January 8-14, 2004

city beat

March Madness

The city's budget is a mystery until spring.

by Amy L. Webb

For those who attended Mayor John Street’s inaugural festivities this week, it was difficult not to think about money.

The official ball was held at the Convention Center, which was the object of a custody battle pitting the state government against the city and its financial management early last year. Inauguration attendees donned sharp tuxedos and gowns for the $5,000-a-couple dinner and $1,000-a-plate reception. In the main hall, tables were topped with lush bouquets of exotic lilies and delicacies including green papaya salad with shrimp, roasted pears with mascarpone cheese and petits fours. A swanky band, complete with full string and horn sections, played "Come Fly With Me" as guests sipped top-shelf liqueurs.

Earlier in the day, the newly sworn-in Mayor Street talked about the intersection of money and his next four years during his address at the Kimmel Center for Performing Arts. "Philadelphia is an indispensable part of the economic engine that drives the success of this entire region," he said. Street even announced a $500 million fund that he plans to create in order to "leverage billions of dollars of other public and private investment" in Delaware riverfront development and in areas recently cleaned by the Neighborhood Transformation Initiative (NTI), the mayor's sweeping blight removal program.

Wait a minute. Another massive plan, sans details, to find funds in a downtrodden economy? Where is Street planning to find $500 million -- which he hopes to spend trying to bring other people's money into the city? And what of that 800 pound gorilla--in Street's case, the newly announced $144 million projected budget deficit -- lurking in the back of the room?

Even after small press conferences, stolen moments with city officials and frank discussions about Philadelphia's unending economic paralysis, it's still unclear what "leveraging billions of dollars" means in the context of a city that already relies on a municipal bond structure to fund many of its social service programs. No one has any idea what will happen when the Tax Reform Commission meets to hash out the details of the city's draconian wage taxes. And as for those other promises -- additional Spanish-speaking City Hall staff and increased police presence -- the money may be somewhere, but the tangible outcomes, so far, remain to be seen.

What is clear -- that is, what was made painfully clear last week -- is that between January 2000 and January 2004, the city went from a $300 million budget surplus to a projected multimillion dollar deficit.

The question now is why.

Maybe it's best to start off with an explanation of how big American cities like Philadelphia earn enough revenue to provide the multitude of services they do.

"Nationally, about a third of total revenue that cities now use to provide services comes from property taxes," says Christopher Hoene, a Washington, D.C.-based researcher for the National League of Cities, a national organization representing municipal governments. "A third comes from a combination of sales and income taxes. Another third comes from user fees and charges. Depending on how cities are organized, federal and state money is also added in to pay for services."

Departments then estimate the amount they will need and submit their projections to budget directors. "Imagine trying to forecast how much revenue you think the city will pull in through those tax bases and how much programming and services will cost. Forecasts are never right. There are so many variables," Hoene says.

In Philadelphia's case, that process involves a $3.25 billion bank account, thousands of employees, hundreds of social service programs and 1.5 million residents. The people responsible for marking the ledgers and balancing all that money with the needs of so many people have to assume that, without major shifts in policy or natural disasters, their targets will stand. The budget goes through an approval process, and the mayor typically announces the new budget -- including any cuts or additions -- at the end of January. It takes effect July 1, which is the beginning of the fiscal year.

When city finance officials announced Dec. 29 that they projected a $144 million budget deficit for the coming year, they weren't really sure of the exact amount and blamed the rising costs of employee pensions and health care and slow revenue growth. They only said the mayor would unveil the city's new budget in mid-March, two months later than usual.

During a Dec. 15, 2003 City Paper editorial board meeting, Finance Director Janice Davis said that her office was already working with various city departments to streamline staffs. But when asked about bond ratings and the city's fiscal state, neither Davis nor the city's managing director, Philip Goldsmith, mentioned anything about a budget shortfall. The news came as a big surprise to City Controller Jonathan Saidel, who for 14 years has checked to make sure that the city's spending was in check.

"I don't know what the mayor's office is talking about or why they made the announcement. It doesn't make any sense," Saidel said. "We don't have a dramatic shortfall of revenue. I don't have a problem with reorganizing departments and revisiting the budget. But I do have a problem when you hold a press conference and immediately say the sky is falling. I think that it was a political statement rather than an informed economy statement."

"We have a $144 million deficit, and we're not making this up," said Street spokesperson Barbara Grant. "If we do nothing over five years, it will reach $700 million."

City Budget Director Rob Dubow said the reasons for the the deficit include a $37 million decrease in expected tax revenue, and increases of $26 million in pension costs (including the DROP program), $16 million in health benefits, $5 million for the Convention Center and $4 million in the mayor’s scholarship plan. "Because the cuts we’re asking departments to make this year are so dramatic we’re announcing this now," Dubow said. Dubow and his team must bring that $144 million deficit to a balanced zero by March 18.

Some think City Hall is crying Chicken Little to gain advantage during upcoming contract negotiations. Labor unions, representing thousands of blue- and white-collar municipal employees and safety officials, will discuss wages that haven’t increased in four years. "The unions know that the mayor and Council voted themselves a 15 percent raise before the election," says David B. Thornburgh, executive director of the Pennsylvania Economy League. "The city doesn’t want to show its hand right now."

Still, the announcement of a sudden budget deficit, regardless of amount, could be anathema to the very investors and builders that the Street administration is endeavoring to attract. "Investors and employers prefer stability to instability," Thornburgh says. "So, if the smoke signals from City Hall are a cause for concern in terms of a budget deficit, that creates an unwelcome sense of instability."

To be sure, a $144 million projected deficit from a total $3.25 billion budget isn’t the end of the world, and Thornburgh says that the city budget isn’t in grave danger.

Cities across the nation have experienced the same kind of decline since 2000, so Philly isn’t alone. A November 2003 survey compiled for the National League of Cities shows that most cities had the largest negative gap between revenues and expenditures since the survey began in 1985. Like Philadelphia, 85 percent of the responding cities cited rising health care as a main culprit. Rising pension costs and big drops in sales and property tax revenue are also not unique to Philadelphia. "Things are bad everywhere," says Michael A. Pagano, who authored the survey and is a professor of public administration at the University of Illinois at Chicago.

To remedy the situation, cities are now focused on increasing revenue without cutting services. But Mayor Street has already pledged to cut taxes, which thwarts the most common remedy to a budget deficit. "Some cities have identified a lot of public goods, such as parks and recreation, for which they can charge a fee," Pagano says. "They figure that because not everyone benefits from a park, only those who use it should pay. That’s fairly regressive. But it’s a policy option."

Philadelphia could start charging for its public halls and rec centers -- but the more probable scenario is that some will just be shut down. The mayor has said that he will not deplete the Fire or Police departments and the programs such as NTI will continue undaunted. But until the budget is outlined in March, where money will be coming from, where it will be going and exactly how much of it Philadelphia still has will likely remain a mystery.