Thank you, Councilman. 98 10/21/08 - FISCAL STABILITY - RES. 080603 Ms. Scott, the response, I guess, to the earlier testimony about my questions on the budget or projected budget as it relates to the workforce, can you -- and you gave some interesting statistics relating to what the proposed contract calls for or revenue set-aside for that proposed contract. Can you as an addendum just add that to your testimony later on and just forward it over to us so we can attach it to what you submitted?
Thank you. Any other questions by members of the Committee or Councilmembers of this witness? Councilman Green.
Thank you, Mr. Chairman. Thank you, Ms. Scott, for coming in and testifying today. Councilman Jones asked the 99 10/21/08 - FISCAL STABILITY - RES. 080603 question I told you last night I was going to ask you, but I think it's very important to note that over the years, the union has been a participant in creating cost savings for the City many times, especially when we had the Productivity Bank, and I wonder if you could spend a minute discussing that and then also talk to us about whether or not you regularly sort of poll the members of your union for ideas or how they come to you and whether maybe we should put a formal process in place for recommendations from members of your union.
Thank you for that question, Councilman Green. I think that the loss of the Productivity Bank is really something that the City should reconsider. One of the things that we have done with the Redesigning Government initiative that we had and unfortunately is really not functioning right now because I think that the resources were 100 10/21/08 - FISCAL STABILITY - RES. 080603 not put into having staff on the City to be able to do Redesigning Government initiatives, that is where the real input from department and membership happens. Unfortunately, the structure of how revenue flows is that when departments save money -- there's very little incentive, if any, for departments to save money, because if they save money, it doesn't stay with them, it goes into the General Fund, and the Productivity Bank was one of the ways that departments could draw on funds that would take them through a period of time in order to do an initiative than in the long run would save the City significant money. And so I think that it would be good to revisit that and start Redesigning Government initiatives. At the present time, the way we get feedback from our membership is, we do it through our union leadership. We have meetings with the members. We have stewards who do shop meetings with the 101 10/21/08 - FISCAL STABILITY - RES. 080603 members. They make suggestions for how to better produce whatever work they're doing. But the Redesigning Government initiative, unfortunately, is really not functioning now, and I think if the City went back to that, there would be a lot of opportunity to save in departments by streamlining operations and having people work in a more efficient way, especially being able to develop -- it's so important to have the City management involved in it, because frequently saving money requires cross department cooperation, and that is something that is not happening if it's limited to just within departments.
Thank you, Ms. Scott. Thank you for your testimony. Oh, I'm sorry. Councilman Jones.
Before you go, Ms. Scott, just a point of 102 10/21/08 - FISCAL STABILITY - RES. 080603 information on your last idea and issue. Does that include that RFP grant-writing group that you mention that might be utilized to go after dollars outside of the General Fund to attract resources here? Is that a part of that think tank?
No. That has not -- unfortunately, I think what's happened, when the City -- the City used to have a central grant-writing unit, and when that dissipated, most of that function, I think, got reverted to departments or departments felt that they needed to do that and so they created their own positions.
Well, some departments. Not all departments. And I think therein lies the problem, because it appears that departments are looking 103 10/21/08 - FISCAL STABILITY - RES. 080603 for their particular stream of funding as opposed to looking on the broad perspective of what funding there is out there. So I think that having it centrally located in the Finance Department or something that would specifically go after grants would be a really good initiative for the City to undertake, and we would certainly be very happy to cooperate in doing something like that.
Well, I want to take you up on that. Mr. Chairman and particularly within this body, as we start to look at opportunities that present themselves, I know, having sat on the other side of that table, that there are a lot of dollars that we leave on the table because we don't have a concerted effort by way of an Administration to go after it, and I absolutely think that working with the labor, working with the 104 10/21/08 - FISCAL STABILITY - RES. 080603 Administration and just knowing where some of these dollars can be found, those are dollars that can help to supplement some of the things that we do every day in a municipality. So if we go after clean water dollars at the federal level to deal with some of our Water Department issues and infrastructure development issues, I think that that can help us in the long term.
Thank you, Councilman. Thank you, Ms. Scott. Our next panel briefly, we have Dr. William Dunkelberg from Temple University and Dr. Ed Schwartz. (Witnesses approached witness table.)
Good morning. 105 10/21/08 - FISCAL STABILITY - RES. 080603
I'm William Dunkelberg. I am a Professor of Economics at Temple University, former Dean of the business school there and Chief of Commerce for the National Federation of Independent Business, which, of course, has me checking on the status of a couple hundred thousand firms every month to see how the small business sector of the economy is doing. It produces about half of the private sector GDP, so it's pretty important, and, of course, it's not on Wall Street, so nobody pays much attention to it up there, but it is pretty important. I listened this morning to the testimony from the Mayor's Office. I thought it was excellent, comprehensive 106 10/21/08 - FISCAL STABILITY - RES. 080603 and appropriately concerned and conservative. So I'll just try to amplify a few things around that. We did have some good news this morning. The leading indicators, the index of leading economic indicators, actually turned up. Six of the ten components were positive. That's the first time in six months that it has turned up, and, of course, that tells you about economic activity out there six to 12 months, but it's nice to see that that part has turned around. The key to what's going to happen to the economy, I think, of the next six months is really dependent -- will really depend on the consumers -- that's you and me -- spending money. I had dinner downtown last night. There's certainly a lot of the money being spent in the restaurants here. You can't get into them. But that can change, of course. So about 70 percent of the GDP 107 10/21/08 - FISCAL STABILITY - RES. 080603 is the consumer. The consumer has misbehaved for a couple years now, which has driven the economy. The savings rate went all the way to zero for a year and a half; that is, we spent every dollar of our after-tax income, saved nothing. The savings rate did go up to about two percent in the second quarter and it will probably go up a little bit more here. That's good news in one way, but the other -- the bad side of that, of course, is it means lower retail sales currently. And it takes a while when the consumer puts money in my bank -- I am the Chairman of a little bank, too, so I do that. When they put money in my bank, it takes me a while to get that money into the hands of a small business person, who is then going to buy equipment or do something to put the spending stream -- put it back into the spending stream. That period can be pretty slow. So we're looking at, I think, a pretty slow period where the 108 10/21/08 - FISCAL STABILITY - RES. 080603 consumer is just not going to be providing a lot of economic oomph to the economy. There is one other good thing that's happened. As you've all noticed, I'm sure, oil prices have fallen dramatically. Looking at the national economy, we kind of use the rule of thumb about $4 billion in a tax change for every dollar the barrel price of oil goes down. So we've gone from 140 down to, say, 70 or 80. So let's say 140 down to 80. That's a huge decline. Sixty dollars times four billion is the $240 billion tax cut, meaning the money is staying here in our pockets and not going over to other political entities or private entities who are taxing consumer spending. So that will be a break there that will certainly help us. The big weakness for the overall economy is manufacturing. A lot of that is driven by the fact that we're not buying any cars. One of the reasons 109 10/21/08 - FISCAL STABILITY - RES. 080603 we're not buying cars so quickly right now is that the leasing companies figured out they can't predict the price of a car three years from now, so they stopped making leases. And a lot of consumers enjoyed renting their cars for three years rather than trying to amortize the loan. So that certainly didn't help. So the manufacturing sector is weak. The most recent Beige Book report that the fed put out showed that manufacturing is pretty weak right here in our area as well, although we don't make too many cars here.
The other is construction. The most recent numbers we had for housing starts nationwide was 700,000. Two years ago we were building them at a two million annual rate. We built a million or two too many houses. We have nobody to live in them. House prices are falling as a result. And that's basically going to continue, because the only way you can solve that is to get 110 10/21/08 - FISCAL STABILITY - RES. 080603 more players. It's kind of like musical chairs with a million extra chairs. We may move around a little bit, sit down in a different chair, but it will take population growth and foreign buyers and baby boomers to become multiple homeowners to really kind of get rid of this. In the meantime, we're under-building substantially, because we need about a million three units a year to handle household formation and destruction where we take units out of the stock. So if we're building 700, we only have a million three kind of in the City saved, you can see that if we do that for a year or two, we can get rid of the excess houses. Actually, it won't take that long because most of the excess houses are in Florida, California, Arizona and Nevada, and so they're going to have trouble for a long time, whereas around here I noticed that the most recent Prudential report on house price declines was really pretty much modest 111 10/21/08 - FISCAL STABILITY - RES. 080603 and activity has really picked up. In some areas, things aren't too bad. So we'll get back to building houses a little bit sooner here in our region than we will in the rest of the country. So that will be good news there. Consumer optimism, of course, went into the tank along with Wall Street. Wall Street is in a depression. They're going to fire a lot of people in New York, but that's probably -- that's the way it goes. They had a good time. Hopefully they saved some of that money, but I don't think they did. But in any event, that's certainly going to happen. Not hurt us so much here. My NFIB Optimism Index has increased for two months in a row now. So it's a ten-component index, much like the Michigan's index, because I did that for five years as a graduate student, so I kind of copied it. I do it for the small businesses. But that's up for the last few 112 10/21/08 - FISCAL STABILITY - RES. 080603 months, and hiring plans are edging up. That's really a good sign as well. So those numbers are looking a little bit better for the national economy. I don't know if we're going to be in a recession or not. We wait for the National Bureau of Economic Research to tell us whether or not we're in a recession years later, because the data get revised. But certainly it's a very weak economy, and I think your report from the Mayor's Office accurately represented kind of where we stood on that. It's very regional. Recessions always are regional. If you go down to North Carolina around Raleigh and those areas, they're doing very well, but Florida and California are probably in recession as we would kind of think of a recession. They're not doing very well. Clearly, Detroit and that area is not doing well at all. That's kind of the automobile manufacturing part of the 113 10/21/08 - FISCAL STABILITY - RES. 080603 economy. We, as was pointed out, I think, by several individuals, are very lucky. We have kind of a recession-resistant economy here, which is good, because it's education, it's medical, it's pharma, it's professional services like lawyers and insurance and all those kinds of things. The services sector isn't really showing a lot of down pressure at the moment. S. economy has turned down, and that's very good for us, because that really is our strong point. So we won't surge back. When the automakers start making autos again, they'll get a big spike. We won't enjoy that spike, but we will enjoy steadiness that really, I think, makes life a lot better, especially for you, ladies and gentlemen, who have to plan and manage the budget and keep the City running.
So it will 114 10/21/08 - FISCAL STABILITY - RES. 080603 look okay there, I think. See what else I wrote down in here. A lot of the things -- a lot of us are worried about what's been going on in the stock market. Yes, the 401(k)'s are looking lower. Yes, the funds that universities and other institutions are holding certainly have a lower market value today, but that happens all the time. So look at 50 years. The nice thing about the market is, it goes like this and you have -- the blips are there. This is a big blip, but we've seen these blips before and we go through them. So I think the long-term prospects for having your money invested in America is pretty good. I think the valuation that the current stock market puts on this company called America, Inc. with $14 trillion in revenue is too low. It's a good time to buy if you have any cash, and cash is really one of the interesting issues we have to worry 115 10/21/08 - FISCAL STABILITY - RES. 080603 about. You had a good discussion about the borrowing issues. I think the fed and the Treasury have probably done enough to make sure that we will be able to fund cash needs and so on so that we won't have a serious problem. The Gubernator did find a way to fund his tax anticipation notes in California without borrowing from the government, I think. So the markets will start working again. But it's certainly been a very stressful month or two, and it will probably be less stressful for the rest of the year, but the economy will be pretty slow. So that's my quick take on kind of where we are and what we can expect. We're lucky to be, I think, in the kind of economy we have. And I don't know if more tourists will come here now with the slow economy, but with gas prices cheaper but still expensive to go overseas, maybe we'll get a little help from that piece 116 10/21/08 - FISCAL STABILITY - RES. 080603 of our economy as well.
A little more optimistic. It's good to hear. Doctor, real quick, a quick couple of questions. Our housing starts, as you indicated in your testimony, is obviously one of the more significant problems in our economy. Recently, I guess this past week, the Treasury inserted about $125 billion in the nine largest banks, I understand, and I think a part of that -- and correct me if I'm wrong -- was that they were essentially encouraging -- there was an interesting show I heard with the CEO of Wachovia -- not Wachovia, I'm sorry, Bank of America, and I understand that Mr. Paulson told them they had to take the money regardless as to whether or not they needed it. And I think a part of that was that they were to put money back on the market, understanding that the standards for lending practices is going to be much higher. And one of the 117 10/21/08 - FISCAL STABILITY - RES. 080603 individuals indicated that they thought that it was a possibility that money would start flowing for new housing starts and for mortgages in the late part of the first half of next year. Is that analysis overly optimistic or is it more realistic? Because one of the problems, as you heard in our testimony, was our reduction in our transfer tax, which we've been basically living off of the last couple of years, and we're hoping that we can get more money out there.
Right. Well, housing starts in our area are down as well. Not as seriously as they are nationally, because they just aren't building in California and Florida, for example, and we are building here. So the housing start numbers aren't falling as far here, and that's very good news. On the employment side, although employment growth is flat, it's not falling for both New Jersey and Pennsylvania. So we've been pretty 118 10/21/08 - FISCAL STABILITY - RES. 080603 stable on the employment side. Our unemployment rates are lower than the nation, and that's good. Those are all the kinds of things you need to have to have a housing market. I think we feel that mortgage credit isn't as available now as it was last year, and that's because last year there were no underwriting standards. If you had a pulse, you could get a mortgage. And the reason people made those mortgages like a Countrywide or whatever it is, that they could sell them to Fannie Mae and Freddie, so all they did was collect the fees and that's how we kind of got into trouble. So mortgage lending has to be tighter than it has been in the last couple of years, and that does mean fewer houses will be sold, and so the transfer tax can't be expected to be as good as it was in '07 or '06, because there was an unprecedentedly high and too high number of houses being transacted and now we've 119 10/21/08 - FISCAL STABILITY - RES. 080603 got to try to figure out how to get rid of them. So, unfortunately, since the fed made it so -- the fed and Treasury made their move two weeks ago, mortgage rates are up about 50 basis points, about a half a point. They're still not bad historically. Six and a half isn't bad. Anybody who can do 80 percent down and so on and so forth can get a mortgage today.
Sorry. That would be a heck of a deal. I'll give you a mortgage any time with 80 percent down. Twenty percent. Thank you. If you can do 20 percent down more or less, you can get it -- and you have decent credit, you can still get a mortgage today. But all the other kind of stuff, you can't do interest only, you can't -- it's really hard to get even variable 120 10/21/08 - FISCAL STABILITY - RES. 080603 rate mortgages now without still putting a significant amount of money down. So it's going to improve for us. You'll see it get better over the next six months probably. So you can expect some improvement in the transfer tax, because there will be more activity here, but some of the things aren't working anymore, like the Ritz Carlton condos. I don't know what's going to happen with those. You can get a lot of tax there if somebody would buy them, but that's not happening.
So do you think with the insertion of the 125 billion, that money will be made available to builders? Because one of the things -- and I know Councilman DiCicco, because we represent similar districts that have experienced a significant amount of new housing starts in our district, and I know Councilman Jones in parts of his Council district, the market rates have dropped 121 10/21/08 - FISCAL STABILITY - RES. 080603 dramatically, and when we talk to developers, they said, Well, I'm not going to build now, I can't get money. I have a block and a half from me and he was supposed to be building 50 townhouses and he said he's gone to six different banks and can't get any money to build. Do you think that this 125 billion insertion will kind of free up some money for the --
No. And the reason is that there are too many already there. So I can give a builder really cheap money, whatever, but just because you get a good deal on the money doesn't mean you're going to build the housing units if you can't sell them, and right now there's just too many on the market.
Not so bad here as other places. So the banks are going to look at that and say, I'm not going to fund the construction of these 122 10/21/08 - FISCAL STABILITY - RES. 080603 things because there's nobody to buy them yet. So we have to really clean up the over-supply that we created over the past three or four years before we can really see that kind of building really come back. Now, again, regionally -- I just got an e-mail from somebody in Raleigh who said that market is hot, the houses are all selling. So there are differences, and we'll not be as bad as, say, Cape Coral, Florida, which was ground zero for the single-family housing bust, or Miami or whatever. But it's still going to be -- that injection of funds really the banks are using to just make their capital side look stronger. It's probably not going to generate the kind of lending activity we were hoping it would. But, again, the issue is what are you going to lend them money for. Probably not to build houses for a while.
Okay. 123 10/21/08 - FISCAL STABILITY - RES. 080603 Straight answer. Thank you. Councilman Jones.
Yes. Thank you, Mr. Chairman. One of the things that you mentioned was the slowing, delay of new construction in the housing market. In your expert opinion, these condos that we maybe jumped the gun, overbuilt, are they going to shift to rental opportunities, and how will that affect -- if people aren't qualified to buy homes, does it move them to a renter's market and, if so, how does that work?
Well, it could. What usually happens is, the best thing to make people more qualified to buy them is have the price come down. So you see major declines in prices. And we probably are cursed with a few too many condos. I think when I led off at RealShare Philadelphia last year, I made the comment that I thought I knew everybody who could afford $2 million 124 10/21/08 - FISCAL STABILITY - RES. 080603 condos and they already lived here in them and I didn't know who was going to buy the rest of them. So if we lowered the price, that obviously makes them more affordable. They can also be rented as well, and that's what a lot of the excess homes do, is they move into the rental market. So if you look at the rental vacancy rate nationally, that's running around ten percent. So it's higher. And that, of course, again, with everybody trying to rent these houses that they built but now can't sell -- the flippers ran out of flippees here -- that's putting downward pressure on rents as well. So it makes the market work a little bit better.
Thank you. COUNCILMAN DiCICCO: Any other questions for this witness? (No response.) COUNCILMAN DiCICCO: Mr. Schwartz. 125 10/21/08 - FISCAL STABILITY - RES. 080603 Thank you, Doctor. Thank you very much.
My pleasure. I'm going to address a question that I was pleased to hear many of you ask, and, that is, the relationship between what's happening in Washington and what's happening here and what might happen in Washington in a couple of weeks, because it's like we're living in two different countries. So I've got a longer narrative, as I usually do, but I will summarize, because you usually want me to. Let's start with the stimulus package that you've mentioned. This was being discussed sometime ago by Barney Frank and Nancy Pelosi. Even before it hit the press, I called Pelosi's office and talked to them about it. It does in fact call for $150 billion to be invested in new initiatives in this country to improve the economy. To give you an idea of the magnitude of that, the Community 126 10/21/08 - FISCAL STABILITY - RES. 080603 Development Block Grant nationally is $5 billion. That's all. So $150 billion is not chump change. You asked the question of Rob Dubow how might this benefit Philadelphia. I agree with him that the part of infrastructure improvement, which is an absolute priority in this program and one that Governor Rendell has been pursuing, can certainly benefit the capital budget in the Streets Department. I'm not quite clear how that necessarily benefits our operating budget. But if the mayors and others went after an additional possible recipient of that; namely, the Community Development Block Grant, then the benefits would be considerable. Because while the Block Grant cannot be used to replace existing City services, at least 15 percent of it under the current regulations could be used to enhance City services in areas where they're being neglected and, by definition, save money. 127 10/21/08 - FISCAL STABILITY - RES. 080603 So that this is an extraordinarily important development. And while we're talking gloom and doom in the City, we are not alone. That gloom and doom is all over the country, and it has become a national issue, and that even President Bush and Bernanke today suddenly come out and say, Well, yeah, we may be for it, indicates how much traction that proposal currently has in Capitol Hill. And whether it passes in December or they have to wait until January, I know from the conversations I've had, there have been very serious discussions going on between the Obama campaign, the Congress as to getting this done. So we need to think very hard and quickly about what we want done, along with cities all over this country who are facing the kind of crisis that we are facing now. That's the most immediate relief. But the gloom and doom we're 128 10/21/08 - FISCAL STABILITY - RES. 080603 hearing is not immediate relief. It's over a five-year period. That's where the figure of $450 to $800 million deficit goes in. Let me give you a point of comparison. Between 1993 and 2000 during the Rendell years, the amount of federal investment in this city annually increased by a half a billion dollars; that is, in the year 2000, we were receiving $544 million from the federal government in just three areas, in housing and in law enforcement and in social services, like health and human services. Three areas. 5 billion more in federal support than you can anticipate on the basis of the previous administration at that time. So now we have gotten used to 129 10/21/08 - FISCAL STABILITY - RES. 080603 hoping that they don't cut us too badly, because that's been the reality over the last eight years. We've seen the Community Development Block Grant go from $72 million to $52 million, the total elimination of the COPS program and all sorts of other federal initiatives that have dropped. 5 billion overall, but that includes a lot of stuff that does not benefit the City directly. Now, where can we look prudently at possible benefits that the new Administration and the Congress might bring? There are two I'd want to point out.
One has to do with the Philadelphia Prisons, which I've discussed several times in this Council going back five years, and the other has to do with homelessness. Right now the projections in the budget, our budget, for the Prisons call it to rise from $218 million in 2008 to $251 million in 2014. When I started 130 10/21/08 - FISCAL STABILITY - RES. 080603 testifying here about this a few years ago, that budget was at $186 million. I will say if that is the reality five years from now, this city will have failed. That is failure. This is a projection of fiscal failure. Now, reentry at this point has become a national priority. It is a priority for the likely new Administration, who is proposing a Prisoner to Work program parallel to Welfare to Work. It is reflected in the passage this past year of something called the Second Chance Act, in which our Senator Arlen Specter, a republican, took a leading role and which conservative republicans, like Sam Brownback, are also on board. So there is an enormous opportunity now, not only because of Philadelphia but because this is a problem throughout the country, of generating a sizable reentry program that could significantly reduce the number of 131 10/21/08 - FISCAL STABILITY - RES. 080603 people in prison by reducing the number of people who commit crimes. The parallel is Welfare to Work. Welfare to Work in fact when it started, Philadelphia had 67,000 households on welfare. Today we only have 30,000 households on welfare. Welfare to Work generated as much as $320 million in additional support from TANF over the last five years. And even when the City -- when the state shifted state and federal money to support this, there was still $89 million of federal money there. And when you look at the City budget, the one area in which federal government has some meaningful investment is $30 million that helps support the youth programs run by the Health and Human Services. So I am saying to you that in the immediate year, there will be an opportunity for a demonstration project or two that the City is well equipped to go after that could bring sizable 132 10/21/08 - FISCAL STABILITY - RES. 080603 resources in it, and anyone who is planning over the next five years in the Prisons needs to be planning on reentry, as this Administration is. And that alone could save $70 to $100 million. The other has to do with the homeless. Thirty-eight million dollars is currently in the budget for the homeless, and five years from now $38 million is still in the budget for the homeless. But we are pursuing a blueprint to end homelessness. So how is that blueprint yielding a fiscal result? Now, it's a little hard to do what I'm suggesting now in an environment in which the national Administration has been relentless in its effort to eliminate City housing programs. But that ends, and the Community Development Block Grant, the funding for rental rehabilitation, the support for public housing modernization, we have a commitment from the likely President that they will restore all of that money. 133 10/21/08 - FISCAL STABILITY - RES. 080603 So the question is not just how do we build houses or rehab public housing. It is how do we make that work to reduce the number of people who are homeless in Philadelphia and thereby reduce the number of dollars that we spend on this. When I started in City Council 350 years ago when we had little statue huts, there was no budget for something called the homeless. It wasn't necessary. Within three years in the 1980s, now we suddenly have thousands of people lying in the streets and $35 million is now being spent on homeless shelters. But Wilson Goode, Sr. instructed Jane Malone, our first homeless czar, in that second term to reduce the number of people in the shelters by 300 a month, and she did. And where did they go? Most of them ended up in public housing. We had to fight to get public housing to accept them. That seems to be taking place now.
134 10/21/08 - FISCAL STABILITY - RES. 080603 But they did, and that needs to happen again. And I would say that if we can't reduce the needed support for homelessness by $20 million a year over the five-year period, if not immediately, then I would say that's also a failure, because the blueprint is supposed to end homelessness. Now, those are two areas in which I am really familiar, in reentry and in housing. In every area there is a strategic discussion that needs to take place as to how proposed federal policy which is likely to happen can benefit this city in tangible ways. In Mayor Nutter's platform last year, even under the previous national Administration, there was a small annotation that somebody had done a study showing that Philadelphia was losing up to $500 million in federal grants every year. I never could figure out who did that study, but some other people seemed to be aware of it. And that's under an 135 10/21/08 - FISCAL STABILITY - RES. 080603 Administration that was cutting funds. This has to be as relentless a strategy as it is to figure out who gets thrown out of work and what groups get unfunded and how the suffering can be distributed in an equitable way. So my recommendations really at the conclusion -- and you'll see the data that I've provided here to back it up -- I think that first the Mayor needs to immediately get together with the other mayors, as he does, and a major concerted effort here and nationally needs to be made to get the Community Development Block Grant added to the stimulus or something specifically oriented to local governments. There are other things that are in fact being applied to state governments. I don't know how -- relating to Medicare and Medicaid. I don't know whether they may benefit us, but at the very least, local government should be part of that package too, and I think they can be. 136 10/21/08 - FISCAL STABILITY - RES. 080603 Secondly, I think that we need to have a meeting between the Mayor and our legislative delegation to talk about not only these immediate priorities, but what our longer term, six-month priorities need to be for the next fiscal year. There needs to be working out the strategy for a reentry plan and the strategy for an expansion of public housing so that it can accept the homeless. You know, it's hard to kind of break out of an old habit. We've gone through seven or eight years in which every year we wonder how badly we're going to be cut, and it's understandable that in this environment, that's what we think. And particularly when this fiscal crisis was first confronted about a month ago, perhaps it wasn't as clear as to what is likely to happen in two weeks as it is now, and obviously we need to wait two weeks to see where we are. But if 137 10/21/08 - FISCAL STABILITY - RES. 080603 present trends continue as it were, then we have to see that as much of an opportunity as we currently see our fiscal crisis as a permanent disaster. It is not and it need not be. It wasn't in the 1990s when the Clinton Administration invested significantly in the cities, and we can well be heading back to an era like that again. Thank you.
Thank you both for your testimony, but you talked about connect the dots in such a way on both sides of the ledger. So I'm going to try to just narrowly -- because I did hear everything that you said and I do agree with most of what you said. Not just where we are, but how we get to where we need to be.
But a couple of them that I honed in on. One, you 138 10/21/08 - FISCAL STABILITY - RES. 080603 were talking about the possibility of a friendly presidential Washington Administration, God willing and the creek don't rise and the polls don't shift. But what we were talking about is possibly some help coming from the federal government by way of restoration of CDBG cuts that we've grown used to anticipating, and for us to kind of figure ways to reduce homelessness, if I understood you correctly.
Which was reduce our obligations and some of our expense side of the ledger in doing so. One of the other things I'd like you to focus in on, though, is some of the -- it is my anticipation that the way we're going to work our way out of this might also be infrastructure repair. And these are non-exportable jobs. These are localized jobs. These are family wage-supporting jobs that we can use. We have, I think the last estimate was, over 139 10/21/08 - FISCAL STABILITY - RES. 080603 300 bridges, trestles in the state of constant disrepair in the City and region and that these funds might be used to begin the restoration process. I also understand we are ten years behind in maintenance in those kinds of bridges, and I can't understand why, but that is in fact true. One other area that I want you to actually respond to, both of you, please, green jobs, green economy, something that is near and dear to Councilwoman Reynolds Brown. Is that going to be, in your estimate, some of the area of opportunity, if you would, for reviving this economy?
I have two answers to that. First of all, both of these; that is, infrastructure and green jobs, are going to be major new initiatives of the federal government 140 10/21/08 - FISCAL STABILITY - RES. 080603 that will help us. No question about it. It's the top priority of everybody, and they're there. Just yesterday as I was writing this, something came out from the Philadelphia Workforce Development Corporation, some sort of a conference that's being held on the potential for green jobs. And obviously that will help deal with our economic situation and create areas of a new economy. The infrastructure funding will do the same. The reason I didn't focus on those as much is that it's harder for me to see how they have a direct impact on the City budget as currently defined as opposed to just the broader economy. I'm not sure at this moment how much, for example, of the infrastructure money would go into the operating budget of the Streets Department as opposed to the capital budget. I think some probably could, but I just didn't know enough about it. I also couldn't figure out, for 141 10/21/08 - FISCAL STABILITY - RES. 080603 example, whether the green jobs and some of the climate change initiatives would provide new federal support for recycling, and that, too, would certainly benefit the City. I think what you're suggesting, though, is sort of what I said, we need the kind of analysis that you've just asked for and that I've just tried to do applied to every area of the City. I don't know much about the health issues. My wife knows a lot about it, but I don't. The City's Health Department, there again, that's the other area in which federal money plays a part, Medicare payments. So I think we need to do this throughout.
Point of information. I think I heard also Ms. Scott from the unions talk about how we need to kind of join at a table from our varying perspectives to see in this adversity some of the opportunities that arise, and if in fact we have a different 142 10/21/08 - FISCAL STABILITY - RES. 080603 Administration -- we're definitely going to have a different Administration, but one that might be a little more city friendly, and if in fact how do we benefit directly from that.
Absolutely. And let me also just stress one aspect of what I focus on here. The biggest area of City expenditure has to do with destructive behavior. We spend 40 percent of our money on the police and the criminal justice system. You look over at DHS and that's a lot of destructive behavior. And we are left holding the bag in ways that other cities aren't, because, as you know, Philadelphia's county and city are contiguous, so unlike Chicago, which has Cook County, or Los Angeles, which has a much broader Los Angeles County, that is the administrator of the programs to address these things with a much higher local revenue base is a terrible problem for us. So that to me the relentless 143 10/21/08 - FISCAL STABILITY - RES. 080603 effort to reduce destructive behavior and to create constructive behavior is by far the most cost-saving initiative that we can pursue. And those are initiatives that the federal government historically has supported and, to some extent, the state government has supported. So that has to be, it seems to me, as much a strategic vision as how many cars are we going to tow today, because that's important, and every little bit of savings -- I appreciated the recommendations that were made by our three new Councilmembers. I think that's important. But there's big, big bucks here. And if we were to wake up tomorrow and the federal government or the state government took over the Philadelphia Prison, just took it over outright and decided to pay for it and do that, suddenly we have just gained $233 million a year. That's a billion dollars over a five-year period. Deficit gone. So look at those things and see 144 10/21/08 - FISCAL STABILITY - RES. 080603 what we can do. And imagine if we could wake up five years from now and say not only that we were saving this money, but there was not only fewer crime -- less crime, but fewer people committing crime, that there were more people living in houses and not abandoned. Now, I haven't even gotten into schools and some of the other areas where, again, I don't know exactly what the federal proposals will do for our local School District and whether that benefits us, but you can bet that this is something that we ought to be thinking about now, how it can, so we can be fighting for the things that would be of greatest benefit to us.
I'd just make one comment on waste cuttings. Remember, one man's waste is another man's income. If you're hiring too many people, it may be wasteful from our budget point of view for the City. But on the other hand, 145 10/21/08 - FISCAL STABILITY - RES. 080603 they have income and they're spending it. And so it kind of gets to be interesting. On the construction side, you said how did we get ten years behind. There is, I think, a simple proposition, and, that is, you don't get -- it's harder to get reelected to office by just fixing things, because it's not really visible, until the bridge falls down. And then, of course, everybody says, Oh, my goodness, what happened. New Orleans is a great example where lots of money that should have been spent on building up the system to prevent the waters from coming in was spent on kind of more obvious things where you could get your picture taken. It's a tendency to spend the money in the wrong place and it's very difficult. And so you get behind on these kind of things. Were we to get a chunk of money to do this, there would be some benefit to the budget in a sense. If it created jobs like we would hope, 146 10/21/08 - FISCAL STABILITY - RES. 080603 then you get some money from that, but not a lot. So I think you're basically right, but it would certainly help some. And certainly we need the repairs, but the lags are very long. Typical recession, even '80, '82 kind of period where it was like under a year, by the time Congress says, Let's spend quadra-zillion dollars on this, they call up Mayor Nutter and say, You've got $10 million, he then has to get contracts out for bidding, and then by the time that happens and people are actually working, it's over. I mean, thank goodness. And we hope that this will be the same kind of a pattern. So it doesn't mean you shouldn't go for it, because we need it, but we shouldn't count on it, I think, as a way to help us out in the short term. From the budgetary point of view, it wouldn't really help us a lot. But let's get all we can get and let's get busy 147 10/21/08 - FISCAL STABILITY - RES. 080603 fixing things up, because you're right, we are behind.
I would say that if the proposal I'm suggesting for the Community Development Block Grant -- and the Speaker indicated that was there -- were adopted, that would have an immediate impact. It would be able to fund a lot of things that might be cut and it would be able to be used in certain areas that would be equivalent. And, in fact, ironically, the position the President is taking, which is the public works over time is too long, this would be a far faster alternative, and it's the one in fact that the Clinton Administration used when they initiated their stimulus package in the early '90s. That's what they used for it. They had proposals come in from all over the country related to CDBG and it was expanded to meet that, and it paid for rec centers and various other things here in the City. 148 10/21/08 - FISCAL STABILITY - RES. 080603
All right. Thank you. Gentlemen, I want to thank you very much.
Thank you. I'd like to call the next 149 10/21/08 - FISCAL STABILITY - RES. 080603 panel. Stan Shapiro, Phil Lord, Andre Butler and Jonathan Stein. (Witnesses approached witness table.)
Terri Falbo will be joining us from the National Organization of Women. Good morning, Chairman Clarke, members of the Oversight Committee and other members of City Council. My name is Stan Shapiro and I'm here as Coordinator of One Philadelphia. One Philadelphia is a network of advocacy groups and individuals that has worked for the past four years to oppose the notion that tax cutting is a panacea for all that ails us. The current budget crisis vividly supports our argument. In the past, we have argued that 15 years of annual tax cuts have done nothing to solve the acute problems that the City faces: growing poverty, overcrowded, understaffed schools, growing homelessness and a broken 150 10/21/08 - FISCAL STABILITY - RES. 080603 healthcare safety net. Countering that stark reality, we have heard faith-based arguments touting the magic of the marketplace. In essence, these arguments have claimed that if we supply businesses with more cash in the way of tax cuts, their profits will grow and everyone will prosper. And even tax revenues will grow rather than narrow, because expansion of the tax base will outstrip the impact of lowering rates. Until this year, some of the growth forecasts have been realized. But what we've said about this phenomenon is now clearly proven. When the national economy grows, so does the Philadelphia economy and tax revenues. When the national economy declines, so does the Philadelphia economy. Local rates just don't matter. org, you will find a variety of studies that further back up that reality. And here is some more reality. 151 10/21/08 - FISCAL STABILITY - RES. 080603 Businesses will not prosper unless they can sell their products or services, and they cannot sell their products or services to a public that is poor and getting poorer. If businesses make money, they can pay their tax bill. If they do poorly, lowering tax rates will not help. All of this results in a simple bottom line: Programs that lift working people and the poor cannot be sacrificed in order to fund tax cuts. Tax cuts enacted last year will cost the City some $700 million over the next ten years, and that is without computing the additional losses caused by a declining economy, strangled by a city unable or unwilling to support its schools, infrastructure and supply of decent housing. So we say this to the Mayor and to City Council respectfully, please spare the austerity. Instead, freeze the tax cuts. Use a tax cut pause to rethink the entire tax structure and then impose 152 10/21/08 - FISCAL STABILITY - RES. 080603 rates fairly. Let's have an income tax instead of a wage tax, and let's structure the real estate tax fairly so that the poor and those living in gentrifying neighborhoods are protected. Exempt the working poor from the income tax just as they are from the state income tax. On the business tax, let's look at a variety of options. First, let's remove the special treatment for banks, utilities and securities firms. As we've seen all too clearly at a national level in recent weeks, these classes of companies have done nothing to justify unique preferences. Second, let's structure the tax so that it favors local and small businesses. Let businesses deduct their gross receipts tax against their net income tax, as Cathy Scott suggested. That would reward businesses for staying in Philadelphia and let companies like Coors and Sony, not located here, 153 10/21/08 - FISCAL STABILITY - RES. 080603 continue to pay. In addition, we must demand that our state government treat our city government fairly. It is unconscionable that the Legislature still refuses to fund our courts, despite the Supreme Court's ruling that it must do so. The state must pick up a bigger share of other county costs as well. Finally, I think we need to confront the issue of what are the appropriate programs and services that a city, Philadelphia in particular, must fund and which ones should be considered, quote, discretionary, unquote.
It is commonly suggested that maintenance of streets, police and fire protection are normal city services that must be funded and that such things as housing, healthcare and job programs are services that should be funded by other governments. While I agree that this is true in an ideal world and, as I've said, the state should pay more, it is not true 154 10/21/08 - FISCAL STABILITY - RES. 080603 that this distinction makes sense in Philadelphia in 2008. The City pays for jails and courts. Those expenses are largely driven by the hopelessness of so many of our fellow citizens who live extraordinarily difficult lives. Putting the demands of simple justice aside, unless this city confronts the root causes exploding our prison population, balancing the budget will be increasingly challenging. There is simply no basis for cutting back any services which help poor people stay on their feet if we are going to solve the City's fiscal problems. And one more thing, as Ed Schwartz elaborated in detail, we will have a new President soon who hopefully will actually care about cities. Let's not starve ourselves with cutbacks now before the rescue arrives. Thank you for hearing me today, and I'm happy to answer any questions. 155 10/21/08 - FISCAL STABILITY - RES. 080603
Thank you. We're going to allow each of you to testify first and then open it up for questions.
Good morning, Chairman Clarke and members of the Oversight Committee and members of City Council who are here. My name is Phil Lord. I'm the Executive Director of the Tenant Union Representative Network, which is a tenant advocacy and service organization here in Philadelphia, and we see thousands of tenants every year who face eviction and substandard housing, and we're here today to testify on behalf of One Philadelphia and ask the City to reconsider its proposal to reduce the gross receipts tax and to cut corresponding City services. Trickle down has never been a credible economic theory, but it has long been a covert political strategy. It 156 10/21/08 - FISCAL STABILITY - RES. 080603 basically states that if you give tax breaks to big corporations, the result will be more jobs and economic prosperity for everyone. Even though economic analysis and the most recent census have confirmed that this is untrue, the myth lingers. We have just ended the economic period of the most tax breaks for the rich, the most deregulation, the most cutbacks in fundamental economic programs, and the results are in. We have increased poverty, increased joblessness, deteriorating education, and the list goes on. Only now in the midst of an historical presidential election and a record-breaking economic meltdown has the public discourse caught up with common sense. Trickle-down or supply-side economics is slowly giving way to its logical counterpart, bubble-up economics. Our country is perhaps the richest and certainly the most powerful in the world, yet infant mortality 157 10/21/08 - FISCAL STABILITY - RES. N. S. ranked last. I would like to suggest that it's not because we lack our funding or because we have more irresponsible people. It is because we do not care enough to help those who really need it. Housing is fundamental. You cannot hold down a job without a permanent address. You cannot eat nutritiously and affordably without a kitchen in which to cook your own food. You cannot convalesce from illness without a roof over your head. Children in shelters suffer academically. What is needed is more affordable housing, more homeless prevention and more code enforcement. We cannot do these things and cut taxes at the same time. Every day at TURN we see the 158 10/21/08 - FISCAL STABILITY - RES. 080603 tragic results of trickle-down policies. We see rising homelessness as there is less money each year for affordable housing. We see communities deteriorate as housing code enforcement diminishes. We see record foreclosures on homeowners and, yes, on rental properties too, creating a hidden homelessness. We see exploding utility prices. And while national and local attention is focused on banks and homeowners, we must recognize that renters are also victims of the current financial crisis. Forty percent of Philadelphia are renters, and many tenants who have faithfully paid their rent for years suddenly find that the money they've been paying to the landlord is not going to the mortgage company as expected and they're facing eviction. Many homeowners just pretend to be homeowners in order to qualify for low-interest mortgages and then turn around and rent out the properties. 159 10/21/08 - FISCAL STABILITY - RES. 080603 Tenants who do not open the mail of their landlord are surprised when the sheriff comes out and tells them they only have a short time to move. What will attract business and jobs to Philadelphia? Superficial tax cuts that have little effect on a company's bottom line or a city with an educated workforce, affordable housing for employees, clean streets, decent healthcare and recreational facilities and reduced crime? One Philadelphia believes it is the latter. Bubble-up economies reflects the economic human rights notion that we all have basic needs that must be met for us to be productive and contributing members of our society.
It starts with the premise that we are all in this economic boat together, and if we are to grow as a society, as a city and as a nation, we ignore each other's basic human needs at our peril. If one of us is denied healthcare, the disease can 160 10/21/08 - FISCAL STABILITY - RES. 080603 spread. If one of us is uneducated and unemployed, that hopeless person may take from us and be a burden on others. If one of us is hungry, it is a shame upon all of us. Rather than give money to the wealthy and hope they find ways to help the poor and unemployed, let's spend it directly on where it would count most. No more tax cuts. Keep and expand necessary city services for our city. Thank you.
Good morning, Chairman. Good morning, Council. My name is Andre Butler and I am on the Board of Directors of an organization called the Philadelphia Unemployment Project, and I've testified before this body previous times. I'm privileged to come here, always under adverse circumstances. Nevertheless, I'm always privileged to be here. Our organization deals with 161 10/21/08 - FISCAL STABILITY - RES. 080603 basically what it says. It does its best to advocate for the underprivileged. The first thing we believe is important is jobs, obviously. After that, we help people who need help with their mortgage, unemployment compensation. We also advocate for various issues that help the regular people. We were just in a fight for healthcare that will not end, but it just -- unfortunately, we didn't get it passed in Harrisburg, but the fight isn't over. So that's what we do. And we're part of One Philadelphia. We've been a part of it for about four or five years. And it's interesting to listen today to testimony ahead of me, because Dr. Dunkelberg, who is somebody who I respect but have always been at odds with, everything is so optimistic with him, but the reality is, the people today are scared. People are absolutely scared. 162 10/21/08 - FISCAL STABILITY - RES. 080603 I work at three different jobs and one of them laid off ten people Monday morning. We do papers. At 5:30 every morning we deliver papers. Ten of my colleagues were told 5:30 that morning, You no longer have a job. At 5:30 on a Monday morning. Companies are scared because they don't know -- they don't have the money to pay their employees. People themselves are scared because they don't know whether they're going to be able to pay their own mortgage or their own rent. So everybody is scared now, and that's why we're concerned about -- because if we continue to go on the path that we're going and looking at all the service cuts, who does that really affect? It affects the average person that is just trying to make a living day to day. I was watching one of the post debate analysis, and one lady made it very simple. She said, The Americans have one eye on the President race and 163 10/21/08 - FISCAL STABILITY - RES. 080603 one eye on their pocketbook. And that's where it is, because they don't know how much money is in their pocketbook to pay their bills for the very next week. They do not know. And this situation, if you're going to look at continuing to fund tax cuts which are affecting the have's and implement service cuts affecting the have not's, what do we really have? Businesses are not going to be able to sell their wares to nobody. Remember, our population is dropping. Let's not forget that years ago we had -- we were the fourth largest city in this country. We're now the sixth largest city in the country. Remember, last year Phoenix, Arizona passed us. We're continuing to drop people every single year. And you're not going to be able to get that base to return if we continue to go down the path of looking at service cuts, social service cuts, and continue to look at tax 164 10/21/08 - FISCAL STABILITY - RES. 080603 cuts for the ones who can really -- as President Obama said one time, the ones that haven't asked for it and really don't actually need it. So we need to have a more focused and a really more strategic look at what we're doing here. Let's also not forget one of the main proponents of tax cuts, Brett Mandel, said on one of his recent websites, We should slow down these tax cuts. They need to be slowed down in this particular situation to try to get some fiscal stability to the City. So we need to keep those things in mind. You say everything is on the table. Everything should not be on the table. There are certain circumstances here that my colleagues said here that should be looked at and not that they need to be -- there are certain things that should not be on the actual table.
So we're here to advocate for the average person, the one on whose back the economy of this city really actually 165 10/21/08 - FISCAL STABILITY - RES. 080603 builds, and that's the average person who is fighting day to day to keep a job and protect his or her family. And we hope this Administration and this Council takes a look at that. Even me myself, I work at a catering -- I'm a part-time caterer. I went to a job -- this is how bad the economy is. m. m. I got a call from my boss asking me, Do you want to work -- leave Camden, go over to King of Prussia, pull an all-night shift for me at the King of Prussia hotel, come back on a Sunday, do an eight-hour shift with me at another King of Prussia hotel. I'm thinking to myself, I'm going to be dead tired, but I need this money. So people are out here with no 22 sleep just trying to make ends meet. So I'm hoping this Administration and this Council keeps the regular people, the ones -- the low-income, bottom-level 166 10/21/08 - FISCAL STABILITY - RES. 080603 people in mind when you do what you're doing to try to help this City out. Thank you.
Thank you. Sir, did I hear you said that Brett Mandel recommended a slowing of the tax --
You heard correctly. I saw it on one of his recent things he wrote on one of his websites. He recommended slowing down the tax cuts.
Times must 167 10/21/08 - FISCAL STABILITY - RES. 080603 really be bad. Okay. Thank you. Who is next? Mr. Stein?
Good afternoon, Chairman Clarke and Councilpeople who are here. I'm Jonathan Stein. I'm general counsel at Community Legal Services and also a former member of the Philadelphia Tax Reform Commission. I think we heard from the City people this morning that they said a mantra or this generalization that all things are on the table, but I think the "all things are on the table" generalization doesn't really speak to really the more difficult issues we have to grapple with, which is what are the priorities for the City in dealing with a budget crisis. And I think the very first thing that should be the order of business is to freeze the tax cuts. Before you make cuts in City services that we know are important for people's lives and for businesses who depend on 168 10/21/08 - FISCAL STABILITY - RES. 080603 City services to provide a quality of life and the infrastructure that allows business to thrive, we should take a very sane and rational step of saying let's freeze. And it could be a temporary freeze, for those who are really zealous about the value of business cuts, but let's, for the sake of fiscal stability and integrity, put a hold, a two-year, one-year, two-year hold on any tax cuts until we get a clearer picture of what the City's fiscal future will be. This is not a radical step. We had a republican governor named Mark Schweiker, who people know as the President of the Greater Philadelphia Chamber of Commerce now, who when he faced a downturn recession a few years back, 2001, 2002, as Governor of Pennsylvania, one of the first things he did was stop and put on hold major corporate tax cut and phase-out of the capital stock and franchise tax. It was on the chopping block to phase out. That 169 10/21/08 - FISCAL STABILITY - RES. 080603 was put on hold in the face of the fiscal reality of the state budget being in the red. And I think we could learn from a republican pro business governor to say we should do the prudent thing now and freeze the tax cuts that are in motion as we speak. For those who are that enamored about tax cuts as growing business, one of the lessons that Professor Robert Lynch taught us in his review of tax cuts across the country that city and state governments have poured out there in the billions of dollars over years is that you have a very lethal cocktail for business growth when you combine tax cuts for businesses and service cuts. And those two things, which would be continuing here or happening here if we allowed the tax cuts to continue and we have service cuts, which seems like they're rather inevitable, that combination is clearly one that is not -- doesn't help business at all or business 170 10/21/08 - FISCAL STABILITY - RES. 080603 growth at all. I think when we have a freeze or a temporary freeze, if you want to call it, it can give us pause to really look at our tax structure and revisit the tax structure, because I think there's been so much either misinformation or lack of information about tax policy in the City, and I think part of it is the fact that City Administrations have not been very forthcoming with who pays taxes. And I think Councilwoman Sanchez's disclosure ordinance/bill is a step forward to really bring some transparency and sunshine on our tax system. Instead of it being in closed cabinets in the Finance Director or Budget Director's Office, people on Council and the public should have a much better idea of who is paying a variety of taxes, including the business privilege tax. If you look at the gross receipts tax, which I know has been 171 10/21/08 - FISCAL STABILITY - RES. 080603 knocked as really awful tax and is on the skids for being eliminated, one would see that the largest businesses in Philadelphia, not small and medium-sized businesses, pay the great proportion of the gross receipts portion of the business tax.
It's a tax that if you're a big company, like Sony or Budweiser or Coors beer that is not going to set up a headquarters here but will do business in Philadelphia, that's the only tax that that multi-national or national business that's outside the City and won't locate here pays. So one has to really see whether eliminating a gross receipts tax across the board is worth giving multi-million-dollar tax breaks to businesses that profit from the Philadelphia market, but have no 22 employment or corporate presence here. And I'm not saying what the Council should do, but I think a tax pause, a tax freeze could at least allow 172 10/21/08 - FISCAL STABILITY - RES. 080603 us to revisit this area and say if we really want to help a start-up business, a small business, can't we fine tune some of our tax policy to achieve that end. Do we need a tax cut for Wal-Mart? When Wal-Mart accountants take their business privilege tax cut and send it back to Bentonville, Arkansas, can we really say that that's helping business in Philadelphia grow and employ people? So I think these are valid questions to raise. The wage tax can be revisited. The idea of a city income tax replacing the wage tax is an idea that has never really been seriously looked at. The Tax Reform Commission began to study it, but then became a low priority for the Commission because it had other priorities than looking at things like reforming the wage tax or closing tax loopholes that Mr. Shapiro spoke to. I mean, we have entire businesses, insurance, banking, securities, that either pay no or very reduced business 173 10/21/08 - FISCAL STABILITY - RES. 080603 tax and, in that way, discriminate against other businesses who pay a business tax, because state law has given them a break for years and no one in the City has revisited that area and say is that fair to other businesses. So what I'm saying is, the bottom line is, I think we should avoid service cuts to the City. There are ways of perhaps dealing with waste and efficiencies, and I know a number of Councilpeople have put forward that the City says they're going to look at carefully, but I think we have to take a very prudent and rational step and say let's freeze these tax cuts right now, the City can't afford them, and let's use that opportunity to really revisit this area for the future. Thank you.
Thank you. One more individual and then we'll open up to questions, and I believe Councilman Green would like to ask 174 10/21/08 - FISCAL STABILITY - RES. 080603 Mr. Agostini a question or two and I believe that Mr. Agostini would like to respond to some of the comments made by this particular panel.
Good afternoon, Chairman Clarke, members of the Oversight Committee and other members of City Council. My name is Terri Falbo and I am the Secretary of the Philadelphia Chapter 11 of the National Organization for Women, NOW. I also work on a volunteer basis with many ex-prisoners and helping people to find affordable housing. NOW is a member and supporter of One Philadelphia, and we support the request of One Philadelphia that the City reconsider its proposed gross receipts tax cuts and the corresponding City service cuts. Cutbacks in City services, whether they be for education, healthcare, housing or employment related, will disproportionately affect women. And I can say from the work that I do on a volunteer basis that we don't 175 10/21/08 - FISCAL STABILITY - RES. 080603 need cutbacks. That will just make our City worse. We need expanded City services. So we don't think that -- even though we know the projection for shortfalls in the budget is there, we do think that instead of automatically then going to tax cuts for the gross receipts tax cuts and the cutbacks in City services, instead the other ideas that were raised by many of the presenters here and some of the Councilpeople also should be what the focus is, and that we can and we must do better. No tax cuts. No gross receipts tax cuts, and no City service cuts.
Could I have Mr. Shapiro come to the table, along with Mr. Agostini. (Witnesses approached witness table.) 176 10/21/08 - FISCAL STABILITY - RES. 080603
Of course I'm not going that pass up this opportunity for another step in this public policy discussion. I will start by saying that let's say for the sake of argument I agree that we should freeze BPT cuts for two years.
According to the chart that I have here, I believe the amount would be 11.9 million in Fiscal Year '10, 21.1 million in Fiscal '11.
So, in other words, we would save less than one percent. In fact, probably less than one half of one percent.
So part of 177 10/21/08 - FISCAL STABILITY - RES. 080603 what you realize by looking at those numbers is that the BPT cuts were already back-loaded. In other words, we were already slowing ourselves into the BPT cuts, and for that reason, if we freeze them for two years, it's almost as if to say who cares, because no one was getting a major cut over the next two years anyway.
Well, we're not suggesting -- and I don't have access to obviously all of the budget resources that the Administration does, all of the forecasting resources, all of the access to --
But I'm agreeing with you. I'm saying let's freeze them for two years. If we freeze them for two years, we save about $30 million over two years, which is less than probably half of one percent of total revenue. We back-loaded the tax cuts on purpose to ease our way into them. So if we freeze them, the issue is 178 10/21/08 - FISCAL STABILITY - RES. 080603 whether there should still be a long-term schedule or not. Because I'm trying to figure out -- first I'm starting with a point of agreement. We're agreeing --
-- that we should consider freezing them for two years.
Now we're also agreeing that it's a drop in the bucket if we freeze it for two years, it's not going to make that much of a difference. So now let's have a discussion about what should happen after those two years.
Okay. What we've said is, we think we ought to use the pause as an opportunity to reexamine the structure of tax cuts going forward, assuming that after the two years --
So you're 179 10/21/08 - FISCAL STABILITY - RES. 080603 not talking about pushing the schedule back two years?
I'm just asking what you're talking about. Are you talking about pushing the schedule back for two years?
No. Our preferred solution is to use the pause to restructure the back years, to not implement the tax cut the way it is now structured in the code. Our preference would be if we --
So you're not talking about freezing it for two years. You're talking about basically --
-- eliminating business privilege tax cuts until we decide what we're going to do with the business privilege tax cuts.
I think it would 180 10/21/08 - FISCAL STABILITY - RES. 080603 be perfectly prudent to simply freeze the tax cuts for the first two years, if I could finish the thought.
Leave the back end of or push those cuts back, structure them the way they are but postpone the inception for two years, but during those -- but not look at that necessarily as a final step, just as the enactment of the inclusionary zoning ordinance last year was not the final step, but use that period of time to reexamine the structure of business taxation and, in fact, all taxation in the City, which could use a substantial restructuring to make it more fair, more progressive and hopefully more robust to bring in more revenue in a fairer way.
We agree again. So let's say we freeze the tax cuts for two years. Over the two years that we freeze the BPT cuts, we consider 181 10/21/08 - FISCAL STABILITY - RES. 080603 other ways to make the tax structure more progressive, and let's say we are lucky enough to get that type of legislative support from Harrisburg, and we are being very hopeful in that regard. Are we then focused on making Philadelphia still competitive in terms of business tax structure?
Competitiveness, frankly, in business tax structure, according to the research that we've looked at, is not a main factor in growth or in reducing poverty, and actually rather than talking about growth, we would rather talk about reducing poverty, that unemployment or employment is an interesting statistic, but a 25.1 percent poverty rate is a much more pressing statistic. So we don't really find that a competitive, quote/unquote, tax structure is the main ingredient in reducing poverty. We think that spending for social programs, for schools, libraries, recreation centers, 182 10/21/08 - FISCAL STABILITY - RES. 080603 employment, ex-offender programs, the range of things that are now threatened by these budget difficulties, increasing those, maintaining those are more important to making the City what it ought to be.
In our last discussion on this issue we talked about job loss over the last several decades. Do you believe that business tax structure has anything to do with the job loss that we've experienced over the last couple of decades?
If it does, it's a secondary factor to the fact that our schools are overcrowded, that our neighborhoods are run down, that we have a welfare program for young males which is incarceration and that the City has very deep social problems which need to be solved.
Is that also what contributes to the unemployment rate?
Okay. Interesting that you state that, because in your testimony, at the beginning of your testimony you seemed to state otherwise, that as the national economy goes, the local economy will go.
In terms of local policies that can impact that. I mean, there's no question that the major gross determinant of what happens in cities --
But did you make a statement that as the national economy goes, the local economy goes? Was that your statement?
That is correct, but if we're talking about local policies that have -- that's the -- that would be the headline. In terms of the sub-headlines as far as -- which I'm elaborating on now, because I was trying 184 10/21/08 - FISCAL STABILITY - RES. 080603 to keep my statement down to two pages. As the local -- in terms of what we can do as a local government to influence that at the margins and also not so incidentally just make life better for our citizens, it's far superior to add to the social service safety net than it is to make marginal reductions or even gross reductions in business tax rates.
The question at hand is, are you still sticking by the statement that as the national economy goes, so the local economy goes? Are you sticking by that statement?
The latest data that I have from the City Controller's Office on unemployment rates is for the month of July. Information was released in August. Can you tell me what the unemployment rate was for the United States?
For the United 185 10/21/08 - FISCAL STABILITY - RES. 080603 States in July?
It's around -- I think currently it's 6.1 percent. In July, it may have been --
It was 5.7 percent. Can you tell me what it was for the region?
It was 5.6 percent. Can you tell me what it was for the City?
It was definitely a couple points higher. It has been a couple points higher for the last couple of decades. It was 7.4 percent. So do you stick by your statement that as the national economy 186 10/21/08 - FISCAL STABILITY - RES. 080603 goes, so the local economy goes?
There's been a persistent two point difference in the unemployment rate over the last several decades.
Right. But as the national employment rate goes up, so will the local rate go up. And as a national -- even though there's a margin that continues, which goes to the point that the national economy and the local economy are pretty much tied to each other, there is a gap, but given -- but the fact that there's a gap --
There's a persistent gap. The fact that there's a 187 10/21/08 - FISCAL STABILITY - RES. 080603 gap is not proof in any way that that gap is caused by business tax rates as opposed to poor schools, inadequate housing, impacted poverty and the variety of other social ills that we have in this city. And we argue that it is the variety --
But you would agree that there is definitely a gap between national economic performance and local economic performance and regional economic performance and local economic performance?
Do you also agree that there is a connection between the unemployment rate and the poverty rate?
Councilman Green. 188 10/21/08 - FISCAL STABILITY - RES. 080603
I just had had a point of information, and, that is, the savings that were mentioned in Mr. Shapiro's testimony would actually be less, because revenue assumptions have declined significantly with respect to the BPT. Therefore, the percentage savings or the percentage of the tax deduction will also go down. So the dollar amount will be down by several million dollars.
Well, we don't have -- I don't have the benefit of the latest projection. I'm glad to have that updated, but I just suggest that the failing to pause and just leaving the tax cuts --
It wasn't really a question there, Mr. Chairman. That was just a point of information.
Could I comment? If I could just make a brief comment. My concern is -- no?
Let him 189 10/21/08 - FISCAL STABILITY - RES. 080603 talk.
Yeah. That leaving the tax cuts in place, according to earlier estimates, over ten years would cost some $700 million. So unless we pause them and reflect on the direction of which we're going, even if that 700 million is now less than 700 million, we're talking ultimately about real dollars. So it seems to us that this would be a good time to pause and reflect on the direction in which we're going.
Since he wanted to comment, I have one more question. 190 10/21/08 - FISCAL STABILITY - RES. 080603
This is, I guess, in the personality of my freshman colleague, Mr. Jones. How often is a broken clock right?
Thank you, Councilman. Councilman Green, you had some -- first of all, are there any other questions of the witnesses in this panel? (No response.)
Councilman Green, you had some questions for Mr. Agostini?
Yes. Very quickly. Thank you for staying around and listening to this. I appreciate your time. I know it's precious right now. So thank you.
The question really relates back to the chart on 23, and what I wanted to do was try to really define the worst-case scenario so that there's a clear definition of it on the record. We talked about school funding and other stuff, and you're going to provide us the information with the increased interest costs, which is not a part of this chart. But leaving those two things aside even, I was just wondering whether this chart on follows the scenario on or the 192 10/21/08 - FISCAL STABILITY - RES. 080603 scenario on with respect to revenue assumptions.
On . So that means if we add that $200 million to the fund balance after potential negative adjustments, we end up with $1.2 billion as a worst case before interest costs, and then if we assume that we can't do the revenue obligation bond, which is already in that top number -- pension obligation bond, sorry, that would mean that we have the MMO increasing in '11, '12, '13 potentially as a result of losses this year. So let's assume that's a billion-dollar loss this year between the eight and three-quarters and a half a million loss in the market. That would be another $30, $35 million a year. So we're looking in the Five-Year Plan at another, conservatively, 120 million in MMO payments if we can't do the pension obligation bond. So it looks to me like 193 10/21/08 - FISCAL STABILITY - RES. 080603 the worst-case scenario before interest expense increase is around $1.32 billion. Would that be an accurate way to look at this?
Councilmember, let me respond to that in two ways. To the more immediate about adding the assumptions and the change in assumptions on , the 197 million to the bottom line here of the 841 million --
No, no, Steve. I'm adding it to the -- I'm looking for the worst-case scenario, so I'm adding it to the fund balance after negative potential adjustments.
So if we could just answer that question before we get the answer.
If you'll allow 194 10/21/08 - FISCAL STABILITY - RES. 080603 me to get there. The $200 million we would in our projections add to the 841. The second approach to this, you and I and many others, we could sit here for hours, as we have been doing in MSB and in this building, contemplating a range of assumptions. And that has been part of the challenge in this, is that none of the assumptions you have just raised are out of the realm of possibility. They are all possible scenarios. And what we have tried to do is stay within what we think is likely, given data, evidence, what we know to date. I'm not going to say to you that we have encapsulated this and so it is this number. It could get worse. And so we've been very cognizant of that. And, yes, there are a number of scenarios we could draw up that would make it worse, but right now this is where we think we are.
Okay. But 195 10/21/08 - FISCAL STABILITY - RES. 080603 based on the numbers you have provided today to us, the worst-case scenario, assuming we don't have the pension obligation bond and increased MMO payments as a result in '11, '12 and '13, is above $1.3 billion?
I don't think it's that high. I'm not comfortable with that assumption on the MMO payments.
Well, assuming it's eight and three-quarters and we've lost half a billion this year, which we have lost more than that year to date. Let's hope we'll make it up. With that as the assumption, because obviously assumptions underlie every number here, it's 1.3 billion plus; is it not?
Councilmember, it's conceivable it could get that high, but right now this is where we are. But I'm not going to sit here and tell you, no, that couldn't happen.
But we're at a billion adding the 200 to the 841 from 196 10/21/08 - FISCAL STABILITY - RES. 080603 the difference between Pages and 21, and we're at a billion two if we don't have -- based on your own numbers, we're at a billion two, worst-case scenario, assuming the market recovers and we have no increase in MMO. Can we agree on that?
If you don't 10 have the POB as you were assuming, that's 11 105 million, plus the 200 million roughly 12 from the scenario provided on , 13 and now you're at about 1.15 billion. 14 And I'm not trying to parse it. 15
I'm just 16 adding here 1,003,541,000 plus 200 17 million, the difference between and 21, that's - 19
I think we would 20 both agree given the magnitude of what we're talking about, 50 million or so, we're pretty much in the same area.
So what's the worst-case scenario then? 1.2 billion? 197 10/21/08 - FISCAL STABILITY - RES. 080603
Councilmember, I really can't say. I mean, I will tell you that all of us are anxious about what could unfold in the economy.
That's fair enough. Just to come back to Councilman Goode's comments earlier, I'd like for us in this process to plan for the worst and hope for the best. So as we come in, let's have a plan that looks at that scenario and has a plan for it and not just have us cutting things slowly over time. I think we have to --