How a gap in city's budget became a $1 billion canyon

In June, Mayor Nutter presented a budget that had something for just about everyone - tax cuts, better parks, more police - but it came with a caveat.

"It is worth remembering that any contraction in national economic activity in 2008 or later will place many of the revenue estimates . . . at risk," he said in his five-year plan.

Well, that contraction has come, and with it a gaping $1 billion hole in Nutter's five-year spending plan.

How did the gap grow to such monstrous proportions? Just about every major area of city revenue - including business, wage, and real estate transfer taxes - has fallen precipitously. Some critics say Nutter should have braced for slow economic times, though no one suggests he could have foreseen such a breathtaking economic collapse.

Trouble arrived in August when the city's second-largest source of income, the business-privilege tax, was found to have been $399 million in the fiscal year that ended June 30 - $39 million below the $438 million predicted by Mayor John F. Street.

Nutter had counted on annual 4 percent growth in the business tax starting with Street's higher number - so the drop meant an immediate $300 million gap in the city's five-year plan.

At the same time, the sagging stock market eroded the municipal pension fund, leaving the city to make up the loss with $150 million total over the next five years.

On Sept. 11, Nutter announced that those two factors had opened a $450 million hole in the five-year plan. He warned that it could easily get worse.

"Even when we announced it at $450 million, it was a much bigger problem," Clay Armbrister, Nutter's chief of staff, said in an interview.

That became evident in the next three weeks. Lehman Bros. filed for bankruptcy on Sept. 15. Washington Mutual failed on Sept. 25, and the stock market plummeted. Finally, on Oct. 3, Congress passed its $700 bailout package, but global stocks continued to fall.

On Oct. 8, Nutter put the five-year shortfall at between $650 million and $850 million because tax receipts for the first quarter of fiscal 2009 had come in - specifically real estate transfer taxes and wage taxes - and the picture was bleak.

Real estate transfer taxes, which come from property sales, had been been sagging for two years, but Nutter predicted they would go up slightly in 2009 and throughout the five-year plan.