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• The Budget Address We Need to Hear: Ten Issues Philadelphia Must Face

I.     CONFRONT THE PENSION BEAST
II.    SHRINK GOVERNMENT AND ITS HOLDINGS
III.   VIGOROUSLY EMBRACE TECHNOLOGY
IV.   GET FINANCIAL HELP FROM NON-PROFITS
V.    HOLD PUBLICLY-FUNDED NON-PROFITS ACCOUNTABLE, TOO
VI.   MAKE SUCCESS (AND FAILURE) CLEAR
VII.  IMPLEMENT MEANINGFUL TAX CHANGES
VIII. KEEP MINOR OFFENDERS OUT OF JAIL
IX.   REDUCE LEGAL COSTS
X.    THEY ARE OUR KIDS

MY FELLOW PHILADELPHIANS

MARCH 2011

 
Philadelphia is out of lifelines.
 
The financial crisis that is strangling every state in the nation will mean far less support from Harrisburg for Philadelphia.  Within days, when the governor delivers his budget address, we will know just how badly this city’s funding will suffer.
 
Concern over the ballooning national debt almost certainly means that less money will be coming from Washington, too.  
 
In its effort to maneuver through bad economic times, Philadelphia already has imposed significantly higher property and sales taxes on its taxpayers.
 
Our choices now are limited. We can hide like those Wisconsin politicians.  Or we can create a real 21st Century government in Philadelphia.
 
We can even do this in an election year.
 
It is tempting – especially this year -- to just make the budget numbers balance, to embrace the status quo, to declare that we have sufficiently adjusted  to  “the new normal” and to park our aspirations.
 
Instead, we must fundamentally remake city government and rethink its policies so Philadelphia can thrive – not merely survive.  The recession might be loosening its grip, but, in a far more competitive world, Philadelphia must be in a position to exploit the economy’s rebound. 

Instead of arguing endlessly over one controversial pension benefit – the DROP program – we must decide how to pay promised pension benefits for current and retired city workers and how to provide reasonable benefits to future workers while substantially reducing the cost.

We need to shrink government smartly, even at the cost of some city services we came to expect in more extravagant times.

We need a tax structure and a mindset that will attract jobs and businesses.
 
We must make the public schools more successful, so there are competent workers for those new jobs and so the social cost of academic failure can begin to drop.
 
Big, hairy problems can escape the attention of politicians and the media in an election year. Or they can frame a healthy debate.
 
Philadelphia has plenty going for it, as we all know. But we shouldn’t hide from some of its unpleasant realities either: 
 
     - Philadelphia has the second highest unemployment rate of the 10 largest cities in the nation.
     - Philadelphia is the third poorest of the 10 largest cities, with 24% of its population below the poverty line.   
     - More than a half-million working-age Philadelphians are barely literate.
     - Almost four out of 10 public school kids who enter 9th grade never finish.
     - No major U.S. city has a higher rate of violent crime.  
 
These are tough facts to face. But only by confronting them will we drive real reform, change the city’s trajectory and find the courage to touch our sacred cows. In Philadelphia’s insular culture, there is no cow that isn’t sacred to somebody.
 
There is good news. After three years of intense pressure on the budget of every public and private organization in the country, few of the budgetary fixes need to be invented from scratch or devised by high-priced consultants.
 
Necessary reforms are happening in other states and cities. Others ideas have been identified here by commissions, study groups, transition teams and private sector leaders.
 
Philadelphia must adopt the best ideas and move – no, run – forward. 
 
People are angry – in Philly and just about everywhere else. The shareholders who own this government want transparency, accountability, honesty and frugality. They want solutions and they do not want sugar-coating.
 
So here goes.

CONFRONT THE PENSION BEAST

Philadelphia is due to pay $602 million into the public employees’ pension fund in the final year of the city’s current five-year plan. This is $58 million more than it will take that year to operate the entire Philadelphia Police Department.
 
Imagine what Philadelphia could do with even some of those dollars.
 
The city’s fiscal overseer, the Pennsylvania Intergovernmental Cooperation Authority, calls the city’s growing debt to the pension fund – according to the latest figures, 55% or about $4.9 billion short of its obligations – the city’s “greatest long-term fiscal challenge.” 
 
Benefits for government workers were improved when salaries in the public sector lagged behind those of private sector employees. The big gap doesn’t necessarily exist any longer, but the costly benefits for government employees certainly do. Most private sector perks – especially old-style pensions – have disappeared. 
 
Philadelphia has to make this call: Should essential services for all taxpayers be slashed in order to honor pension promises to current workers and retirees? Or should pensions be adjusted – at least for future city workers?

Given the Philadelphia Housing Authority’s recent troubles, it is hard to view PHA as a model of anything. But that embattled agency reached an agreement with the Building and Construction Trades Council on a new pension plan for future union employees. Why was the deal made?  According to Council President Patrick Gillespie, the $80 million gap between what’s in the PHA pension fund and what it can pay out offered no other alternative.

Taming the pension beast won’t be easy, but there are ways to start: 
 
     - To set an example, current and future non-union city employees should move from the existing pension program to a 401(k)-type retirement plan. Most of these “exempt” city employees are at the top rungs of city government in salary and authority.  
 
     - Settle the contracts between the city and its non-uniformed employees, which have been unresolved since June, 2009. And, in the meantime, make it clear to citizens – most of whom have seen their own private sector benefit plans change – what reform proposals each side has on the table and how the contracts must change in order to fix the pension mess.      
 
     - End the controversial DROP program for city employees.  Though the cost is in dispute, DROP clearly has been misused. At any price, it places further pressure on the ailing pension fund and it has seriously eroded public confidence in government.
 
     - Sell off whatever city assets can be sold responsibly, not just to shrink government, but to reduce the workforce and move the retirement cost associated with these workers off the backs of the taxpayers.

City employees and the political leaders who want their votes have to realize that self-interest must finally give way to reality.

SHRINK GOVERNMENT AND ITS HOLDINGS

Philadelphia has 40,000 vacant properties, including 12,000 that are owned by the government. The pace of converting them to productive use is agonizingly slow.

This is not because nobody’s paying attention.

“No single entity is responsible for acquiring, assembling and disposing of vacant parcels….or for thinking about the entire inventory of parcels and making strategic land use decisions,” a recent report concluded. Vacant properties are owned by the city’s Department of Public Property, the Redevelopment Authority, the Philadelphia Housing Development Corporation and the Philadelphia Housing Authority. 

A better system of disposing of these properties could generate $35 million in tax revenues and save $20 million now spent to maintain them.

The problem of vacant lots is just one tiny example of government that must be restructured.

The city owns too much property. It has too many agencies doing similar things. The outcry over library branch closings a few years ago probably fueled the tendency to play it safe.

Transforming government is a complex exercise. But Philadelphia can start by: 

     - Conducting honest evaluations and performance reviews of every city facility – especially those that are underutilized – and every city-funded program. This has to include city schools, which have 70,000 open seats. Programs and facilities that fall short should fold or be sold.

     - Reducing the 22,000-person workforce even further. Somewhere between 1,200 and 1,600 job slots have been stricken from the city’s organization chart in one way or another, but that might not be enough. Phoenix – the U.S. city closest in size to Philadelphia – has reduced its full-time workforce by 2,100 positions. Phoenix is about to eliminate 546 more positions, making the city’s workforce the smallest in over 40 years.

     - Selling government-owned assets, with the proceeds going to help fix the pension mess.  We can begin with smaller targets, like the well-located Roundhouse or parts of the Philadelphia Parking Authority, and then consider bigger ones, like the city-owned gas works or the airport.

     - Taking every opportunity for consolidation. The creation of the new Department of Parks and Recreation shows it can be done. Does it make sense to have a Water Department and a Water Revenue Department – one reporting to the Managing Director and the other to the Finance Director?

As evaluation and restructuring happens, the public has a right to know what our plans are and how and whether they are being accomplished. Without that information, there is no way to learn lessons that can be applied in the future.
For instance, government now has a chance to demonstrate that it places a high value on transparency as it considers changes involving the sheriff’s office. 




Last year at this time, Philadelphia seemed to be on its way to implementing a consolidated across-all-of-city-government technology plan to streamline operations, increase productivity and bring technology functions under one roof. 
 
The price tag is big: $120 million over six years.  The long-term pay-off for Philadelphia’s government, for business and other taxpayers is supposed to be even bigger.
 
The taxpayers deserve to know that technological improvements are progressing, how much the city plans to save and whether those savings are being realized.
 
When it comes to technology, Philadelphia needs to be a leader. Utah’s chief information officer brought 1,000 workers under his direct control, reduced staff by 20 percent, decreased the state’s data centers from 35 to two, cut the number of servers from 1,864 to 591 and upgraded all of them. Utah’s web portal offers 750 services online. The annual savings is $4 million.
 
In February, 2011, New York City launched a new digital mapping system – apparently the first of its kind – to track complaints and requests coming into the 3-1-1 call center in real time. The city’s deputy mayor of operations said: “The more people that look at the data, the more likely they are to find some way that we can effectively resolve [problems].” 

The technology story is now murky in Philadelphia, where the architect of the city’s transformation initiative has just quit government. The necessary steps are reasonably clear:

     - The strongest possible successor to Chief Technology Officer Allan Frank must be recruited and must report directly to the mayor.  
 
     - The city’s new Advisory Board on Technology, which Frank will chair, must be guaranteed influence.

     - Because of the intense national competition for information technology professionals, the new CTO and his or her key aides have to be paid the going rate and, if necessary, exempted from the city’s residency requirement. Philadelphia needs to do what it takes to get the best talent.    




Philadelphia loves and needs its big non-profits. And we need them to pay a greater share.
 
The property owned by its big universities, hospitals and religious institutions – property which is, by law, exempt from the real estate tax  –  represents more than 10 percent of the city’s total property value. That percentage is larger, by far, than other big cities in the country.
 
In 2009, the market value for all tax-exempt property owned by non-profits was estimated at $12.4 billion. If the current property tax rate were applied to the assessed value of these properties, it would bring in nearly $360 million. 
 
Asking non-profits to make voluntary payments to generate revenue for the city is not new.
 
In 1995, 46 city non-profits agreed to participate in a voluntary PILOT – Payment in Lieu of Taxes – program to bring in $9.4 million annually. By 1996, PILOT contributions fell to $8.8 million; by 2001, payments dipped to $800,000. By 2009, only 17 non-profits were contributing around $687,000, with a retirement community in Roxborough topping the list of contributors with a $250,000 payment.
 
The non-profits bring plenty to Philadelphia’s economy. That truth – and their influence – make it difficult to pry more voluntary contributions loose. 
 
Boston is doing it right. In fiscal year 2010, Boston’s voluntary PILOT program raised $34 million, including just over $2 million from Harvard and $1.8 million from Massachusetts General Hospital, which is located in the heart of Boston.
 
Philadelphia can help itself by creating a voluntary, comprehensive and far more successful PILOT program than it has today.

HOLD PUBLICLY-FUNDED NON-PROFITS ACCOUNTABLE, TOO

Non-profits that receive city money can be kept on the payroll too long. Too often, the reason they survive is because of their ties to public officials.

Over a 30-year period, an estimated $100 million went to Germantown Settlement, an organization that was supposed to deliver social services and build low income housing. A judge finally killed off the group, which was protected by powerful politicians, after it ran up $16 million in debt and failed miserably at running a charter school.

Philadelphia – and the state – must make public the ties between officials and non-profits and reveal any potential conflicts of interest.

MAKE SUCCESS AND FAILURE CLEAR

We have already talked about shedding light on restructuring efforts and on ties between non-profits and politicians. But this should be the beginning of a whole new era of openness.

Despite tough times – or perhaps because of them – more and more cities are improving the information they provide to the public about how they spend taxpayer dollars, especially on their websites.

Even Pennsylvania’s General Assembly is seriously considering putting details of government spending online – including information on state employees’ salaries, overtime and bonuses.

No big city does a perfect job making spending and performance matters transparent, but Chicago, New York and San Francisco are leading the way.

In Philadelphia, by contrast, spending information is splattered over multiple documents, including thousands of budget materials only a financial wizard can decipher. Philadelphia’s website does not seem to reveal even the number of employees the city has.  

Philadelphia can help build faith in government by publicly identifying priorities of every department, linking them to both budget goals and actual spending and reporting results. Then – especially when elections roll around – taxpayers can judge performance for themselves.

IMPLEMENT MEANINGFUL TAX CHANGES

The city’s tax structure has been studied enough. It is clear that it is complicated, unfriendly to business and overly-burdensome to residents. 
 
Another thing is clear, too, from all the past research. The places that are successful in attracting businesses and jobs are the ones that have removed disincentives caused by their tax structures and by government itself. 
 
As tax revenues improve with a healthier economy, Philadelphia can spend that money. Or it can invest in tax reductions that make Philadelphia a more attractive place to do business.
 
A good case study is the recent battle over proposed changes to the Business Privilege Tax.  Promises to enact some changes in business taxes followed a fierce and valuable debate about tax reform. But there has been no visible sign of action.
 
Everyone agrees that this city taxes too much. Perhaps the wage tax is the best example. Everyone who works here pays it….and hates it. It drives businesses and residents away and stops new ones from coming.
 
The wage tax was dropping – at a snail’s pace – and then the cuts were frozen.  It is time to adopt even more ambitious reductions in the wage tax.
 
When it comes to property taxes, the taxpayers are footing the bill for a system they have no faith in. (And, of course, they are paying 10 percent more than they did last year.)
 
Philadelphia must dedicate itself to quickening the adoption of a trustworthy system for assessing residential and commercial properties – to replace one that was peppered with favoritism and incompetence – even if that requires greater investment.  A credible assessment system is likely to yield the mixed blessing of higher taxes and greater revenue.
 
Regardless of the financial impact, however, Philadelphians will know fundamentally flawed parts of city government can indeed be fixed. 




Philadelphia’s prison population is steadily declining, but the prison system still ranks among the most costly items in the budget – $233.1 million in this fiscal year. But the cost is expected to start to climb back up. Up is the wrong direction.
 
Philadelphia must bring prison costs down by investing in programs to keep non-violent and minor offenders out of jail. 
 
Now, some private dollars are being used in Philadelphia to replicate San Francisco’s “Back on Track” program. It is designed to provide education, find a job and give other support to 18-to-30-year-olds convicted of low-level drug offenses.
 
Over a two-year period, fewer than 10 percent of the “graduates” of San Francisco’s 12-18 month BOT program returned to jail. It costs $5,000 to place one offender in BOT – seven times less than the $35,000 it costs taxpayers to house a prisoner for a year in Philadelphia.
 
It is time for this city to put its money behind more programs that seem to work and are cheaper than incarceration.




Philadelphia spends a lot of money on private lawyers. The costs are spread among many departments and agencies. For instance, Philadelphia spent $32 million to settle lawsuits against the Police Department over the last three fiscal years and the number is likely to rise.
 
In tough economic times, some cities are attacking high legal bills. For instance, Chicago reduced the number of lawsuits against police and saved several million dollars, by bringing cases alleging police misconduct to trial rather than settling them. Chicago pays a flat $35,000 fee, plus a $15,000 bonus for a win, to law firms willing to handle cases involving damages below $100,000.

The result is that nearly half the plaintiffs dropped their cases. Chicago’s Law Department calls the results “nothing short of astonishing."

Any discussion of legal costs naturally leads to questions about bringing down the costs of all city contracts, particularly those outside the city’s competitive sealed bid process. 

In the wake of troubling issues surrounding the recent award of no-bid contracts – by the School District of Philadelphia, the Supreme Court of Pennsylvania and Pennsylvania government, among them – Philadelphia must conduct an evaluation of its own non-competitively bid contracting practices. President Obama, Chicago Mayor-Elect Rahm Emanuel and Pennsylvania’s Auditor General Jack Wagner are calling for similar reviews.

There are several reasons for reviewing non-bid contracting practices, including assuring the public that political influences or personal relationships do not enter into award decisions, making sure that costs are as low as possible without compromising on quality, and guaranteeing the participation of minority-owned businesses. 

Professional services firms and other city vendors should also be asked to pitch in. At the urging of the mayor of Phoenix, 120 businesses – including law firms, architects and consultants – reduced their invoices to the city by 3% this year. An estimated $785,000 has been saved.




It has been more than eight years since the state took over the city’s public schools.  As with other state takeovers – including the Philadelphia Parking Authority – the time comes to ask whether the unnatural arrangement produces better results.   

Philadelphia’s Board of Education was killed off in a bargain that anticipated massive additional state funding for Philadelphia’s schools.  Today, the schools are overseen by a largely anonymous – and hard-to-hold-accountable – School Reform Commission. The state appoints three of the five commissioners.
 
What about the other end of the deal?
 
Aid to education will plummet in the next state budget – reportedly by $1 billion state-wide. Philadelphia’s schools face up to a half-billion-dollar deficit.
 
Beyond accountability – which wasn’t perfect under the system that existed before the state takeover either – there are good business reasons to think about a return to local control.
 
City Hall and the School District’s mammoth headquarters sit six blocks apart. But there is too little progress on plans for the city’s $3.8 billion bureaucracy and the School District’s $3.2 billion bureaucracy to identify joint savings or reap the benefits of joint purchasing. Their budget deficits alone should provide a powerful incentive for the city and its schools to come out of their separate worlds and collaborate.
 
There are longer-term financial incentives. To nobody’s surprise, high school dropouts have a much greater probability of committing crimes than those with more schooling. Who pays the cost of operating Philadelphia’s prisons? Philadelphians do.

And there is a larger reason, of course.
 
There are almost 200,000 kids in Philadelphia’s public and charter schools. This city has no greater responsibility than to make sure they receive an education that can propel them as far as they are able to go.




Why should the city even consider something as difficult as re-taking responsibility for the troubled schools?
 
Why should we do any of this other hard stuff?
 
Because we are expected to lead. Expected to innovate. Expected to cooperate.
 
It is the deal we struck with the voters.
 
The budget we begin to fashion now covers a year that begins on the first of July. It is the first year of the next 5-year plan for the city.
 
If our budget represents mere numbers, consider it a failure.
 
It should be the beginning of a five year effort to make Philadelphia a place where jobs multiply and the schools actually work.
 
These are ambitious goals. But to quote Niccolo Machiavelli, a politician who has always gotten a bad rap, “Make no small plans, for they have no power to stir the soul.”
 
Why should we set to work to aggressively shape Philadelphia’s future?
 
Because we must.







The information contained in this Budget Address comes from many sources, both in Philadelphia and across the country. 

For understanding complex issues surrounding the pension crisis and the city’s budget, we relied heavily on reports and analyses prepared by the Pennsylvania Intergovernmental Cooperation Authority. Articles appearing in The Philadelphia Inquirer and Philadelphia Daily News were especially helpful in providing background research and factual data.

Materials available on Philadelphia government’s website were also useful, in particular FY2011-FY2015 Five Year Financial Plan, with Budget Revisions.  

Other valuable resources include, in no particular order: “Thinking Beyond Today: A Path to Prosperity,” Mayor’s Task Force on Tax Policy & Economic Competitiveness in Philadelphia (2009); The 2003 final report of the Philadelphia Tax Reform Commission; “Vacant Land Management in Philadelphia: The Costs of the Current System and the Benefits of Reform,” November 2010; “Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests,” Lincoln Institute of Land Policy, November 2010; Fiscal Year 2011, Operating Budget Testimony, Philadelphia Board of Revision of Taxes; 2010 Accomplishments Reports, Utah Department of Technology Services; National Summit on 21st Century Literacy, Philadelphia 2011; Neighbor Scout Crime Rate Statistics; Kids Count Data Center, The Annie E. Casey Foundation; Crime in the United States, Federal Bureau of Investigation; GOVERNING Magazine and governing.com; Philadelphia Public School Notebook; The Arizona Republic; “Taylor Made: the Cost and Consequences of New York’s Public-Sector Labor Laws, Manhattan Institute for Policy Research, October 2007; www.backontractsf.org; Los Angeles Times, City government websites: Boston, New York City, Los Angeles, Phoenix, Chicago.  

Several reports from The Pew Charitable Trusts provided important insights: “Local Jails: Working to Reduce Populations and Costs,” November 2010; “Philadelphia – The State of the City – A 2010 Update,” March 2010; “Philadelphia’s Crowded, Costly Jails: The Search for Safe Solutions,” May 2010.

Finally, we appreciate the input from many members of the Committee of Seventy’s Board of Directors.

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