Committee Hearing, May 10, 2004

COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Monday, May 10, 2004 9:45 a.m. - - - BILLS - 04009, 040010, 040011, 040012, 040013, 040014, 040015, 040016, 040017, 040018, 040019, 040020, 040021, 040022, 404256, 040261, 040313, 040421, 040422, 040423 - Operating Budget and Tax Bills - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DAVID COHEN COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JACK KELLY COUNCILMAN JAMES F. KENNEY COUNCILMAN JUAN F. RAMOS COUNCILMAN FRANK RIZZO COUNCILMAN FRANK DiCICCO COUNCILWOMAN JANNIE L. BLACKWELL COUNCILMAN MICHAEL A. NUTTER COUNCILMAN DARRELL L. CLARKE COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN BRIAN J. O'NEILL V A R A L L O Incorporated Litigation Support Services 1835 Market Street, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 OPERATING BUDGET & TAX BILLS - 5/10/04

Please. Good morning, everyone. This is the Committee of the Whole Public Hearings. And I would ask Mr. McPherson to read the title and the contents of each bill, please. MR. McPHERSON: Bill No. 040261, an Ordinance amending Chapter 19-1500 of the Philadelphia Code entitled "Wage and Nets Profits Tax," by establishing certain tax rates, amending the effective date for various rate changes, and by amending the definition of Excess Growth Rate, all under certain terms and conditions. Bill No. 04313, an Ordinance 17 amending Chapter 19-2600 of the Philadelphia Code entitled "Business Privilege Taxes," by making permanent and clarifying the pilot program under which a Job Creation Tax Credit will be given to certain businesses that create new jobs within the City of Philadelphia, all under certain terms and conditions. Bill No. 040009, an Ordinance 3 OPERATING BUDGET & TAX BILLS - 5/10/04 amending Chapter 19-1500 of the Philadelphia code entitled "Wage and Net Profits Tax," by decreasing the rates of the tax, by making technical amendments changing the effective dates for the rate changes, and, repealing certain provisions, all under certain terms and conditions. Bill No. 040010, an Ordinance 10 amending Section 19-2604 of the Philadelphia Code relating to tax rates, credits and alternative tax computation for the business privilege tax, by reducing certain tax rates, all under certain terms and conditions. Bill No. 040011, an Ordinance 16 amending Title 2 of the Philadelphia Code entitled "City-County Consolidation," by removing the authority of the Board of Revision of Taxes to hear appeals and reassigning that authority, with the power, functions and duties of hearings and deciding appeals, from the Board of Revision of Taxes assessment, to a newly appointed independent city agency. Bill No. 040012, an Ordinance 4 OPERATING BUDGET & TAX BILLS - 5/10/04 amending Chapter 19-2600 of the Philadelphia Code, entitled "Business Privilege Taxes," by amending the definition of "Net Income" to determine the net income of unincorporated businesses by allowing deductions of payments to certain proprietors or partners. Bill No. 040013, an Ordinance 9 amending Chapter 19-1300 of The Philadelphia Code, entitled "Real Estate Taxes," by specifying a rate for Tax Year 2004, specifying that rates thereafter be dependent on total taxable assessed values. Bill No. 040014, an Ordinance 15 amending Chapter 19-2600 of the Philadelphia code, entitled "Business Privilege Taxes," by providing a minimum number of estimated tax payments in the last six months of the city's fiscal year and authorizing additional estimated payments in the first six months of the subsequent fiscal year. Bill No. 040015, an Ordinance 23 amending Chapter 19-1300 of the Philadelphia code entitled "Real Estate Taxes," to mandate a phase-in of equal percentages of the target 5 OPERATING BUDGET & TAX BILLS - 5/10/04 Tax Billings to be imposed upon lands and buildings for real estate tax purposes. Bill No. " Bill No. 040017, an Ordinance 9 amending Chapter 19-2600 of the Philadelphia Code entitled "Business Privilege Taxes," by amending the definition of "Net Operating Loss" with respect to carryforward period for net operating losses. Bill No. " Bill No. 040019, an Ordinance 18 amending Chapter 19-1400 of the Philadelphia Code entitled "Realty Transfer Taxes," by amending the definition of "Value" to include deeds in lieu of foreclosure. Bill No. 040020, an Ordinance 23 amending Chapter 19-1300 of the Philadelphia Code entitled "Real Estate Taxes," by providing discounts and penalties related to 6 OPERATING BUDGET & TAX BILLS - 5/10/04 the installment payments and new fiscal year billing, and to guarantee that payments are applied to current year tax first to avoid accumulation of additions and penalties. Bill No.

040021, an Ordinance 7 amending Chapter 19-500 of the Philadelphia Code entitled "Taxes and Rents-General," by providing for uniform time limitations on collections, examinations and assessments, under certain terms and conditions. Bill No. 040022, an Ordinance 13 amending Chapter 19-1300 of the Philadelphia Code entitled "Real Estate Taxes," by providing that no change by the Board of Revision of Taxes to the ratios it uses to calculate assessed value shall be effective unless Council by Ordinance adjusts real estate tax rates so that such change is revenue neutral or else Council otherwise approves such change by Ordinance, all under certain terms and conditions. Bill No. 040256, an Ordinance 24 amending Chapter 19-1200 of the Philadelphia Code entitled "Parking Tax," by establishing a 7 OPERATING BUDGET & TAX BILLS - 5/10/04 rate of taxation on parking transactions for fiscal year 2005 and thereafter, under certain terms and conditions. Bill No. 040421, an Ordinance 6 amending Titles 3 and of the Philadelphia Code, the "Air Management Code" and "Health Code," respectively, by increasing the fees or establishing new fees for various health-related licenses, permits, certificates, approvals, and variances issued by the city. Bill No. 040422, an Ordinance 14 amending Title 9 of the Philadelphia Code, entitled "Regulation of Businesses, Trades and Professions," by adding a new Section 17 establishing a fee schedule for reinspections conducted by the Department of Licenses & Inspections. Bill No. 040423, an Ordinance 21 amending Section 11-203 of the Philadelphia Code entitled "Sewer and Water Pipe and other Underground Service," by increasing permit fee charges for breaking and excavating of any paved or macadamized street, under certain 8 OPERATING BUDGET & TAX BILLS - 5/10/04 terms and conditions.

Thank you. Our first witnesses will be from the Administration. Is Ms. Wilkerson here? Good morning.

Good morning.

Please identify yourself for the record and proceed with your testimony.

My name is Joyce Wilkerson. I am Chief of Staff to Mayor John F. Street. With me today is Janice Davis, the City's Finance Director; Phil Goldsmith, Managing Director; and Rob Dubow, Budget Director for the City of Philadelphia. I want to thank you for this opportunity to present testimony on FY '05 tax measures that are currently before City Council. Over the years, few people have done more in support of tax change and tax relief than Mayor John F. Street. As Council President, he joined with Mayor Rendell to initiate the city's unprecedented program of 9 OPERATING BUDGET & TAX BILLS - 5/10/04 tax cuts after a half century of steadily rising tax burdens. As Mayor, he has not only continued this program through a ninth consecutive year, returning $244 million in tax relief to taxpayers, he has proposed and implemented accelerated rate reductions. The $375 million in tax relief proposed in the FY '05, FY '09 five-year financial plan would extend the tax reduction program to a 14th year and provide the largest amount of tax relief in any Five-Year Plan. Although the Mayor has warned of the challenges and choices involved in making these changes, he has proposed tax relief in each of his budgets because it is one of the key investments that is necessary to our city's future. You have heard about a $270 million deficit that loomed when we began to prepare the plan. You have learned about the steps we propose to head off the deficit and avert another fiscal crisis. In spite of the palpable risk in our 10 OPERATING BUDGET & TAX BILLS - 5/10/04 future, this Administration maintained its commitment to tax reductions. And not only maintained the existing tax reduction program, but also provided another $65 million in tax relief proposed by the Tax Reform Commission. The annual reductions in the wage tax would leave the resident rate percent 9 lower in FY '05 than before the tax cuts 10 began. And annual reductions in the gross 11 receipt rate would cut the FY '09 rate to less 12 than half what the rate was when the cuts 13 began. , Atlanta, and Baltimore to raise taxes or halt tax reductions, we found a way to continue tax cuts. As you well know, our neighbors in Pittsburgh, on the brink of bankruptcy, sought and received the designation of a fiscal distress in order to obtain the authority to increase their taxes. 11 OPERATING BUDGET & TAX BILLS - 5/10/04 Here in Philadelphia, we are doing things differently. No other major city has continued to cut taxes every year, as we have. We are unique. We make tax relief a priority because it is one of our strategic investments. However, there is a limit. There is a limit to what is affordable and fiscally responsible. We are faced with the daunting task of balancing the many strategic investments that Philadelphia needs to grow in the midst of our most serious financial challenge in a decade. For the past month, you have been diligently learning about the difficult choices that must be made on the expenditure side of our budget. 4 percent. 12 OPERATING BUDGET & TAX BILLS - 5/10/04 You have heard about the impacts these cuts may have on services. Even though in our proposed budget we attempted to limit the impact on service as much as possible through innovation, restructuring, and productivity improvements, the proposed budget you are considering makes no allowance for wage increases or public emergencies. We have been cutting our expenditures in our greatest expense item, personnel costs, consistently for the past several years, until there is very little opportunity to reduce the size of our work force further without disrupting services. 5 percent. Prior to that date, the hiring freeze we implemented in 2001 had already resulted in the reduction of over 600 positions in departments that were not exempt from the freeze. The hiring freeze will remain in, and we will fill positions only when absolutely necessary.

We will continue to replace only 13 OPERATING BUDGET & TAX BILLS - 5/10/04 half the positions that leave through the DROP, as we budgeted for in this year's proposed plan and last year's. Further reductions in staffing will likely lead to service reductions. It will become more and more difficult to pick up the trash on time, replace and restore our roads on the proper cycle, keep libraries open, fight homelessness, child abuse, and the spread of disease, maintain our parks and recreation centers, and make Philadelphia a safer place with ever-dwindling staffing. Although the Mayor in his budget message signaled the willingness to compromise on his proposed budget, he was clear that for every recommended restoration there must be a correction through new and offsetting cuts. Similarly, for every dollar of revenue that we forego, there must be an adjustment in expenditures. We are not the federal government. We cannot print money or borrow against our future to avoid the difficult choices of today. Yet, we all agree that tax reductions are valuable and necessary 14 OPERATING BUDGET & TAX BILLS - 5/10/04 for our city to become more competitive and grow. Unfortunately, as we sit here today, we start from less than zero. Many of you would like to see funding restored to programs or departments you support. The reality is that we must first find the funding to make the plan balanced again. PICA sent a letter to the Mayor and City Council indicating that it would not approve certain revenue projections. Subsequent to that letter, the Administration determined that we would need to forgive the annual payment from the Philadelphia Gas Works in order to cease PGW's cash flow crisis and avoid a devastating ratings downgrade. 5 million in FY '09, we must now address a negative fund balance of almost $90 million before we can even think of restoring spending cuts or tax relief beyond the $440 million already in our proposed plan. The Philadelphia Tax Reform Commission was charged with studying our taxes 15 OPERATING BUDGET & TAX BILLS - 5/10/04 and making recommendations on how they would be reduced and simplified in a fiscally and socially responsible manner. I would like to take this opportunity to thank the members of the Tax Commission for their volunteer service and their contribution to the discussion of our tax structure. The report of the Commission brought many potentially fruitful ideas to light and provided informative data on which to base decisions, data which in part was developed in conjunction with members of city government. Our proposed Five-Year Plan endorsed and incorporated 15 of the Commission's recommendations. These recommendations are detailed in the plan. But the key changes the city is proposing for the next year, which were incorporated into the proposed five-year FY '05 budget, include, establishing accurate land and structure values for all parcels. This will provide more comprehensive and accurate data collection for the real estate tax assessment process. The FY '05 16 OPERATING BUDGET & TAX BILLS - 5/10/04 budget includes $5 million in funding for the Board of Revision of Taxes to carry out this recommendation. Next, eliminate fractional assessments. The BRT will attempt to value all properties at 100 percent of market value. The Administration supports the BRT's proposal to implement this recommendation in FY '06 following a pilot and the establishment of more accurate land and structure values. This proposal would entail adjusting real estate tax millage rates in the future. Phased-in land value taxation. 5 to 50 percent by 2014. This change would begin in FY '06 after the BRT has established accurate values. Single factor apportionment. Instead of basing the net income portion of the business privilege tax on property, payroll, and a double weighting of sales in Philadelphia, the city would base this tax 17 OPERATING BUDGET & TAX BILLS - 5/10/04 solely on sales in Philadelphia.

Although the change is projected to cost the city $13 million annually, it will eliminate the current penalty for businesses that operate and invest within Philadelphia. This change is proposed for our FY '05, in conjunction with the proposed increase in the parking tax from to percent to 10 help offset the cost. 11 Finally, a shift to January 12 implementation of changes in wage and earnings 13 tax rates. Changing the effective date of 14 reductions in the wage and earnings tax rates 15 from July 2 to January 1 beginning FY '05 16 would conform those changes to the federal tax 17 year and remove a compliance burden for 18 businesses so they need only adjust their 19 withholding rates once each year. 20 These recommendations will reduce 21 the city's revenue by approximately $65 22 million, and cost at least $5 million to 23 implement and administer over the life of the 24 plan, in addition to the $375 million in tax 25 relief from our proposed rate reductions. 18 1 OPERATING BUDGET & TAX BILLS - 5/10/04 The Tax Reform Commission made other recommendations that, unfortunately, we determined we could not responsibly adopt at this time. The recommendations that require your approval have been introduced as legislation. Exhibit A to my testimony indicates which bills we do not support because of the potential negative effects they would cause, including unavoidable revenue losses, changing in timing that would significantly impair our budget or cash flows or cause taxpayers to pay their bills twice in one year, or unduly restrictive legal constraints. The recommendations we do not support were projected by the commission to reduce the city' revenues by $285 million over the life of the FY '05-'09 plan, although this revenue projection has since increased to over $290 million due to increased growth assumptions in the plan. However, the loss of revenues resulting from the Commission's 19 OPERATING BUDGET & TAX BILLS - 5/10/04 recommendations did not end with this plan. The bills before you today include schedules for mandated wage tax reductions through 2014 and the elimination of the BPT by 2015. Yet, despite its charge to provide a fiscal impact statement along with any required ordinances, the Commission made no 9 estimate of the cost of its recommendations beyond FY '09, even as the magnitude of the wage tax reductions increased in FY '10 and the gross receipts reductions accelerated in FY '09. Put another way, in order to pay for the wage and business privilege tax reductions in changes proposed by the Tax Reform Commission in FY '09, the city would have to increase the real estate tax revenue collections by 37 percent or find alternative source for the $146 million cost in that single year. To pay for the elimination of the business privilege tax, whether by 2015 as recommended by the Tax Reform Commission, or by 2009 in an alternative bill, the city would 20 OPERATING BUDGET & TAX BILLS - 5/10/04 have to increase collections from real estate tax by 75 percent or find alternative sources to replace this funding. In addition, the recommendations we do not support would possibly even worsen the tax burden for a significant portion of our taxpayers, particularly our most vulnerable taxpayers. The Tax Reform Commission hired Econsult to produce an econometric model on tax rates and their effect in Philadelphia similar to the model they were hired to produce for the Pennsylvania Economy League in 2002. In their report, the Commission Econsult produced estimates of the supply side effects of tax reductions. The Econsult report estimates that by FY '09, the city's real estate tax revenue would increase by $92 million. 5 percent increase from our plan projection. 5 percent more real estate taxes due to the Tax 21 OPERATING BUDGET & TAX BILLS - 5/10/04 Reform Commission's package of recommendations.

The Econsult report also projects that by 2017 the median home value in Philadelphia would increase 29 percent in real or inflation-adjusted dollars, or 40 percent after inflation. To many this would be great news, to others it would represent a difficult burden and a damaging blow to one of Philadelphia's historic strengths, its relatively high home ownership rate among northeastern cities. To the Tax Reform Commission, the increased real estate taxes represent an opportunity for the city to replace some of the revenue lost by tax cuts. However, the Econsult itself addressed these concerns in its 2002 report to the Economy League. The increase in property tax revenue from the increased value of properties is unlikely to be politically feasible. It would imply large increases in property tax payments by Philadelphia property owners, many of whom have little ability to pay the increased 22 OPERATING BUDGET & TAX BILLS - 5/10/04 property taxes resulting from the higher value of their properties. You haven't heard much about this, but it is a critical issue. If real estate taxes did increase as much as the Econsult report estimates, many Philadelphians would suffer. If elected officials prevented real estate taxes from increasing as much as Econsult estimates, then the supply side effect touted by the Tax Reform Commission would be illusory. It is also important to point out what Econsult modeled. Econsult modeled the effects of the tax rate changes recommended by the Tax Reform Commission by comparing them to our current rates. In other words, the supply side effects they estimate include the effects of both tax reductions in our proposed plan and the Commission's additional reductions. Whenever you see the costs of Tax Reform Commission's proposals, however, they are always calculated by subtracting the cost of tax reductions included in the 23 OPERATING BUDGET & TAX BILLS - 5/10/04 Administration's proposed plan. If anyone shows you a comparison of Tax Reform Commission cuts and supply side benefits where the supply side benefits are greater than the costs between FY '05 and '09, they are comparing apples and oranges and they are wrong. Under the most optimistic supply side scenario, which is essentially what Econsult has given us, tax cuts would mean less revenue for the city during this plan. Since Econsult modeled the impact of both cuts proposed in the plan, as well as the additional cuts proposed by the Commission, we can identify the potential impact of the cuts proposed in our plan. The cuts proposed in the plan represent 66 percent of the value of the tax cuts modeled by Econsult through FY '09. Based on that proportion, their model indicates that the plan's tax cuts alone would result in an increase of over 31,000 jobs by 2010, although we do not have enough confidence in that figure to build it into our 24 OPERATING BUDGET & TAX BILLS - 5/10/04 budget. Supply side effects, or voodoo economics as they were once described by George Bush, have a very limited role in government forecasting. Some state governments, and very recently the federal government, look at supply side effects as part of their budget analysis, but they do not include them in the budget itself, despite years of pressure. As recently as 2002, the nonpartisan congressional Budget Office believed that using supply side effects in the budget process would pose intractable problems. We believe that the tax reductions have a beneficial effect on our economy, or we wouldn't be discussing these measures today. What we don't know with any certainty is how great these effects are and when they would take place. For this reason, in 1998 the District of Columbia Tax Reform Commission refused to recommend the use of supply side effects as a means of funding tax reductions 25 OPERATING BUDGET & TAX BILLS - 5/10/04 following their two-year-long study.

Consider that after years of pressure from Republican legislators, the State of California developed a supply side model with the assistance of the university of California Berkeley economics department. This model projected no more than a percent 9 supply side return to state tax cuts. 10 Other models, Connecticut and 11 Massachusetts state governments, have similar 12 returns, as did a study in New York City tax 13 cuts by a private think-tank. 14 The Conservative Heritage Foundation 15 projected no more than 50 percent supply side 16 returns to the federal cuts, although even the 17 Bush White House continues to avoid using 18 supply side to justify tax cuts. 19 The Econsult model projects far 20 higher returns than any of these models, more than five times as great as the model developed for the country's largest state by one of the leading economics departments in the world. To our knowledge, no other federal, OPERATING BUDGET & TAX BILLS - 5/10/04 state, or local government explicitly budgets for supply side effect, and this government does not intend for Philadelphia to be the first. Even though cities that have multi-year budgets have made tax reductions in the last five to ten years, like New York City and Washington, do not budget for supply side effect. We did not believe that being the first would be bold and innovative. We believe it would be unreasonably risky, desperate, and fiscally irresponsible. While we are discussing tax measures here today, it is appropriate to touch on the issue of tax collection rates and receivables. There has been some discussion recently of our outstanding tax receivables. The Tax Reform Commission recommended that the city could improve tax collection rates by percent, although it provided no benchmarking or other support for that contention. This Administration does agree that tax collections could improve and, accordingly, proposed a 27 OPERATING BUDGET & TAX BILLS - 5/10/04 small investment in staffing for FY '05 in expectation of generating additional revenue. Based on some preliminary analysis of other cities and the real estate tax collections, while there is room for improvement, it is not a dramatic amount of room. For FY '05 -- excuse me. , and only slightly lower than Pittsburgh, while a four-year average rate produced similar results. The majority of our tax revenues are, of course, from the wage tax. And due to state laws mandating employer filings, our improve database, and our cross-matching against IRS files, we are confident that our tax collections of this tax are strong. As City Solicitor Ramos detailed in his budget testimony, we can and will do better. But I assure you that this is not the magic wand and it will provide the funding for budget restorations -- that will provide the 28 OPERATING BUDGET & TAX BILLS - 5/10/04 funding for budget restorations and additional tax cuts. The Administration supports several bills that were not part of the Tax Reform Commission's package, including 040261 and 040256. Bill No. 040261 would allow for the adoption of the Tax Reform Commission's recommendation to shift effective date of future wage reductions from July 1 to January 1 to ease compliance burdens for businesses. This bill would also modify the trigger for reductions in wage taxes that by Bill No. 030073 must be implemented in response to real estate tax collection growth of more than percent per year. This bill would increase that threshold to percent, which will continue to provide residents relief and protection against surges in real estate values, while allowing the city to benefit from reasonable levels of inflationary growth in our second largest tax source. Bill No. 040256 would raise the 29 OPERATING BUDGET & TAX BILLS - 5/10/04 parking tax rate in order to provide additional revenue necessary to balance the plan. The Tax Reform Commission commented that, when compared to our Philadelphia taxes, the burden created by the parking tax is relatively small.

The Administration agrees. This change would provide much-needed revenue, while protecting Philadelphia residents. Just as we all believe the tax reductions provide an economic benefit or we wouldn't support them, we all recognize that maintaining our core public services is also necessary, or we would agree to the wage tax rate -- of reducing the wage tax rate to zero percent. Professor Robert Inman of Wharton has conducted ground-breaking an extensive work on the effect of taxes on our city. And while he was the first to estimate the negative effects of taxation, he has also always stressed the need to maintain public services in order to gain economic benefits 30 OPERATING BUDGET & TAX BILLS - 5/10/04 from taxes. 25 percent. The Commission then concluded these recommendations were fiscally and socially responsible. Each year this Administration and this Mayor applied decades of collective expertise in the city's finances in order to determine what tax reductions are affordable and to make them work within the city's budget by trimming expenditures. This year we are facing the biggest fiscal challenge in a decade. The tax reductions included in the proposed plan provide an investment in our future, while protecting our services and fiscal health. The cost of any tax reductions beyond those in the proposed plan must be paid for with offsetting revenue increases or 31 OPERATING BUDGET & TAX BILLS - 5/10/04 expenditure reductions. Those who support additional tax reductions should be prepared to identify the corresponding budget cuts. We have gone as far as we can. Thank you for the opportunity to present testimony regarding the FY '05 tax measures. We would be happy to answer any questions you have at this time.

Thank you. Are there any questions from members of the committee? Are there any questions? The Chair recognizes Councilwoman Tasco.

I just want to ask, you may have made an error in your discussion. I want the record to reflect the correct number. On of your testimony, the last paragraph, "In order to offset a $119 million increase in our pension and health benefits costs in Fiscal Year '05, as well as increases in our mandated subsidies to state authorities and key investments in a few 32 OPERATING BUDGET & TAX BILLS - 5/10/04 departments, we have proposed cutting a total of $107 million," I thought you said, "170." Did you just transpose? Did you mean 107?

It is 107.

Thank you.

You are welcome. Are there any other questions or comments of these witnesses? The Chair recognizes Councilman O'Neill.

Yes. Thank you, Madam President. Ms. Wilkerson -- and this is, really, for the other two witnesses, as well. I think everyone realizes that if there is tax reduction, it can put a hole in the budget. I mean, the idea of tax reduction, I believe, is to grow the economy so that we are doing something to increase revenues. Before asking a question that involves the Five-Year Plan and the impact, Tax Reform Commission has a chart that shows 33 OPERATING BUDGET & TAX BILLS - 5/10/04 the projected hits on the budget in the early and out years in the Five-Year Plan. Does the Administration agree with those numbers? This is if all the bills 6 are -- 7

Let me -- 8

-- that affect 9 our business privilege and our wage tax are 10 approved. 11

Rob Dubow, Budget 12 Director. We actually worked with the Tax Reform Commission in developing those numbers. So we, essentially, agree. There are minor differences here and there, but we essentially agree with those numbers, with the exception that one of the recommendations that went into their cost calculation, the single-factor apportionment, is in our plan. So, you need to back that out.

In looking at the chart, do we come out positive in the end?

No; we come out negative. 34 OPERATING BUDGET & TAX BILLS - 5/10/04

This doesn't result in additional revenues to the city?

The Econsult report identifies potential additional revenues that you could get based on growth in the economy. It is comprised of several things, including growth in the property tax. And I think the way the report was laid out there, it included both the city portion and the school district portion of the property tax. So if you believed in using a supply side effect, which we don't for the reasons that Ms. Wilkerson identified in her testimony, you would still have to adjust the numbers that were in the Econsult report.

So you disagree that we have a positive cash flow at the end of five years?

Yes.

If this Council felt so strongly that we were willing to take the risk that they were right, you were wrong, and the PICA would do something that, in the 35 OPERATING BUDGET & TAX BILLS - 5/10/04 short history of PICA, I guess, would be unprecedented, and that would be to agree to this Five-Year Plan -- in other words, that we would have hits in the first few years, we would look at them each year to see if they were meeting our targets, this is a Tax Reform Commission and the Econsult targets that I am talking about -- and then would finish positive after five years, what would you say to that? If they would sit down at the table, PICA, that is, and agree to work with us on this.

We have had discussions with PICA because we tried to work through these numbers, even assuming a supply side effect. And even in assuming the supply side effect that is included in the Econsult report, we still didn't think that we came out ahead. And that was the last conversation we had with PICA.

Right. But what if PICA agreed to approve these numbers 36 OPERATING BUDGET & TAX BILLS - 5/10/04 in a Five-Year Plan with knowing there is an annual review where adjustments could be made?

We would still have a problem with rating agencies. I think that's what Ms. Davis wants to address.

Yes. I think while PICA might be willing -- and I am not certain that they would -- be willing to sign onto this, we would quickly find ourselves in trouble with the rating agencies who do not buy supply side as a way to balance a budget. Particularly from the standpoint that, if we were wrong, we would quickly face a cash-flow problem. The diminishment of our fund balance has removed a lot of the excess cash in this government. And we will quickly find ourselves with not enough cash to fund operations, if we are wrong by just the slightest bit. So while perhaps we could get PICA to sign on, I don't believe that the rating agencies would be as accepting of a plan that was built on hopes for a future. 37 OPERATING BUDGET & TAX BILLS - 5/10/04

Do you think the rating agencies would accept a plan that's built on more aggressive tax collection?

I don't believe that they would, especially since in the past they have been unwilling to sign on to anything that we didn't feel fairly certain was a positive and a definite. Rating agencies are in the business of protecting bondholders, and they are not into supply side or voodoo economics. They have to be certain that what they say goes to the real dollars that will come in. And there is -- there has been just recently a statement by the rating agencies that identified some of the political risks associated with credit analysis. And one of those is an unwillingness to do taxes and an unwillingness to tax to pay obligations. And, so, I viewed this as something that the rating agencies would picture as our supporting -- supplanting the need to generate true revenues with a wish for revenues to 38 OPERATING BUDGET & TAX BILLS - 5/10/04 grow.

Do you believe -- and I am talking about the Administration -- that your tax collection efforts are as good as they can get?

The Administration has, you know, as I mentioned in my testimony, increased funding for the law department because we do believe that there is additional dollars, there are additional dollars, out there. We have increased projected collections from the revenue department by about 10 or 11 million dollars. We have also increased -- or proposed to City Council that we increase a number of the fees and fines in order to increase revenue to the city. We have legislation that we have been working with the state legislators that would increase our capacity to raise the fines. And, so, we believe that there are additional revenues out there. We have not been as aggressive in 39 OPERATING BUDGET & TAX BILLS - 5/10/04 putting a dollar figure. We think what we have is what we can reasonably expect to collect. We have looked at the receipts out there, we have looked at what we have done in the past, and that's how we arrived at our $10 million figure.

That's about half a percent increase in collections?

Roughly.

Pretty aggressive. The question I have, Ms. Davis, I appreciate your candor about the rating agencies and the concern the Administration well should have for their concerns because of the negative impact rating agencies can have on the city. But does the city have the same discussions, and do the rating agencies have the same concerns, when we go on a spending spree with overtime, where we don't have the money in the budget, we are just spending done surpluses and bringing ourselves to the point 40 OPERATING BUDGET & TAX BILLS - 5/10/04 we are at today? It would seem to me that they wouldn't wait two years to tell you that we are on a downward spiral if we continue to spend money we don't have. Can you address that, please?

The rating agencies don't look into our expenditure side, and we don't have two-year discussions with the rating agencies. Whenever there is anything significant happening around our finances, we in fact contact the rating agencies and have the discussions. Rating agencies -- when the rating agencies know what's proposed, and there are no surprises to the rating agencies, you are least likely to face negative impacts. So we have discussions with the rating agencies whenever there is anything of a significant financial impact on the city. But, they don't monitor our expenditures.

So they are concerned if we do something that lowers our 41 OPERATING BUDGET & TAX BILLS - 5/10/04 revenues to the point where they may be below expenses, but they don't monitor if we increase our expenses to the level that they are beyond our revenues?

In the context of our budget -- (Applause.)

In the context of the budget, which is all that the rating agencies have to review, they are concerned if we include speculative revenues.

But I thought my question was, they don't seem to have the same concern when we are spending more than we are going to take in, but they are concerned if we take in less than we are going to be spending. (Applause.)

It would seem to me one should match the other.

The rating agencies look at our budget as a balanced budget. Their concern doesn't weigh on those things, such as expenditures. 42 OPERATING BUDGET & TAX BILLS - 5/10/04 They look at the reasonableness of the revenues that we say will cover those expenditures. It is just not something that they review.

Well, it just seems to me from the Administration's standpoint, putting aside the rating agencies, that we are being contradictory because we are concerned now that lowering revenues, lowering taxes -- and this morning's Inquirer was shocking, even when you know you are uncompetitive, how uncompetitive you are when you go down to No. 3 below you on the taxation side. (Applause.)

I have trouble with the Administration that seems to be right now awfully concerned about a budget possibly being out of balance because of an attempt to bring some tax fairness to this city and some competitiveness and hopefully increase revenues in a few years, when there doesn't seem to be much concern in the last several years about spending money we didn't have. 43 OPERATING BUDGET & TAX BILLS - 5/10/04 (Applause.)

I mean, what kind of discussions did you have in the Administration at the top during the last two years when you saw this happening, when you saw us spending more than we were taking in?

The Administration has reduced the number of positions within government by over 800 positions. We imposed a tax freeze -- excuse me, a hiring freeze back in November 2001. We have been contracting our expenditures fairly aggressively. That's why we have presented the budget we have this year. Getting to the point of proposing the elimination of funding for the arts, proposing some of the other changes that we have proposed, did not come easy to the Administration. It came with an awareness that, if we were going to have a strategy that called for reducing our taxes, having the capacity to make targeted investments and maintaining high 44 OPERATING BUDGET & TAX BILLS - 5/10/04 services within our neighborhoods, we were going to have to make choices, difficult choices, in cuts elsewhere. I think it is important to note that throughout the Tax Reform Commission's proposal and all the other reports, tax reform is just one component of making the city grow. It is no less critical that we have adequate security. It is no less critical that we have neighborhoods in which people are willing to live, if Philadelphia is going to flourish. And I would like to have Mr. Goldsmith respond just briefly to some of the overtime questions.

Phil Goldsmith, Managing Director, City of Philadelphia. First of all, I would like to say I welcome this debate. I think it is a great debate for the City of Philadelphia because I think it really raises the issues we should be talking about. And I think this Administration has 45 OPERATING BUDGET & TAX BILLS - 5/10/04 found the right balance in trying to seek tax reduction and tax reform, while at the same time maintaining our core services and making some investments in our future. And I think we have a balanced approach which is important for those of us governing. We have been very aggressive in reducing overtime. And I would say that our overtime in '04 will probably be down a good 10, percent from what it was Fiscal Year 12 '03. So I think we have taken steps. 13 And I have said before in my own 14 budget testimony, I think that there is more 15 that we can do. But I think it is also important to understand that overtime is not totally dictated by this Administration. You have independent elected officials, particularly when it comes to court overtime, who have a large sway in the amount of overtime. We also have events that are beyond our control. I am sure we are all hoping we are going to have a Flyers parade and an Eagles parade and a Phillies parade. 46 OPERATING BUDGET & TAX BILLS - 5/10/04 We live in an age where we don't know when the next anthrax scare comes, the next orange alert comes from, or the next snow storm comes from. So while we can do a better job, and I think we are doing a better job, of ratcheting down overtime, we have to recognize that some of these are beyond our control. And some of the overtime, quite frankly, is a trade-off in not hiring people. So we can ratchet down overtime, but it means hiring people. I want to get to an issue, though, of core services. Because we can talk about expenditures. And I like to talk about not threatening people by layoffs or things like that. But I think it is really important for us to understand some of the things that are not being done in this city, which I think would have as much economic development impact as wholesale tax reform. We have a backlog of 30 streets in this city, blocks, that need street 47 OPERATING BUDGET & TAX BILLS - 5/10/04 reconstruction. We can only do blocks a year. We are far behind in maintaining and restoring ditches. We have 900 children who are sleeping in emergency shelters every night because we cannot provide them with shelters. We have to slow down the number of tours that we give in our Arts Murals Program because we can't staff it. If you wanted to talk about anything for economic development, is to take people in our neighborhoods and see the great mural arts works that have been done. We can't provide Saturday hours at all our libraries. We only inspect restaurants once every or months, as opposed to once every year. 60 percent of our city ladder companies are ten years or older. We need 150 field computers in our fire stations. Our police districts and our fire stations need improved maintenance. We don't get to truancy prevention until the kids are truant. We have to do a 48 OPERATING BUDGET & TAX BILLS - 5/10/04 better job of taking care of our park systems, starting with our sidewalks, starting with the greatest street we have, Ben Franklin Parkway, where all the sidewalks need to be repaired. So I just think it is important. And I could go on and on. But I want to make the point that we are not talking about tax reduction in a city that has our services where we want to be a world-class city. We still have a long ways to go. And I think that core services and enhancing these basic services not only has a social service impact, but also talk about the quality of city we have from an economic development point of view. And I don't want that point to be forgotten. Thank you.

Thank you. You paint a pretty good picture -- not a good picture, but an accurate picture -- I think, of what is out there. But it also is a fairly convincing argument that we have to try to be aggressive in trying to find a way to raise more 49 OPERATING BUDGET & TAX BILLS - 5/10/04 revenues. Thank you. (Applause.)

Councilman, was your question related to overtime?

I didn't mention overtime. I wouldn't call it a spending spree.

Somebody did.

I wouldn't go that far. But in the last couple of years we have had some pretty expensive programs, particularly Safe Streets. That, I believe, as good as they are, there is a whole lot of other things that are terrific too that we haven't had money to spend on. And we have been spending money we, basically, weren't taking in. We were drawing down on a surplus. Knowing that if we continued to spend at that level, we were going to get a deficit. And, guess what? We are here.

Talking about overtime, when we are spending almost $19 50 OPERATING BUDGET & TAX BILLS - 5/10/04 million in overtime at the prisons, I think that's an exorbitant of overtime, I really do.

Thank you.

Can anybody give an explanation as to why we should be spending that kind of money in overtime at the prisons?

Well, one of the things, number one, we are looking at that issue. And I have instituted a number of changes to make sure that our overtime is being spent better. In some cases, particularly with the prisons, that was an issue of spending overtime because we didn't hire. And, so, we have a trade-off. We can either hire the people and put them on the payroll, or we spend the overtime with the people that we have. That was a judgment that was made. I think in some cases we should have hired and had less overtime. But probably at the end of the day, there won't be a significant difference in the Class 100 expenditures. It is really a trade-off we 51 OPERATING BUDGET & TAX BILLS - 5/10/04 made between the hiring and the overtime. But I will grant you that there were cases that we were having people do work that probably we should not have done, so I am not going to defend it entirely.

Thank you. The Chair recognizes Councilman Ramos.

Good morning, Madam President. Good morning, Chief of Staff and those from the Administration that have taken time out to, again, continue in this budget process. I learned last year, as I campaigned to seek this office, and I did successfully, obviously, that I was very encouraged by something that I referred to as the great tax debate in Philadelphia. And that it no longer was an issue of the affluent or the middle class of Philadelphia, but that I actually came across people playing dominos talking about taxes. I think that's a very positive 52 OPERATING BUDGET & TAX BILLS - 5/10/04 indication of the civic evolvement and concern of the people of Philadelphia that want to stay in Philadelphia. And I think that the Tax Reform Commission has done a very, very good job in continuing to encourage this great tax debate that we are in the middle of, that I suspect will go on for many years to come. I want to commend the Chief of Staff Wilkerson for a very good presentation, making a very clear argument of where the Administration stands. And there has been times that I have been frustrated coming here to chambers for these budget hearings where there were things that were not very clear to us and information not gotten to us. But today, after listening to you, I want to commend you for a presentation that is very clear, at least today, on where you stand, particularly on the issues at hand today on taxes.

Well, I would be remiss if I didn't point to Sean McNealy, who 53 OPERATING BUDGET & TAX BILLS - 5/10/04 is sitting back there in the corner, and Rob Dubow. They are supported by an entire department, you know. We come forward and give this testimony. It reflects an enormous amount of expertise developed over decades that's within city government. And, you know, we have people who are every day being solicited by the private sector. We hope, you know, they don't leave, Rob. And the hundreds and hundreds of hours of work that they do, they do it because they are concerned about the city's welfare and worry about tax reform and they worry about the budget and they worry about cash flows on and ongoing basis. And I don't want to take the credit. So much of it belongs to them.

And I commend them, as well. I just have a couple of questions for you. What is the hole in the budget created for Year 2005 by the passage of the entire tax reform package proposed in 54 OPERATING BUDGET & TAX BILLS - 5/10/04 Councilman Nutter's bill? And by "whole," I mean additional shortfall of revenues to expenses/liabilities.

It is about $15 million.

million? 7

15, one five. 8

And this is very 9 important to us. Because -- yes. 10

We didn't hear 11 you. 12

It is about 15. 13

15. 14

Yes. 15

Per year.

15 in '05. It grows in outer years.

Thank you.

And this figure is very important to us because we have to pass this budget for Fiscal Year 2005. And I needed to know what kind of an impact, if we pass all these tax reform bills, what kind of impact it would have.

I think that is a 55 OPERATING BUDGET & TAX BILLS - 5/10/04 critical figure. You know, million in the context 4 of a multi-billion dollars budget frequently 5 doesn't seem like much. But it is 15 million 6 on top of the millions of dollars we have to 7 find. There's $18 million because of PGW. 8 You know, there are other 9 recommendations made by PICA urging us to 10 reform our projected revenues. There are 11 items that we are currently struggling with 12 now that the Administration proposed that we 13 cut, that others would have replaced. 14 So I think when you say, "15 15 million," I think there is also a need to identify where is the $15 million going to come from, what is going to be cut that the city currently does that will fund the $15 million tax reduction.

What is the hole in the Five-Year Plan that would be created by Bill No. 040009? That's the wage tax reform bill. That alone, how much would that be?

Over the life of the 56 OPERATING BUDGET & TAX BILLS - 5/10/04 plan, that's about $98 million.

How about Fiscal Year 2005?

2005, the wage tax impact would be a little over 2 million.

Point of information.

The Chair recognizes Councilman Goode for a point of information.

I think in '05 it is actually an increase in revenue. I think '06 is $2 million.

No. The increase that you are seeing there that was in the original Tax Reform Commission report was comparing against last year's plan. And the reason that went positive was because of the shift in the date of the change in the wage tax from July to January 1. But that shift is assumed in the plan. So comparing to this year's plan, you don't get that increase in revenue.

So what is it for 57 OPERATING BUDGET & TAX BILLS - 5/10/04 '06?

It is about million in 4 '06. 5

Okay. Thank you. 6

Councilman Ramos. 7

What's the basis 8 for the $275 million hole create in the Five-Year Plan that you say the tax reform package would create? Are you saying that if we go with the entire package of the Tax Reform Commission recommendation, that we will create, that a 275 million additional dollar deficit will be created. Can you take us through how you reach, you know, those numbers?

Yes. Most of the reduction is on the business tax side. And the places where there are differences between the Tax Reform Commission's report and the Five-Year Plan are on the gross receipts tax in the fifth year. So gross receipts rates are the same in the first four years. In the fifth year 58 OPERATING BUDGET & TAX BILLS - 5/10/04 the Tax Reform Commission would have a more aggressive reduction in the gross receipts tax than the Five-Year Plan has. On the net income side of the business privilege tax, the Tax Reform Commission would start reducing the net income rate in '06. The Administration Five-Year Plan doesn't have any reduction in the net income side. There are also changes in net operating loss carry-forward. The Tax Reform Commission had that go from three years to ten years, and the Five-Year Plan doesn't have that change in the definition of net income. So that payments to partners, for example, would be considered as a cost, so you would change the way that your tax rate is applied. So those are the major differences, and that's where the rest of the cost comes from.

Can I continue, Madam President? Or I can --

Can we have a 59 OPERATING BUDGET & TAX BILLS - 5/10/04 second go-around, please. There are a number of Council Members that would like to be recognized. The Chair recognizes Councilman Clarke.

Thank you, Madam President. Good morning. A couple of questions. The Administration has indicated its willingness to support the land value tax and the repeal of the nonutilization tax. I am trying to get a sense, is that support for the repeal of the nonutilization tax solely based on their support for or your support for the land value tax, or is it based on other issues that were raised at an earlier hearing, I think maybe three years ago, three or four years ago, when I appealed the original nonutilization tax?

I think there have been legal questions about the nonutilization tax. But the Administration, after review of the Tax Reform Commission's proposal, 60 OPERATING BUDGET & TAX BILLS - 5/10/04 thought it made sense to adopt a land value tax approach. (Applause.)

I think this is -- you know, we in the Five-Year Plan discuss adopting it for FY '06. The Tax Reform Commission appropriately indicates that we need to fix the problems with our assessment system and go to, I think, 100 percent assessments before we go down that road. It is something that is proposed for a ten-year phase-in, so we will have the opportunity to evaluate it. But we support that approach, as opposed to the tax that I believe you sponsored.

So the answer is?

Yes, it is either/or.

It is tied to that?

Yes.

I am trying to 61 OPERATING BUDGET & TAX BILLS - 5/10/04 make sense. Is it more your belief that there are some legal issues or is it more the need to merge it with the implementation of the land value tax?

I think it is both.

All right. Do you agree that if the legal issues -- and I am not sure they are -- but if they are, if we can overcome those legal issues, our ability to implement such a tax could possibly increase a substantial number of revenue, amount of revenue, as a result of the vacant land throughout the City of Philadelphia, and possibly encourage people to do something with this underutilized land? Underutilized in every sense of the way, in that this focuses primarily on blighted property, not necessarily individuals who have a lot of land that they use, probably lawns, parking garages, things, parking lots, things of that nature.

I think it creates pressure for property owners to use their 62 OPERATING BUDGET & TAX BILLS - 5/10/04 land. I think we are seeing increased values in a number of areas of the city, areas that had for a long time, you know, been throw-away areas from a real estate value point of view. We are seeing increased interest in it. I think there remains the question of, can you find the property owners. They have to come forward before that tax has any real significance. But I think we might realize revenues that even five years ago, ten years ago, weren't going to be available.

Well, as it relates to finding property owners, I am assuming that we have run into that problem under the NTI program and our aggressive acquisition of land. Our ability to impose an additional lien or impose an additional penalty or tax on that land, I am assuming, would enhance our ability to acquire properties under NTI. I look at my friend Councilman 63 OPERATING BUDGET & TAX BILLS - 5/10/04 DiCicco over there. And I know he is thinking about that vacant window bill, and the ability to ratchet up the liens on blighted properties. I mean, we don't really concern ourselves when we are trying to acquire land under NTI as to whether or not we will find owners. Why would we concern ourselves about --

When it comes to acquiring land through NTI, you are right, the more liens we have, the less cash we have to outlay. I was thinking in terms of simply, you know, properties that are not going to be acquired through a condemnation strategy, but where you have abandoned property and you are just looking to collect revenues and make it expensive for somebody to support blight in our cities. You know, under the scenario where we are not going to a acquire it and you don't have the proper owner available, the tax doesn't make a big difference. 64 OPERATING BUDGET & TAX BILLS - 5/10/04

I don't understand that. If there is a property that's vacant now, right -- and I am assuming that we are taxing that property separate and aside from the nonutilization tax.

That's right.

We do impose that tax. We don't simply say, because we can't find you, we are going to not impose that tax.

In terms of creating revenue for the city, you don't necessarily create revenue when you can't find the owner, that's the big difference.

Have we ever run into instances when people feel that the cost of land, and subsequently the imposition of a tax, is sometimes worth the cost of business, particularly when we have speculators who own properties in parts of the city where the taxes are relatively low, and they say, look, I am not going to worry about that, I am going to speculate and I will sit on it. The taxes are a hundred dollars a year, that's the cost 65 OPERATING BUDGET & TAX BILLS - 5/10/04 of doing business. At some point this property will be valuable, as we are seeing across the city.

If in fact there are people who are holding property for speculation, that would have an impact. But what we have seen historically is that these are not properties that are vacant because they are being held for speculation; they are simply properties that have been abandoned.

So the worst-case scenario, we would increase the lien on the property. And at some point we will probably get to that property, particularly in some of the areas, since you have indicated that there is a renewed interest in some of these areas. I can speak about my district in particular, because I happen to have a substantial amount of vacant properties and vacant land in my district. And, interestingly enough, people are now interested in the properties. And I am now 66 OPERATING BUDGET & TAX BILLS - 5/10/04 having to decide as to what strategy we use to dispose of this property to individuals.

You know, if it is legal, there is no down side to a tax like the one you proposed. It will mean additional revenues as property values strengthen, you know. It makes owners -- I think owners will make a different calculation. They will go on and pay the tax or develop the property, as opposed to risk losing it.

Ms. Davis, you had indicated a little earlier that the history has shown that these people cannot be found. What do you base that on? (Applause.)

Well, that wasn't my statement. I just said historically they were abandoned properties. I think a lot -- if one wants to look at the success in collection efforts, or even what liens in Philadelphia really mean, one needs only look at the tax lien sale that 67 OPERATING BUDGET & TAX BILLS - 5/10/04 was done in 1997. That securitization has been, by most accounts, a very unsuccessful adventure. We still at this point, with short maybe month left to go, have outstanding --

Not to cut you off. Wouldn't you agree that the land value has changed substantially from 1997 to 2004?

Land values have changed substantially. But the ability to collect on those liens has not. And, so, that, where you would have expected that there would have been a greater ease to collect on them because of the escalation in the values of properties, we have not seen that. There is, as of today, roughly $45 million that have been uncollected on. And, so, that you have a lien sale, a bind sale, that now stands at risk of being in default because those liens have not generated. And, so, to say that this escalation in values have impacted the liens is not true. And the ability to collect, when you 68 OPERATING BUDGET & TAX BILLS - 5/10/04 are looking at agencies whose livelihood depended on collecting, and for someone who has that risk, as the insurance companies have that risk, millions of dollars, they have done every effort they could to get those liens paid, to get those liens adequately serviced, and still they have not had the success. So I think what we are facing here is, yes, there are areas where there will be a positive impact of having a nonutilization tax. But then there are still areas that, because of the demographics, the properties involved, or whatever, where those won't be -- an encouragement where the tax won't be an encouragement for people to pay, but will simply mean that more liens build up on properties that don't have the underlying value to support the lien.

Okay.

Point of information, Madam President.

The Chair recognizes Councilwoman Blackwell for a point of information. 69 OPERATING BUDGET & TAX BILLS - 5/10/04

Thank you very much. Councilman Clarke is mentioning this tax that's up on or about June 16. And my question is, how does the lien sale affect the taxes on those properties? As Ms. Wilkerson knows, I have been very upset because we can't get any substitutions because we are out of properties, and we have been told the city has to put the whole value of the properties in. And we didn't know this was happening; otherwise, I would have been smart like my colleague, Councilman Clarke, and exempted my area. Having said that, we are stuck. But I have met with people who are interested in trying to work with the city to then buy back these liens. And I know we have the insurance company in the middle. But there are other people who are interested in working with the city to see if the city will enter into an agreement to get these properties back. 70 OPERATING BUDGET & TAX BILLS - 5/10/04 How would that affect taxes, and how does that affect the whole issue of being able to move those properties?

There are a lot of issues around those particular properties that are involved in the lien sale. Number one, in many of those properties, new liens have been established on those same properties. So you have properties now that did not have the underlying value to support the liens that were there in the initial sale, lien sale, that now have more liens layered on. As long as the insurance company is there and has the rights to those liens in order to satisfy what they are going to eventually have to pay out on behalf of the city, if the city does not in some way step up and make those payments, you have a complicated situation that probably, in a meeting, we could examine each individual property or examine properties that people may be interested in and see if there is not a way to negotiate something between the insurance 71 OPERATING BUDGET & TAX BILLS - 5/10/04 company, the servicer, and the parties who are interested in acquiring it.

My final, then I will wait my turn, Madam President, on this whole issue is, it is a really important issue. We have private business owners who want properties to expand their businesses. I have talked about it all the time, so my colleagues know I am talking about Bottom of the Sea in my area and other businesses -- I have been talking about them for the last year, year and a half -- who want to expand business, who want to pay taxes on that land that's tied up in lien sales. People want to invest in our city. Isn't that what we want? Don't we want to support minority businesses and businesses overall and investing? We say we do, and yet we don't have any way to transfer properties to them so that they can get a clear deed. I mean, when and how do we develop a process? I know I go through this all the 72 OPERATING BUDGET & TAX BILLS - 5/10/04 time under NTI and CDBG. When and how do we develop a process, or is there any need to, or do we just let areas, businesses, decide to move because they can't expand, they can't become further tax-producing entities because we won't find a way to get them a clear deed? Is there any move to have that done, that you are aware of?

Yes, I think we have discussed it, you know, in connection with NTI. We are moving thousands and thousands of properties through the condemnation process. We have, you know, 10, appraisers that are working almost full 17 time doing appraisals in support of our filing 18 declarations of taking. 19 We are putting systems in place, 20 IT-supported systems in place, so we will be able to monitor and do things more efficiently. The perfect system, though, is still 18 months out, something like that.

It never 73 OPERATING BUDGET & TAX BILLS - 5/10/04 comes. You know, it is very frustrating when the city says, get businesses to invest in neighborhoods. We have neighborhood businesses, we get them to invest, they want to pay taxes, the properties are either in this lien sale business or they have owners they can't find, and the city still can't find a way to work to get a clear deed. It is very frustrating and it makes businesses and neighborhood commercial corridors think we don't say what we mean; that we really are not committed to their expansion. Because no matter how long we talk about it, we don't come up with a plan. Thank you, Madam President. I will wait my turn.

Thank you. And I suggest that you put your light on again, because it went off. (Applause.)

Councilman Clarke, are you about finished? Because we have a number of Council Members that would like to 74 OPERATING BUDGET & TAX BILLS - 5/10/04 be recognized.

Yes. So your response is that, essentially, the ability to collect taxes on a substantial amount of vacant land and vacant property is iffy, at best. Do you or have you calculated in your equation for your support for the land value tax that, under that particular program, you won't be able to collect that revenue? Because I believe in some of the earlier testimony by some of the supporters of the land value tax, is that the imposition of that particular bill would in fact encourage individuals who currently have vacant land and vacant properties, because the shift of focus -- particularly on vacant land, and in some instances vacant property, because it was indicated that improvement on vacant property would be taxed at a lesser level now because the focus now has shifted to the vacant land in terms of increased penalties. So if you don't get it on nonutilization, you are not going to get it on 75 OPERATING BUDGET & TAX BILLS - 5/10/04 the land value

The rate of the land value tax is, the way we have costed it, to be cost neutral, is that you are spreading it over the same items. But the same -- same things that impact the nonutilization tax would also impact land value tax, if you had a vacant piece of property. Changing the proportion that's tied up in land, or the improvement, if you have something that's abandoned and not desired, is not going to change the dynamic.

So we are not going to get a response from the vacant land under either program is what --

Not if it is land that is not in demand. There are those areas that are hot where --

So the primary focus on the land value tax is, essentially, properties that first we can find the owner, there is a strong likelihood that the land is 76 OPERATING BUDGET & TAX BILLS - 5/10/04 being used for some reason or another, i.e., someone's lawn or parking lot or something that's being used, we can track the person down; but, essentially, the likelihood that it is going to encourage the development of vacant land is --

The land value tax is predicated on taking those properties that are under some lesser use and moving them up to a higher use; i.e., development. So that is exactly the predicate.

Okay. All right. I'm glad we cleared that up. I will come back for followup.

Thank you. I just have a question. From time to time City Council has to approve TIFs and/or KOIZs to attract or retain businesses. By giving our special tax breaks to a few, are you not giving them a competitive advantage over other businesses in the city? With that being said, don't you think that tax reform is a fairer means of 77 OPERATING BUDGET & TAX BILLS - 5/10/04 creating a tax-friendly atmosphere for the city than the other inducements that you have been using? (Applause.)

I will respond to the idea that TIFs and KOIZs and KOZs are of special benefit to a few. I think those are very needed economic development tools and they are used even in those cities that have booming, thriving economies. They are ways of targeting your tax benefit to an area or an industry that you hope to see develop and grow in your area. Tax reform is another way of accomplishing that on a broader base.

I think I found it interesting in the Tax Reform Commission's report that it did not propose the elimination of all the property or project-specific incentives, you know. It basically supported what Ms. Davis just testified to, that, particularly in the interim, these are the kinds of incentives 78 OPERATING BUDGET & TAX BILLS - 5/10/04 that the city needs to continue to utilize; that we may reach the point where we don't have to consider them anymore. Although, you know, Ms. Davis was showing me an article about what's going on in Denver. And even there you still, you know, from time to time find locales still using the incentives, particularly the TIF program.

But you didn't answer my question, in a way. Don't you think that tax reform is a more fair way of creating a tax-friendly atmosphere than the incentives such as TIF or KOIZs?

I think in the long run it may be. But in the short run, I think that there is still a need for the project-specific incentives.

All right. I would like to remind my colleagues that we do have a number of Council Members that want to be recognized. I did not time anyone in the beginning, only because there were very few 79 OPERATING BUDGET & TAX BILLS - 5/10/04 Council Members who had their lights on. However, the board is really full now, so I would ask my colleagues to please keep that in mind. We will start with the next go-around for five minutes per Council Member. Thank you. The Chair recognizes Councilman Rizzo.

Thank you, Madam President. I want to take an opportunity to discuss something that the managing director said about core services. And I want to point out one particular core service that I think, if it diminishes anymore, we might just put the closed sign on the city, and that's the area of traffic control. I get letters, I get phone calls about the gridlock in Center City. And I think many of us have driven from one side of the city to the other during peak. And I look to see if I see police 80 OPERATING BUDGET & TAX BILLS - 5/10/04 officers, traffic officers, and I see very few, if any. But when we see special events, we see just overwhelming numbers of police officers. Mr. Managing Director, if you are suggesting that tax reform would cut any further into some of the core services, I think we would be in big trouble in this city. Because I think right now people that really depend on coming to the city, that can't use public transportation, absolutely have a right to complain because the gridlock that is occurring in Center City lately is beyond description.

Councilman, I am pleased to tell you that I actually have a meeting scheduled in my office some time later this week with the police, and traffic division in particular, to discuss this issue. And I hope you are there with us when we start giving tickets out. Because if I have anything to do with it, we are going to start getting tough on people blocking the 81 OPERATING BUDGET & TAX BILLS - 5/10/04 intersections, going through red lights. It is time that -- as far as I am concerned, it is as much a part of economic development and making this city a livable place and a place where people want to visit. So hopefully you will be there with me when some of your constituents start screaming when they get the tickets.

If they are breaking the law, they can scream as loudly as they like. But my point being that there is very little police presence, especially traffic police, that goes on right now. So, obviously, you have recognized that, and you plan to dispatch police officers to allow people that need to come into the city -- and I know that you are a big promoter on bicycles and alternate forms of transportation. But I can tell you this, that after hearing people at the Chamber of Commerce meeting recently talking about the fact that it is almost impossible to travel through 82 OPERATING BUDGET & TAX BILLS - 5/10/04 Center City either at the morning rush or the evening rush, is to the point where they hesitate to even want to come to the city any longer.

I agree with that.

Thank you, Madam Chair.

You are welcome. The Chair recognizes Councilman DiCicco. COUNCILMAN DiCICCO: Thank you, Madam President. And good morning to the panel. I believe I asked this question a couple of weeks ago. I'm not absolutely certain if I did, so I apologize if I am repeating it. When you do your budget and you take into account whatever those figures are going out over the Five-Year Plan, have you taken into account the buildings that were given the ten-year exemption back in 1997? I see Mr. Dubow shaking his head. And you are factoring in those numbers as 83 OPERATING BUDGET & TAX BILLS - 5/10/04 additional revenues?

Yes. You mean when the abatements expire? COUNCILMAN DiCICCO: Yes.

Yes. COUNCILMAN DiCICCO: I don't want to get away from the tax issue for a moment, but I think this kind of falls into where we are today, how we got here, and what we need to do going forward. And it picks up on Councilman O'Neill's question, which I believe the managing director responded to, about overtime and the way monies are being spent, and what we need to do about getting some of those controlled. So that at the end of the day, no 18 matter what of the bills, if not all of the tax reform bills are passed, or some of them are passed, changes need to be made. A couple of weeks ago I spoke to, when the Recreation Commissioner was in this Council for hearings, I brought up the issue of Camp William Penn, 671-acre facility in the Pocono Mountains. And I have done some 84 OPERATING BUDGET & TAX BILLS - 5/10/04 further investigation as a result of that discussion. My understanding is, it is being used 29 days a year, at an approximate cost of $500,000 per year. I have had some discussions with people in the casino industry, which I raised at the hearing, that it is very valuable land. Not certain if casinos would even be interested in it. But at the very least I am told that that land is probably worth today, non-casino-related purchaser -- and it wasn't done by a professional appraiser, but just kind of, like, off-the-cuff value -- it is worth about $10 million. So when we are sitting here talking about tax cuts possibly, if we pass any of the Tax Reform Commission recommendations, talk about city services, libraries possibly closing and not opening on Saturdays, pools not opening this season and maybe for the next few years, a half a million dollars a year annually over a Five-Year Plan is $2.5 85 OPERATING BUDGET & TAX BILLS - 5/10/04 million, notwithstanding any of the additional monies we may have to invest to keep that place up to the standards that it needs to be kept up to. What, if anything, is being done about that notion, suggestion, if you will, about selling that facility?

Councilman, we are expecting an appraisal on that land any day now, so that's something that we are looking at. I hope that you just didn't put a ceiling on what the value might be. But we do have -- we have contracted with an appraiser. They are going to come back to us with what they believe the value of that land is. And, given that, then we will find out what alternatives we have. COUNCILMAN DiCICCO: I mean, you are half a million dollars a year. I think it costs about $50,000, I am being told, to keep a pool open yearly, on a season. So that's ten pools we can keep open every year. And I understand that 500 children 86 OPERATING BUDGET & TAX BILLS - 5/10/04 get a great experience by going to the Poconos. But I think we can do the same thing in Fairmount Park, if we had to. So this all falls into the area of how do we -- (Applause.) COUNCILMAN DiCICCO: I don't know if that was an applause for the Poconos or whatever. But, in any event, I think those are the kinds of things that, during this whole tax debate, we need to be taking into consideration. Not only about reducing taxes, but on the supply side, as we talked about in Ms. Wilkerson's testimony, these are things that have to be addressed, I think, simultaneously.

Councilman, we are addressing that particular issue, as well as a lot of different issues at the same time. But that one we are looking at, what the value of the land is. Camp William Penn gives a great experience, you know, in the country for urban kids. So we don't want to 87 OPERATING BUDGET & TAX BILLS - 5/10/04 lose that. But we are also looking at ways, can we send them to another camp that someone else operates, and so forth. So those issues are legitimate issues that we are exploring. COUNCILMAN DiCICCO: I have some other questions, but it is really concerning the parking tax. And I will wait for people who are coming up from the Commission. Thank you.

Thank you. The Chair recognizes Councilwoman Tasco.

Yes. Thank you, Madam President. In looking at the bills that you are not supporting, I would just like to have some discussion with you about why the Administration is not supporting some of those bills. The one bill, Bill 040012, phase-in over five years the ability for partnerships to fully deduct payments to partners against 88 OPERATING BUDGET & TAX BILLS - 5/10/04 their business privilege tax liability, so partnerships are no longer taxed higher than corporate competitors, what is wrong with that?

There is nothing wrong with the theory of it. It is the cost that concerned us. We didn't develop a hundred percent accurate cost, but we think it is probably in the neighborhood of $10 million a year. So that was, really, just a decision made on the basis of cost.

Could you just further, could you tell me what that bill 16 means, and how do you calculate the cost?

What that bill means is that, if you are a certain type of business, you can deduct payments to partners, basically, as a cost of doing business. And then instead of being taxed at the net income rate of 6 and a half percent, you wind up getting taxed at the net profits rate, which is lower. So it is a lower tax rate for 89 OPERATING BUDGET & TAX BILLS - 5/10/04 businesses. So it helps them and makes, you know, our tax rate more competitive for them. On the other hand, it costs us money.

So if they go from the 6.5 percent to the lower rate. The city loses money?

Right. So we lose on the business privilege tax and gain on the nets profits tax.

And you calculate it to be?

About 10 million a year, but we're not a hundred percent sure of that.

So how do you make a decision whether it is 10 or 4 or 3 or 2?

Well, one of the reasons that we haven't endorsed it is that we couldn't get an accurate cost. We know it is something that will be costly; we don't know exactly what the cost will be.

Okay. The next one, 13. Enact budget-based real estate 90 OPERATING BUDGET & TAX BILLS - 5/10/04 taxation so elected officials set tax rate after assessments are performed to create accountability in the real estate tax system. What is your position on that, and why?

We oppose that one, too. Our fear as to what would happen if that bill became law was that, in years when assessments were really strong, millage rates would go down and the budget would stay in balance. In years where assessments were weak and we needed additional revenue, we are worried that that millage rate wouldn't be increased, and it would just be a continuing downward spiral in our revenues, which would then lead to reductions in our services.

So the Council has to raise the assessment, and you have no 21 confidence --

The millage.

The millage. And you have no confidence that they would do that? 91 OPERATING BUDGET & TAX BILLS - 5/10/04

It was our concern that that won't happen.

I think the whole -- you know, a lot of the, you know, the Tax Reform Commission's work and ability to pull this off really does turn on a willingness to capture the increased growth in the real estate tax. And the real estate tax is the tax that, because we don't have a lot of flexibility with it, because of the uniformity provision and the state constitution, comes down hard on a lot of the senior citizens and low-income residents in the city. (Applause.)

You know, the Tax Reform Commission, you know, talks about the need for state reform in order to give us some flexibility. But until that happens, there is concern about the city's willingness to capture the growth in revenue from the real estate tax. We saw it last year, when the real estate tax overall did not increase, the 92 OPERATING BUDGET & TAX BILLS - 5/10/04 assessments didn't increase, in a way that was out of line with what it had done historically. It was not one of the highest growth rates in assessment. And, yet, we, you know, as a city, wrestled with and ultimately avoided realizing some of that increased revenue because of concerns for low-income and senior citizen taxpayers. You know, that's something that has to be dealt with. The Tax Reform Commission indicates -- or, the Econsult report indicates, that's one of the big risks in everything that's proposed, is that there will not be the resolve to actually go on and realize the revenue that would come from a growth of the real estate tax and property values.

Thank you.

Next go-around, please. The Chair recognizes Councilman Clarke.

That was quick. 93 OPERATING BUDGET & TAX BILLS - 5/10/04 Thank you, Madam President. Real briefly, I just want to touch base on the nonutilization tax issue. Ms. Wilkerson, you indicated that there was a legal challenge. And I am assuming that you are referencing John Anderson's original bill?

I don't know whether it was the original bill or -- I understand there was a subsequent amendment. My understanding is that what is currently on the books is not legal.

Based on what?

Advice of the City Solicitor's office.

Is the City Solicitor here?

I can have the City Solicitor come and talk about that tax in more detail.

I would just like to get a history of the bill. Because it is my understanding that there is the possibility that the review of 94 OPERATING BUDGET & TAX BILLS - 5/10/04 that was based on the original bill. And I don't know if it was based on the original bill, the legal challenges associated with the original bill. And I am, actually, not even sure there was ultimately a ruling on the original bill. I am hearing different versions of what happened. That conceivably the city decided to drop its case, as opposed to seeing it through. So with respect to the ultimate legality of the bill, I am not really clear.

I will have somebody from the Law Department come prepared to answer your question.

With respect to, Ms. Davis, your comparison to the lien sale and the nonutilization tax issue. Correct me if I am wrong. Under the lien sale -- because, fortunately, I didn't have a substantial amount of properties in my district that was then Council Street's district, that was formerly Councilman Street's district -- my understanding, that 95 OPERATING BUDGET & TAX BILLS - 5/10/04 these liens were sold at a substantially reduced rate to individuals; right?

The liens were not sold; they were used as security for a bond deal. And they were at a discounted rate.

So conceivably the lien could have been $3,000, and that person was able to secure that lien for half of that, maybe?

Well, in order to generate, I believe it was, 75 million, thereabouts, in proceeds, the city put up in the neighborhood of 135, 140 million dollars in bonds. So, there was a deep discount. And most of our liens would be in that situation, deeply discounted lien.

And, so, that person, essentially, had to go out and find the owner of the property and threaten to take the person to sheriff's sale, and that was their only way of getting any revenue out of it?

They would have done exactly the process that the city pretty much 96 OPERATING BUDGET & TAX BILLS - 5/10/04 faces. And I believe maybe the discounting was at 70 percent.

And, so, but when the city takes the property to sheriff's sale, we essentially throw it out there and we start bidding at a certain level. And we, under our powers, must accept the highest bid; correct?

Yes.

So we weren't looking at a number, necessarily the number, that the individual who purchased the lien was looking at when we go to sheriff's sale; we are looking for whatever we can get, in most instances?

By the time it gets to sheriff's sale, even for the people who are now the lien holders, when you go to sheriff's sale, at that point you are trying to get the best deal that you can and the best return that you can for those liens.

What does the city do?

The city does the same 97 OPERATING BUDGET & TAX BILLS - 5/10/04 thing.

Do we turn down a bid at the sheriff's sale? I don't remember that happening.

I am not intimate with that process. But I believe that should a lien -- should there be no interest at all in liens, and you get one that is, like, bottom basement, on a property that it doesn't satisfy the outstanding liens, and the apparent value of the property would be well in excess of the amount bid, you may get a property pulled. But you would have to get the sheriff's office, who are more intimate with --

My limited knowledge of sheriff's sales, particularly when the city goes to sheriff's sales, is, we, essentially, take whatever we can get.

That's generally the process. But there are instances under which you would not want to.

All right. But 98 OPERATING BUDGET & TAX BILLS - 5/10/04 the ability -- would you agree that the ability, because the city has a lower level of acceptance, would you agree that the ability for the city to get some revenue out of that is probably a little better than a person who purchases a lien, because that person has an initial cash outlay and they are trying to get as much as they can get, if not more?

At this point their aim is exactly the same as the city's. So I don't think you would find -- because, in fact, their liens are going to the same sheriff's sales that ours are.

I understand that. But I think you really need to look at the history of the sheriff's sale. Is that when an individual has a lien sale, that individual wants to get more than they purchased that lien for. The City of Philadelphia historically, particularly in a substantial amount of the neighborhoods, frankly speaking, would be very happy if they can get the $800 minimum on a lot of these properties. 99 OPERATING BUDGET & TAX BILLS - 5/10/04 So our ability to collect under the traditional sheriff's sale, I have to say that it is much better than the process that was set in place in 1997, particularly given --

The liens that are in this lien sale from 1997 are in fact serviced through the same sheriff's sales. So properties that they have identified may go through the same sheriff's sale that something that is not subject to that property.