Council President Anne C. Verna
Members of City Council
July 1, 2004
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July 1, 2004
Council President Anne C. Verna
Members of City Council
Dear Council President Verna and Members of City Council,
Philadelphia is undergoing a remarkable renaissance. We are witnessing the production of market rate housing in this city unlike anything we have seen in decades. New housing is being built in Center City, along our waterfronts, and, yes, in our neighborhoods. There are major new retail developments under construction in South and Northeast Philadelphia that will add jobs and convenience for our residents. New and exciting restaurants open every week as we solidify our place as one of the leading culinary cities in the country. Our tourism and business marketing efforts and new state-of-the-art stadiums are generating favorable and well-deserved national exposure for our city. And we are on the threshold of our first new office tower construction in over a decade; construction that will result in new jobs in Philadelphia. These are not the signs of “a dying city”, as some of the proponents of unaffordable tax reductions would call their own home. These are the signs of a great city that is changing and renewing itself.
Everyone recognizes the importance of a competitive tax structure. However, the Home Rule Charter assigns to the Mayor responsibility to protect the financial stability of the City and provide essential City services. The Tax Reform Commission urges that tax reductions be paid for through reduced expenditures and the increase of other taxes. Business and wage tax reductions of the magnitude proposed by Bill Nos. 040607 and 040608 approved by City Council would result inevitably in an unfair “shift” in tax burden to the property tax payers. For example, if half of the tax revenue lost could be made up with service cuts and half through increases in the property taxes, revenues from the property tax would have to increase by over 70% by FY 17. The City cannot afford the $3 billion tax reduction program proposed by City Council in addition to the tax reduction program that the Administration already proposes. Therefore, I am returning herewith as disapproved Bill No. 040608 passed by the Council on June 21, 2004. I have approved Bill No. 040607, the wage tax reduction bill and Bill No. 040256 which would increase the parking tax. I am returning the Operating Budget, Bill No. 040601, also passed by the Council on June 21, 2004, with a line item reduction in order to balance the budget, pursuant to my authority under the City Charter.
Council President Anne C. Verna
Members of City Council
July 1, 2004
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The Original Five-Year Financial Plan I transmitted to you on March 18, 2004 included $375 million in tax relief and embraced fifteen of the Tax Reform Commission’s recommendations, in spite of that structural deficit, because of the importance of affordable tax relief and reform. I also pointed out how the challenges of the Philadelphia Gas Works had forced the Administration to project expenditure and service reductions beginning in FY06, with personnel reductions for most departments accounting for the elimination of 723 positions in FY06. The Revised Five-Year Plan that I submitted to you on May 19th budgeted for 2,273 fewer General Fund positions in FY07 than in FY03, partially reflecting the reduction of well over 850 filled positions in the past year due to the effects of the DROP, attrition, the City’s hiring freeze and modest layoffs. Our best efforts to improve productivity, innovate, and realign our services can not guarantee that our existing levels of service will be maintained with a workforce reduction of that magnitude.
The wage tax and business tax bills I am returning today have been characterized as compromise tax reduction measures because they cost less over the FY05-FY09 Five-Year Financial Plan than the original tax bills passed by City Council. It is true that the wage and business tax reduction bills cost $160 million over the life of this Plan in addition to the cost of the reductions that the Administration is already proposing, compared to the $339 million cost of the original bills. However, it is also true that the wage and tax reductions bills returned to you today accelerate dramatically after this Five-Year Financial Plan. These reductions, if signed into law for the next thirteen years, will cost $2.4 billion after this Plan is over, and over $3 billion factoring in the cost of Bill 040397, which will provide wage tax relief to low-income workers beginning in FY10. I do not believe that the next Mayor, and the Mayor after that, should face the crippling task of accommodating $3 billion in tax reductions after FY09, tax reductions that dwarf the ones we have wrestled with in this year’s Plan. The three tax reduction bills approved by City Council would create a permanent and widening structural deficit that would place the City in a budget crisis each and every year, beginning with next year’s Plan.
The amount of additional tax cuts the City would have to absorb into future Five Year Financial Plans is stunning:
Additional Tax cuts
FY 06 to 10 $113.28 million
FY 07 to 11 $182.21 million
FY 08 to 12 $254.89 million
FY 09 to 13 $332.20 million
FY 10 to 14 $415.77 million
FY 11 to 15 $486.50 million
FY 12 to 16 $531.63 million
FY 13 to 17 $548.00 million
City Council’s Proposed Five Year Financial Plan and aversion to service reductions reflect the difficulty of the challenge in implementing even $160 million in tax reductions over five years, much less $3 billion in tax reductions between FY06 and FY2017. City Council introduced a resolution on June 21st, 2004 that mathematically balances the FY05-FY09 Five-Year Plan and the $160 million five-year cost of the amended tax bills by including a “supply side” revenue effect and by providing for across-the-board personnel cost reductions of 1.5 percent in FY06. Budget balancing tactics that reflect a willingness to “talk the talk” but not “walk the walk”. To fund the Administration’s $375 million tax reduction program, I proposed rightsizing recreation department resources, revamping fire department engine and ladder company deployment, and eliminating funding for nonessential City services. Council has voted twice to restore funding to seven departments and fourteen programs in the FY05 budget. Restoring funding to some programs this year and then cutting revenues and spending across the board in the next year are inconsistent and illogical. While tax reductions will have a salutary effect on the City’s economy, expert after expert has warned that tax cuts alone will not pay for themselves. They must be coupled with high quality services and sound budgetary practices as well. At a time when the City is engaged in negotiations or arbitration with three of the City’s four labor unions, balancing a budget with supply side revenue and unattainable across the board reductions in personnel is not a prescription for tax reform and economic rejuvenation for our City. It, however, is a perfect prescription for credit rating down grade, cash flow crisis, crushing structural deficits, and deplorable city services.
For these reasons, I can not support both of the tax reduction bills passed by City Council. This is not an easy decision, and certainly not a popular one, but I lived through the dark days of our fiscal crisis, and I do not want to squander what we have achieved in the last twelve years by returning to them.
Regrettably, enactment of the parking tax increase is predicated on passage of the entire $3 billion tax reduction package. Because passage of both bills would mortgage this City’s future, I have chosen to veto Bill No. 040608. In doing this, the City will lose revenue from the proposed increase in the parking tax—a $50 million impact on the Five Year Plan. To balance the FY05 Operating Budget and the FY05-FY09 Plan, I have made a $4 million reduction to the Police Department’s Class 100 line item the Operating Budget Ordinance, Bill No. 040601. A version of this bill with my line item reductions is attached.
In addition, I am transmitting to PICA a Five-Year Plan to balance the loss of revenue compared to the Administration’s previous assumptions. Finally, the FY05-09 Five Year Plan also assumes additional Class 100 cuts of 1.5 percent in FY06 for most City departments in addition to the cuts included in the May 20th Amendment to the Plan. This cut would not be imposed across all departments but would be imposed on departments that do not generate the majority of their own revenue through reimbursement revenue from other governments, or through collection of fees, fines, and taxes. It would also not apply to the Fire Department and Prisons.
This process has been long and difficult for everyone involved. In an ideal world we would be able to come together on the serious fiscal challenges facing the City and pass the budget and Five-Year Plan unanimously. Unfortunately, it is not an ideal world. We have limited resources and allocating them inevitably involves dispute, particularly when times are as tight as they currently are. In the coming year the City will determine the cost of its labor agreements. We must be fair with our unions. They deserve small affordable raises and modest increases for their health care costs. We also have promising City supported economic development projects on the drawing board, and we may know with greater certainty if gaming revenues are likely to materialize. I commit to continue to work with the broader community to achieve meaningful tax reform for the residents and businesses of our City.
Sincerely,
John F. Street
Mayor
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