City is sinking under the weight of benefits

Oct. 14, 2007
Tom Ferrick Jr.
For The Inquirer

The biggest crisis the next mayor will face when he takes over city government in January is that there is no crisis.

The city budget is balanced. The tax money keeps rolling in. All outstanding bills are being paid for.

Things are just fine in the $3.8 billion enterprise that is Philadelphia government. So what's the problem?

Let us contrast this moment with 1992, when Ed Rendell first took over as mayor. The city wasn't quite bankrupt, but close to it. We had a dysfunctional government with a budget in the red zone. Deficits loomed. Layoffs were threatened. Wall Street was frowning. The state was grumbling.

With the luxury of a financial crisis, Rendell could go to the people and to city employees and say, in effect: We must change or die. We can't keep doing business as usual.

He used that sense of urgency to force contract concessions from the unions, to shake up government, to make tough decisions that otherwise would have been postponed to another day.

To put it in sci-fi terms, Rendell had to face Godzilla. Michael Nutter is going to have to face . . . The Blob.

You remember that 1950s classic movie, shot in Chester County. A mysterious substance suddenly appears outside a town. Residents ignore warnings about its danger. Slowly, slowly it grows until . . . aaeeii! We're being eaten by The Blob!The analogy comes courtesy of Rob Dubow, a former budget officer in the Rendell and Street administrations, who is now director of PICA, the state board overseeing city finances. 

Dubow knows a Blob when he sees one and has been warning that sooner or later we're going to have to deal with it.

Alas, when people hear sooner or later, they usually circle later and go about business as usual.

The problem (The Blob) is the rising cost of benefits for city employees.

When John Street took office, providing pension and medical benefits to the city workforce cost $380 million a year. For every $100 the city spent, $13 went for these benefits.

This year, pension and medical costs will total $793 million. For every $100 spent by the city, $21 goes for these benefits.

Unless something is done, The Blob will just keep growing. By 2012, the end of Michael Nutter's first term, $25 out of every $100 spent by government will go for benefits.

Aaeeii! We're being eaten by The Blob!The costs of benefits have been rising at a rate higher than that of inflation, and higher than the rate at which the city's tax revenues have been growing.

In the last five years, for instance, while inflation has averaged about 2 percent a year, benefit costs have gone up 13 percent a year.

So, how do you pay for an expense that exceeds your income? Simple. Painful, but simple.

You reduce the costs of the rest of government.

Street has taken money from Streets, Recreation, Finance, Revenue, Fairmount Park, etc. - virtually every department except for prisons and social welfare - and diverted it to feed the benefit kitty.

As a result, when adjusted for inflation, the budget of virtually every city department - with the exception of social welfare - has declined in the last five years.

In other words, to pay its employees' benefits, the administration has been stripping the capacity of city government to deliver services. Over the last five years, it has spent less money for rec centers and road repair and maintenance (down 11 percent). Less for public safety (down 4 percent). Less for the core bureaucracy of city government (down 2 percent).

Where has it gotten money for some of its pet programs? By borrowing it.

In all, the administration has sold $740 million worth of bonds for such projects as the Neighborhood Transformation Initiative (NTI), the sports stadiums and (most recently) for cultural institutions.

This adds $60 million a year in interest payments to the budget each year - until 2027. Twenty years from now, your children's children will be paying for houses demolished for NTI in 2004.

Where did the administration get the extra money to pay for these special projects? In part, by reducing the number of bonds sold for more routine repair and maintenance of city property: bridge repairs, new rec center roofs, major road resurfacing, etc. When John Street took office, the city spent $117 million a year for such maintenance and repair projects. This year it will spend $54 million.

By the way, the City Planning Commission recommends spending $185 million a year for these projects, since letting the city's infrastructure deteriorate is more costly in the long run. It is cheaper to patch a rec center roof for $100,000 today than to replace the whole thing for $1 million five years down the road. That old bridge you fix today won't be the one that falls down five years down the road.

That's the problem with always doing important things later rather than sooner: By the time later rolls around, it can be too late.

Example: You didn't stop smoking when the doctor told you, and you got cancer. Hmmm.

Example: You didn't fix that bridge over the river. Now it's in the river.

Of course, John Street won't be here for the later portion of the proceedings.

By doing nothing about the cost of benefits, by jacking up the city's debt payments, he's left his successor to face . . . an ever-growing Blob.

If the new mayor does nothing, the problem will only worsen. If he tries to do the needed things, which include facing down unions and deciding the city doesn't need to do some tasks it used to do, he will meet political resistance.

It is an exquisite dilemma - and one on which the Nutter administration will rise or fall.

Contact Tom Ferrick Jr. at 215-854-2714 or tferrick@phillynews.com.