The biggest problem facing Philadelphia wasn’t much talked about during the recent mayoral primaries. And when it did come up, the enormity of the problem was perhaps best reflected in the way observers strained to find a metaphor appropriate to its gravity: “The blob that threatens to eat everything.” A “boa constrictor” strangling the city budget in its coils.
The man whose job is to oversee Philadelphia’s budget on behalf of the state favors a global warming metaphor. “I think that captures the slow, subtle way it takes effect,” says Rob Dubow, executive director of the Pennsylvania Intergovernmental Cooperation Authority. “The way you could not notice it until it’s too late.”
In fact, Dubow — a quiet, reassuringly reserved man who speaks in the slow, careful cadences of a children’s counselor — did notice, and for the past several years, PICA has been playing the role of Al Gore and asserting its own inconvenient truth: that Philadelphia is facing a budget crisis of historic proportions, one that could not only eclipse the Rendell-era 1992 deficit that brought the city to the verge of bankruptcy, but that will handcuff the next mayor’s ability to deal with the city’s other problems, from public safety to education to high taxes.
That’s probably why none of the mayoral candidates were anxious to talk about it. Who wants to be the voice of gloom and doom? Even Michael Nutter, the reform candidate, wasn’t bold enough to run a Chicken Little campaign and point to a sky that is, indeed, falling as the number one issue.
The crux of the crisis is basic math. This year, the city will spend $710 million more — on pensions, health insurance, debt service, the department of human services, and prisons — than it did when Street first took office, a figure our revenue growth can’t offset.
And there’s no sign costs are going anywhere but up. Pension and health-care costs alone are projected to reach approximately $865 million by 2009, according to the city’s own figures — a roughly $480 million increase from when Street’s first term began. No less an authority than former Ed Rendell chief of staff David L. Cohen — hero of Buzz Bissinger’s A Prayer for the City, which chronicled Rendell’s first term — is sounding an alarm. “As long as the growth of these uncontrollable costs exceeds revenue growth, we’re in danger of another 1992,” says Cohen. “I’d say in three years, that’s what we could have.”
It’s why Michael Nutter today stands on the cliff of his campaign promises — wondering when he will be able to fulfill them.
“We’re not going to know what we’re facing until we get over there and have a chance to check under all the couch cushions and see what we have,” he says. “We made a lot of announcements about plans we wanted to do, but that’s not to say that if the environment changes we can’t adjust. It’s not like we’re going to do all the campaign announcements on the first day or the first month, or that we promised we would. So we may have to look at the timing of what we do and how we do it.”
A mayor in waiting, lowering expectations before he even takes the oath of office? This much we can be sure of: The 2007 mayoral campaign is over. And reality is upon us.
If Philadelphia fooled itself in the past decade or so into thinking that the future is all mojitos and Striped Bass, tax cuts and luxury condos, it’s only because we’re like the drunk who hasn’t hit bottom yet. We haven’t run out of cash. The city’s current five-year plan calls for a $3.8 billion budget in fiscal year ’09, with a projected fund balance — basically, leftover money — of $130.9 million. Those are funds that can be tapped into for emergencies and perhaps some new programs, just like a private citizen’s savings. But that balance, according to Dubow, falls below the five to 15 percent of operating budget recommended by the Government Finance Officers Association.
Think of an individual with the same percentage of his salary in savings. That would equate to a $40,000-a-year wage slave with $1,378 in the bank. That wage slave is just a missed paycheck or two from bankruptcy. And now think about this: Some people, like Cohen, think the actual fund balance may be lower when Nutter takes office in January. In either case, the sum is projected to dwindle — thanks to those ever-inflating uncontrollable costs — to a paltry $53 million before Nutter’s first term ends. That equates to our $40,000-per-year wage slave balancing on a precarious nest egg of roughly $550.
And now consider this: In 1996, during the Rendell administration, the city budget was threatened by a snowstorm that Rendell estimated would cost over $13 million to clean up. No wonder Nutter, now focusing his talk squarely on the single most important problem we face, says, “We are three snowstorms and a couple of bad events” — a refinery fire, further problems at the financially troubled Philadelphia Gas Works — “from a Rendell-type 1992 crisis right now.”
What might be most galling is that we saw this coming. When Rendell left office at the end of 1999, he declared that the city could be back where it had been in two years if it wasn’t careful. And as long ago as 1992, former city controller Jonathan Saidel predicted the city’s pension costs alone would balloon to a ghastly $566 million per year by 2019.
Today, Saidel is a victim of the political culture that not only failed to heed his warnings, but rudely asked him to step out of the recent mayoral primaries so Bob Brady could run as the establishment’s white candidate. “People always want to look for that big, single reason something like this happens,” says Saidel, now an attorney with Cohen, Placitella & Roth. “But that’s not the way it works. Government dies by a thousand cuts. None of them draw that much blood individually, but pretty soon you’re dead.”
At one point, Saidel remembers, the city didn’t want to leave injured employees on workers’ comp, so it put them on a pension, which undoubtedly seemed like a good idea at the time, since it lessened the strain on the operating budget. Floating bonds to pay for expenses provided temporary relief, too. And plying city employees with deluxe pension and health-care benefits also once made perfect sense, since it allowed government to compete for talent with more lucrative private industry.
But health-care costs boomed, and as Cohen explains it, pension funds are somewhat precarious Ponzi schemes by their very nature — pyramids where the contributions made by active employees pay for the retirement benefits of those who came before them. As long as an organization continues to grow, it can meet the obligations of the pension fund. But even with recent staff increases, Philadelphia is still 650 employees down from its ’03 level due to years of personnel cutbacks, exacerbating the problem of the boom in pension costs.
The fix we’re in is likely the toughest Philadelphia has ever faced, for a number of reasons. “It’s easy to tell people there’s a budget deficit,” says Phil Goldsmith, former managing director for the Street administration. “People understand what it means when you say we don’t have enough money to pay the bills. It’s a lot harder to tell people that we have to suffer a lot of pain right now so we don’t end up in a situation where we can’t pay our bills three years or five years from now.”
So just telling the story is difficult. And of course, fixing the problem is even harder. Though the pension and health costs earn the most attention, Philadelphia also faces escalating expenses in the prisons, debt service, and a decaying infrastructure. The budget is already squeezed tight. Why else would the city’s current five-year plan call for police spending to drop from 15.3 percent to just 12.5 percent of the budget by the end of Nutter’s first term, and this from a city in the midst of a murder crisis?
So it will fall to Michael Nutter to address the mistakes of previous administrations. Rendell got the city onto life support, but even he didn’t completely pull benefits packages into line. Street, for the most part, was fiscally responsible. But he did float $295 million in bonds through the Redevelopment Authority for the Neighborhood Transformation Initiative, and he got an additional $150 million for the Cultural Corridors Program, two debt loads that now hang heavily from the city’s figurative neck.
Even worse, Nutter will enjoy fewer cost-cutting options. “All the low-hanging fruit that we found in 1992,” says Cohen, “is gone.”
The dynamic duo of Rendell-Cohen saved $20 million to $30 million just by renegotiating city leases; they pulled in an extra $50 million to $100 million a year through stepping up revenue collection efforts; they also availed themselves of help through PICA, a state agency, to seed $250 million for capital projects and alleviate the city’s $225 million in debt, which is something Nutter won’t be able to do.
Cohen has been our lead tour guide through this story for a reason. He was not only the chief architect of the 1992 efforts to save the city; he remains — as he puts it — “a sick man” when it comes to city government. He is, in fact, so sick that in his off hours from Comcast, where he works as executive vice president, he sat down to plow through the city budget a few months ago. He produced a succinct three-page document in the process, tallying the city’s “uncontrollable costs” and “inflexible budget items,” like legally mandated contributions to the city schools. He arrived at the sobering conclusion that Michael Nutter can really only control 16 percent of the city’s overall operating budget, or $600 million, which must pay for government functions including the recreation departments, Fairmount Park, the Free Library, the Mayor’s office, and the departments of law, housing, finance and commerce.
The bottom line: We are so screwed.
Rather than panic, however, Cohen counsels patience. “I think Michael Nutter has the capability to guide Philadelphia through this,” he says. “And I think that with tight financial controls, he can make some targeted investments to improve city services. But these won’t be day-one, year-one or maybe even first-term improvements. That’s just the position we’re in.”
In the face of this adversity, even as his talk shifts from campaign mode to executive, Nutter remains the man we saw winning the primaries — the über nerd grown up, deft and deliberate, warm and wonkish. Even talking about the greatest challenge he’ll ever face, and arguably the greatest challenge in Philadelphia history, he remains philosophical, and calm enough to down a couple of Mallo Cups at the start of our conversation. That’s got to be a good sign: At least he hasn’t lost his appetite.
Cohen estimates that Nutter will be lucky if the total fund balance is even $150 million when he takes office. Nutter says he’s unsure precisely how much money will remain in the city’s coffers, and he fears that Street is spending on his way out the door. “The concern here is that the Mayor may be on a spree and leave the next mayor with virtually no money,” he says, “which would just be disastrous.”
In mid-October, members of City Council blocked Street from boosting DHS funding by $34 million, questioning the “urgency” of the appropriation. Joe Grace, spokesman for the Street administration, says the next mayor will inherit a newly projected fund balance of $290 million, a discrepancy he explains by saying that various adjustments are being made, including a bigger increase in revenue than originally projected. “We have run a fiscally responsible government from day one until these final days,” he says. “The bond issues made for both NTI — which has increased property values in neighborhoods that have only known decay — and the Cultural Corridors program are economic engines and the Mayor’s legacy.”
If these revised projections come to pass, they’ll prove a help in the short term but will really only stave off the worst for an extra year or two.
Still, in spite of the known challenges, unknown variables, and elbowing for wiggle room on his campaign platform, Nutter sounds committed to his promises.
The 500 new cops?
“We never promised to hire them on day one, but I firmly believe we need more police on the street,” says Nutter.
He plans to personally ask some officers who put in their retirement papers to reconsider because their city needs them — a move that would create a kind of Kennedy-era vibe around the Philly PD while also saving recruiting costs.
The slow five-to-seven-year abolishment of the gross-receipts portion of the business privilege tax, and the drawback of the wage tax to a level of 3.25 percent? “We would be sending the absolute wrong message to the city, the state and the country — if not the world — if we were to stop a fiscally responsible wage and business tax reduction program,” says Nutter. “It would be counterproductive and destroy any goodwill in the marketplace.”
Besides, so far the city’s tax cuts have succeeded in growing city revenue — and all the experts interviewed for this story agree that any real, long-term answer to Philadelphia’s fiscal crisis must include an increase in revenue.
Nutter is working with a team to prepare a preliminary spending plan even before he gets into office. And the need for a really big, rousing speech is apparent to him — an election-night or inauguration-day address that will serve as both a warm hug and a bracing cold shower. “Everything’s on the table,” says Nutter. “There is going to be shared pain. We need to engage in a very public process, with total transparency, to discuss what kind of city Philadelphia is and is going to be.”
In addition to working out a come-to-Jesus budget, Nutter will face negotiations with the city’s four largest unions — police and fire, who can’t strike but usually win lush contracts in mandated arbitration, and blue- and white-collar workers, who can strike but don’t have the benefit of an arbitrator. Some observers think the new mayor will have to dig in: “Nutter needs to be prepared to sustain a strike, because he’s only going to get one bite at the apple,” says Phil Goldsmith. “This first contract he negotiates is when he’s going to be at his most powerful politically.”
“I won’t get into my mind-set about that,” responds Nutter, though from the stoic look on his face, he doesn’t appear to disagree. The two unions that can strike — districts 33 and 47 — failed to return calls requesting comment. And Nutter knows he’ll face a credibility deficit if it’s perceived that he didn’t do enough to talk about these problems while on the campaign trail. But he believes he campaigned responsibly. “It’s not like we didn’t talk about the budget,” says Nutter. “We did.”
Nutter did release a budget on his website and to the media that addressed all of these problems directly. But what might be most important going forward is that the man Philadelphia saw on the campaign trail — the man whose ego seems to be subsumed by a desire to reformgovernment — is precisely who we need.
This past spring, before the primaries, he attended a forum of candidates for District Council 33, the approximately 10,000-member union representing the city’s blue-collar employees. Just prior to that meeting, City Council had passed a provision to provide cost-of-living adjustments (COLAs) to city pensioners. Someone in the audience asked the candidates to comment. “Of course,” says Nutter, “all the candidates started talking about how they support COLAs.”
But when his turn came, Nutter didn’t offer the same answer. “I authored a bill supporting a cost-of-living adjustment when I was on Council in 1999,” Nutter said. “But it’s not fiscally responsible now.”
He knew his words were politically unwise but felt incapable of answering any other way. Some people approached him afterward, he says, and thanked him for being honest. Today, he recalls the moment with a kind of shrug. “If you’re being honest,” says Nutter, “you can’t support COLAs now.”
Such honesty helped land Nutter a seat atop City Hall. But what he will encounter there will require more than a desire to do the right thing.
Because this isn’t 1992.
And Philadelphia will require more than a prayer to be saved.