Philadelphia Mayor Michael Nutter yesterday announced that the city faces a new projected $1 billion budget deficit over the next five years due to declining revenues and increasing pension costs.
City officials in November eliminated a previous $1 billion deficit through fiscal 2014 and a $108 million shortfall in the current $4 billion fiscal 2009 budget through spending cuts and by delaying plans to lower corporate tax rates. Now the administration must search again for ways to shrink the city's budget by another $1 billion over the next five years, with the mayor open to all options in order to close that funding gap.
"Everything is on the table - programs, services, tax and fee increases, contracts that are already in place, city cars, and everything else that folks want to talk about," Nutter said during a press conference on the budget, before heading to Washington, D.C., to testify on the pending national economic stimulus bill. "Let me repeat, one more time. Everything is on the table for discussion and legitimate debate."
Nutter is set to release his proposed fiscal 2010 budget on March 19 and will hold public budget hearings over the next two months. In addition, a new seven-member private-sector outreach board comprised of area business leaders will now help find efficiencies in the fiscal 2010 budget and beyond.
"The board's long-term mission is to examine some of the major structural issues that have constrained city budgets for many years, if not decades - issues including the tax structure, the criminal justice system, employee pension and health care costs, and court funding," Nutter said.
Large pension payments continue to drain the city's coffers. The administration now estimates that Philadelphia will pay an additional $119 million in pension costs through fiscal 2014 in addition to the $239 million five-year increase officials designated in November.
At the same time, real-estate transfer tax receipts are down. This year, the city will collect less than $129 million in real-estate transfer revenues, a drop from the $236 million and $185 million that Philadelphia received in fiscal 2006 and fiscal 2008, respectively.
Moody's Investors Service and Standard & Poor's rate Philadelphia Baa1 and BBB, respectively. Fitch Ratings assigns its BBB-plus rating to the city.
Moody's analyst Geordie Thompson said the rating agency will monitor the credit to see how the city tackles its economic challenges.
"This is not an atypical situation for municipalities across the country right now, but it is a very big gap," he said. "We want to see how they're going to deal with it before we make any decisions on the rating."
In other news, city officials are searching for a liquidity provider on $271.4 million of variable-rate refunding bonds the Philadelphia Gas Works sold in 2006.
JPMorgan has notified the city that it will not renew the standby purchase agreement that the bank currently provides on the bonds. That agreement will expire on Jan. 26. Philadelphia owns and operates PGW, which is the nation's largest municipally owned natural gas company.
Without a new liquidity agreement, PGW will be forced to pay an acceleration payment of $30 million every six months, beginning in July. City Treasurer Rebecca Rhynhart said the city is working on the issue and expects to resolve the problem as soon as possible.
"We're confident that we'll find a solution before then, either through getting a direct-pay letter of credit or through either remarketing the bonds into a fixed rate or refunding them," she said.
If PGW chooses to refinance the VRDBs into fixed-rate mode, it will need to terminate a floating-to-fixed-rate swap attached to bonds. The termination fee on that stood at $72.6 million as of Dec. 18, according to PGW's 2008 independent audit. Financial Security Assurance Inc. insures the swap. JP Morgan is the counterparty.