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Thorny Finances: Philadelphia Isn't Out of the Woods Yet

September 24, 2009 By:
Uri Monson
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Uri Monson

"Who graciously bestows favor as He has bestowed favor on me." This section of Birkat Hagomel -- the prayer said after someone has recovered from illness or avoided a catastrophe -- was probably on the minds of some in the city this past weekend, as it narrowly avoided the implementation of severe budget cuts. But before bensching Gomel, we need to understand the exact nature of the fiscal problems.

A little over a year ago, as the recession gained steam, a few key dilemmas began to emerge for Philadelphia. On the revenue side, certain tax collections began to trickle in far below budgeted estimates. One of the city's biggest projected costs -- annual contributions to the Pension Fund -- rose significantly as a result of investment losses by the nearly $8 billion fund.

Since the creation of the Pennsylvania Intergovernmental Cooperation Authority in 1991, the city has been required to use a five-year financial plan as part of its budget process.

By last spring, the city had identified a $2.4 billion shortfall over the fiscal years 2009-14. The city made some service cuts, eliminated positions, and suspended the incremental Wage and Business Tax Reduction Program, among other changes, enabling it to close $1.7 billion of the gap. After much public debate, the city proposed a temporary 1 percent increase in the sales tax and the deferment of certain pension-fund payments as a means for closing the remaining hole.

To enact these proposals, the city required authorization from the commonwealth of Pennsylvania -- action held up during the budget stalemate in Harrisburg. If that didn't happen, the city's proposed "Plan C" incorporated laying off more than 3,000 municipal positions, including some 700 police officers and 200 firefighters; ceasing operations at libraries and recreation centers; ceasing operations at two out of eight health centers; and switching to biweekly trash pickup.

These changes would not only have led to a significant drop in the quality of life in Philadelphia, but also had a disproportionate impact on those most in need. The reduction of free health and educational services in a city with such high poverty levels would have seemed particularly cruel as we read the words from Isaiah in the Yom Kippur Haftarah: "This is the fast I desire ... it is to share the bread with the hungry and to take the wretched poor into your home."

Late on Sept. 17, when the state approved the authorizations necessary to close the budget gap without additional service cuts, a palpable sense of relief came to those concerned with the city.

But are the problems truly behind us?

In the short term, the outlook is sounder, but the city remains at risk. While much of the past budget year focused on the "choice" between increasing revenues and reducing services, there is more for Philadelphia to consider. Efforts by the administration to reduce waste and inefficiency, increase transparency and make better use of technology will help

Ultimately, however, the city must reduce its cost-of-service delivery. Last year, spending on employee benefits equaled 68 percent of salaries -- twice the national average for state and local government. The imbalance between pension benefits and contribution levels, ballooning health-care costs and unmanageable work rules result in higher-than-necessary costs.

All of the city's municipal labor contracts are being negotiated or are before an arbitrator. There is no question that employees work hard to provide a safe and vibrant city, but what's needed are contracts that are fair to both the roughly 20,000 employees and the more than 1.6 million people who live and work here.

Uri Monson is executive director of the Pennsylvania Intergovernmental Cooperation Authority, which provides fiscal oversight to the City of Philadelphia.

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