Thread: City of Philadelphia takes out $275M loan...

Sep 1, 2009 10:30 pm US/Eastern

Budget Crisis: City Takes Out $275M Loan

Reporting
Ben Simmoneau
PHILADELPHIA (CBS 3) ―

Philadelphia is taking out a short-term loan to help with cash flow as Pennsylvania's budget crisis continues.

Mayor Michael Nutter announced Tuesday the city will take out the $275 million loan from JP Morgan Chase. The loan comes with a 3 percent interest rate if paid in full by November 30. On December 1, the interest rate increases to 8 percent.

Mayor Nutter expects the city will re-finance the loan at a lower interest rate in the public markets – once Pennsylvania's budget crisis is solved.

Mayor Nutter also said Tuesday that by the end of next week, he will submit a new pension plan to the public agency that oversees the city's pensions. Officials in Harrisburg are forcing the mayor to take that step.

Last week, the State Senate signed off on the mayor's plan to raise the city sales tax by a penny and delay about $150 million worth of pension payments this year – but only if the city cuts the costs of its pensions.

Going forward, the city must freeze pension benefits for current workers and reduce pension costs for new workers by 20 percent. The mayor has said a new pension plan might include some type of 401(k) option to cut costs.

Pensions eat up a large share of the city's budget – this year it's expected to be some 12 percent, or $450 million out of a $3.7 billion budget.

According to the Pension Board, the city owes pensions to roughly 65,000 workers – but less than half, 29,215 are still on the job. Most of the rest are already retired and collecting those checks.

Each worker contributes anywhere from 2 to 6 percent of their pay toward their pension.

Pensions are calculated by multiplying 2 to 2.25 percent (depending on their position) of an employee's average salary at retirement by their years of service.

The average yearly pension for city workers is $17,350 – not exactly a golden parachute.

"We've fought hard over the years for that," said Herman "Pete" Matthews, President of AFSCME District Council 33 – the city's blue-collar union. "Our pension benefits are not out of line. It's something that we bargain for; it's something our members deserve."

The city's pension fund, however, is woefully underfunded. To pay all its obligations, the city should have about $8.4 billion in the fund. Right now, it only has about $4.6 billion – 55 percent of what is needed.

The unions place the blame for that squarely on city officials.

"We always put our money in that we're supposed to," said Matthews. The problem was caused by "past administrations dipping into the pension fund and taking money out or not funding the pension fund."

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Philadelphia Struggles to Conserve Cash as Budget Crisis Drags On
by KYW's Mike Dunn

Philadelphia's budget director says the Nutter administration is forced to watch every penny and nickel -- with a high-stakes juggling of cash -- as the city and state budget crises drag on.

City Hall has a cash flow crunch at the moment, to the tune of about $500 million. That includes reimbursements from Harrisburg that are held up because there's no state budget, and a routine short-term borrowing delayed because the city budget is not settled.

This gives headaches to city budget director Rob DuBow (in file photo above):

"We've been fairly aggressive about conserving our cash. We are insuring that we pay payroll and debt service and benefits for our employees. Other than that, it's mostly just emergencies that we pay."

Vendors haven't been paid since last month. DuBow says in all, the city has about $200 million in cash on hand, enough to get through another couple of months -- by which point he hopes the budget crisis is over.