Despite budget woes, Philadelphia tax hike unlikely

Posted: January 01, 2011

After two years of onerous tax increases, Philadelphians can expect a reprieve in 2011.

The 2011-12 budget process - which could involve significant cuts in state and federal aid - has just begun, but Mayor Nutter is sending the message that tax hikes are not in the mix.

"We are not planning to ask for any tax increases to support that budget," Nutter said in an interview Thursday.

Plans can change, and Nutter won't present his budget to City Council until March. But city politicians generally regard raising taxes in an election year as off-limits.

Although Nutter does not appear to have a serious challenger, many City Council members could be fighting for their political lives, beginning with the May 17 primary.

"Most members would rather walk over hot coals, buck naked, at the 50-yard line at halftime of the Super Bowl than raise taxes before a primary in an election year," former Mayor John F. Street, who also served 19 years in Council, declared in an e-mail exchange.

Or, as Councilman W. Wilson Goode Jr. summarized: "There is no appetite on City Council for any more tax increases."

To balance the $3.8 billion 2010-11 budget, Nutter and City Council agreed on a 9.9 percent property-tax increase and a $150 commercial trash-removal fee. The previous year, they upped the sales tax from 7 percent to 8 percent over five years.

Nutter's message now is that the hard choices of the last two years, along with an improving economy, have stabilized city finances.

Numbers from the first quarter of the 2010-11 budget support his claim thus far, with tax revenue appearing on target. For city Finance Director Rob Dubow, that is "a nice change, after the economy kept falling off cliffs. It's nice to see it stabilizing."

In January, Nutter deactivated seven fire companies, and he had proposed closing libraries and pools. At the beginning of 2010, Dubow asked department heads to present scenarios involving cuts of up to 7.5 percent. The city ended up spending $74 million less than it projected in 2009-10.

For next year's budget, Dubow has asked for plans with cuts of 1.5 percent and 3 percent, but he also offered departments the chance to argue for new "investments" - representing potential increases - in their budgets. Department budget increases would not have been contemplated over the last two years.

Dubow said the city had no extra money lying around, but that it might be possible to justify cuts elsewhere to fund sound investments in a particular department.

In other good news for the city, the end of federal stimulus funding will not hurt the general fund. Less than $5 million in direct aid went to running city government, according to the city's most recent five-year plan.

But none of the above guarantees an easy budget.

First, the School District is preparing for a deficit of at least $430 million, fueled by the loss of $234 million in stimulus aid used for operations.

Although the School District budget is separate from the city's, the district's problem could land in the city's lap. The district raises about $600 million each year from its share of property taxes, and district and school advocates have approached the city about raising an additional $54 million by increasing the school share of property taxes from about 55 percent to 60 percent.

Nutter and Council may be confronted with the option of finding the $54 million in the city budget or watching cuts erode the progress in academic achievement that the mayor and a number of Council members have made part of their platforms.

The end of stimulus funding is also behind other gathering clouds for the city - probably cuts, possibly significant, in state and federal aid. In addition, three out of four major labor contracts remain unsettled. Only the Fraternal Order of Police is under contract; the city has appealed a recent arbitration award to the firefighters union. The two nonuniformed unions are not close to agreement on contracts to replace those that expired in July 2009.

The city expects to receive a total of $730 million from the state and federal governments for the year ending June 30, 2011: $575 million in state aid and $155 million in federal aid.

Most of the state money - $371 million - goes to the Department of Human Services, along with $86 million for casino-funded wage-tax relief and $60 million in pension aid, according to Dubow.

Though much of that aid is directed by formulas in state law, Gov.-elect Tom Corbett has said he won't raise taxes to address a deficit of at least $4 billion. A Republican-dominated legislature may be sympathetic to amending those formulas to achieve savings not just in Philadelphia, but across the state.

City Controller Alan Butkovitz released a report in November that detailed the potential effects of state cutbacks, particularly without Ed Rendell in the governor's mansion and with State Rep. Dwight Evans (D., Phila.) deposed from his seat as ranking Democrat on the House Appropriations Committee.

Butkovitz referenced comments by one Republican legislator who said the budget should return to 2005-06 levels, when Philadelphia received $177 million less from the state. A 10 percent cut would be more than $57 million from the general fund.

"I think this is going to have a more harmful effect on Philadelphia than the tanking economy, because the political will was there to try to lessen the impact on Philadelphia," Butkovitz said.

In preparation for the unknown, Donald Schwarz, deputy Philadelphia mayor for health and opportunities, said he was preparing a budget based on state and federal contributions similar to those of the current fiscal year, as well as several contingency spending plans in which those contributions, mostly in the form of grants, are cut.

"I have confidence the state will do responsible budgeting," Schwarz said, "and will respect the hard work we've done to be efficient, and . . . they will try to work with us to maintain as much as we can, because we don't have a whole lot of fat."

But State Rep. Dennis O'Brien, one of two Philadelphia Republicans now part of the House majority, predicted Corbett would not be able to cut his way out of a $4 billion hole. O'Brien noted that much of the state aid goes to research hospitals and other medical-related programs, such as transportation for dialysis patients. He said Thomas Jefferson University Hospital's emergency room, at risk during last year's budget negotiations, could be among the first to go, which he regards as intolerable.

"I think a reassessment of the realities is in order," O'Brien said.

But the other Philadelphia House Republican, John Taylor, said his caucus appeared "firmly dug in" against tax hikes. He predicted drastic cuts this year.

"I think there's going to be a slash-and-burn mentality, and there's going to be a lot of pain," he said. Taylor said there may be hope in 2012, when legislators will have felt the wrath of their constituents resulting from those cuts.

Nutter refused to discuss scenarios of state cuts he termed hypothetical. And Dubow reiterated that no new forms of revenue, from the soda tax that failed last year to fees on nonprofits, were being contemplated.

Goode said any cuts in state or federal aid were likely to force the mayor and Council to make tough calls. But tax increases would be unlikely, he said.

"Both the loss of stimulus funding and the anticipation of budget cuts may force us to make decisions about specific areas," Goode said, "as opposed to broad revenue decisions in general."


Contact staff writer Jeff Shields at 215-854-4565 or jshields@phillynews.com.

Inquirer staff writer Marcia Gelbart contributed to this article.

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