stable, and within that category we expect volatility,” Jacob said.

Dubow said his team will now assess when the city can head to market with a $275 million tax and revenue anticipation note deal. Officials were reluctant to issue the notes while the legislation was in limbo.

Citi is the book-runner on that transaction. Janney Montgomery Scott and Loop Capital Markets are co-managers.

The note proceeds will pay down a loan that JPMorgan extended to Philadelphia earlier this month so that the city could make good on delayed payments to vendors and suppliers. The 3% rate on the JPMorgan loan will jump to 8% on Dec. 1, unless the city pays down the debt before then.

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