Nutter plan: Taxes up, spending down

With his budget and five-year spending plan due to the printer by the end of the week, Mayor Nutter appears ready to call for a temporary increase in property and sales taxes, spending cuts, higher fees for city services, and sharp reductions in spending on employee salaries and benefits.

Combined, Nutter's anticipated budget adjustments - including a previously announced plan to restructure pension payments ($255 million) - total $1.47 billion over the next five years. That would cover the city's projected five-year deficit and provide something of a cushion in the event of continued economic collapse.

According to budget documents The Inquirer obtained, Nutter will propose two two-year tax increases: a 1 percent increase in the sales tax and a 17 percent increase in property taxes.

The budget proposal would avoid mass layoffs, but it nonetheless foreshadows a showdown with city labor unions this summer as their contracts expire.

Some parts of government - including the Free Library, the prison system, Fairmount Park, and City Council - would not face any cuts. But the budget ax would still fall on most departments, with some of the biggest reductions in store for the District Attorney's Office, the city's vehicle fleet, and the Mayor's Office.

"We already got through a billion-dollar hole in the fall," City Finance Director Rob Dubow said, referring to the initial budget deficit, which was closed in November.

"We can't get through a second billion-dollar hole months later without drastically reducing services or increasing revenues," he said. "In essence, one scenario we're considering is increasing taxes to buy those services."

The plan remains fluid. The administration has backup options - which consist principally of massive cuts, including extensive layoffs of police officers and reduced trash collection - in the event tax hikes do not go through.

City Council will also have its say, after Nutter presents his budget next Thursday. Interviews with seven Council members yesterday suggested the mayor will not have an easy time of it.

"I didn't get the sense Council members are interested in raising real estate taxes at this point," said Democratic Councilman Darrell L. Clarke, the majority whip.

Republican Councilman Brian O'Neill went further, calling a property-tax hike "unconscionable."

"I'm absolutely opposed to it. I cannot vote for it," O'Neill said.

Nutter will have allies, however.

"I expect to do my due diligence with this budget, but I expect to be voting for it," Councilman Jim Kenney said. Though troubled by the increase in real estate taxes, Kenney said there was little choice.

Council President Anna C. Verna reluctantly agreed.

"If we don't do that, what do we do?"

Harrisburg will also have something of a veto power over Nutter's budget. He needs the approval of state lawmakers to raise the sales tax and to restructure pension payments. Without those elements, Nutter's plan is short $590 million.

Erik Arneson, spokesman for Republican Senate Majority Leader Dominic Pileggi, said Harrisburg would hear Nutter out.

"It is something we are very open to a conversation about," Arneson said of the pension restructuring.

Increasing the sales tax might be a tougher sell, Arneson said, citing concerns that it could drive shoppers away from the city.

But Wharton School professor Robert Inman, who has researched the effects of the city's high tax burden on business in Philadelphia, said the proposed tax hikes might not do much damage to the city's competitive position, so long as Nutter does indeed roll them back after two years.

"As long as they sunset those taxes, and as long as the economy bounces back, then I don't see any long-run damage to the economy as a whole from this strategy," Inman said.

If the increases are not rolled back, Inman said, his research shows they could lead to reductions in home values of about 8 percent, and a 1 percent decline in sales in Philadelphia.

One element of the budget that might convince taxpayers that Nutter will roll back the tax hikes is his budget's head-on assault of pension and benefit expenses, which are the fastest-growing part of Philadelphia's budget.

According to the budget documents, Nutter will try to save $125 million in health-care and pension costs over the next five years, a target that could be achieved only with significant concessions from labor unions.

The mayor is also poised to take a hard line on raises for unionized employees.

Labor leaders said yesterday they would fight both proposals tooth and nail.

"It's extremely unrealistic for him to think that over the five years the employees are going to be the ones to have to give up benefits and raises and everything else to satisfy this budget," said Brian McBride of Local 22 of the International Association of Fire Fighters.

Herman "Pete" Matthews, the newly reelected president of the city's 9,400-member blue-collar union, said AFSCME District Council 33 would make no concessions.

Philadelphia's state-appointed fiscal watchdogs, on the other hand, are pleased that Nutter's budget assumes the unions will make concessions.

"It is a good sign that they have that in there," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which by law must approve the city's five-year plan. "It adds weight to the mayor's statements about the need for changes in the contracts."

Some other highlights of Mayor Nutter's draft budget:

The official $1 billion deficit estimate is actually too low, according to the budget documents. New revenue forecasts peg it at $1.2 billion, due to further anticipated declines in tax collections. Nutter's latest plan would cover the larger deficit and leave the city with about $200 million a year in reserve.

The proposed two-year 17 percent property-tax hike amounts to a 14-mill increase. Although the city splits the tax 40/60 with the school district, the entire increase would go to the city.

Nutter is poised to cut the budget of his own office by $619,000, or 10 percent. Administrative budgets are down almost across the board: the Managing Director's Office budget would shrink by $1.2 million or about 5 percent; finance, down $2.8 million or 17 percent.

The district attorney's budget would be slashed by about 12 percent, or $4 million a year. Nutter seeks $4 million in annual savings from city courts as well, but that represents just 3.5 percent of the First Judicial District's total spending.

The plan would cut $3 million per year from the Fire Department budget, or about 1.5 percent of its total spending. The plan anticipates $5 million a year in new revenue from higher ambulance fees.

Police overtime would be reduced by $1.8 million, and the force vehicle fleet would be pared for total savings of $4 million a year, or less than 1 percent of all department spending.

The Streets Department is among the hardest hit, with cuts totaling about $16 million a year, or nearly 13 percent of the department's budget.

Public health will introduce fees at its health centers.

Recreation will trim $575,000 a year, or less than 2 percent of its total annual spending.

The modestly funded City Planning Commission, which Nutter is trying to revive, would have its budget slashed by nearly 15 percent, largely by leaving vacant positions unfilled.EndText