Will City of Brotherly Love Issue IOUs?

July 17, 2009

From the Wall Street Journal:

Philadelphia’s city government has stopped paying its vendors and suppliers, citing a cash crisis.

Mayor Michael Nutter on Friday blamed the drastic move on the failure of the Pennsylvania legislature to act on his request for authorization to raise the city sales tax and change the formula for the city’s contribution to its employee pension plan. Nutter says these items are necessary to help close a projected city budget deficit of $1.4 billion over the next five years.

The sixth-largest U.S. city by population will delay spending on anything other than payroll, debt service and emergencies, until passage in Harrisburg of a state budget and laws related to the sales-tax and pension proposals. Philadelphia’s sales tax would increase by one percentage point to 8% for five years under the proposal.

With the state’s budget delayed in Harrisburg, the city is not being reimbursed for services such as child welfare and juvenile detention. The city of brotherly love is running out of money, much like the IOU-issuing state of California. The city is looking to increase revenue or cut spending somehow, and the two plans on the table are a sales tax increase and some form of pension reform. The city is also planning on selling $329 million in bonds at the end of the month, but the bonds have been rated poorly by Moody’s.

Since the state of Pennsylvania is still in the budgeting process they may end up with an income tax increase as well. Pennsylvania has a 6% sales tax, and Philadelphia’s current additional 1% sales tax was enacted in 1991.

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