City on the Brink

Squeezed by budgetary woes and urban ailments, Philadelphia teeters on the edge of bankruptcy

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At the intersection of 13th and Filbert in downtown Philadelphia lies a crater at least 25 ft. deep and two blocks wide. Located directly across the street from city hall, the big hole in the ground was supposed to be the site of a $170 million Justice Center that would house courtrooms, a 500-cell jail and offices for law-enforcement agencies. But the project was shelved two years ago because of political bickering and financial difficulties. The hole has become a symbol of the fiscal abyss that threatens the City of Brotherly Love.

Beset by a double whammy of rising expenses and vanishing federal and state aid, Philadelphia is going broke. Unable to borrow money by issuing bonds and prohibited by state law from imposing new taxes, the city is running out of cash. This week a crucial deadline looms: unless it can raise $150 million by Jan. 4, Philadelphia will become the first major city to become insolvent since Cleveland in 1978. If the bell does toll for Philadelphia, the reverberations will be heard across the nation. They will be loudest in other cities caught in a similar fiscal bind.

So far, Philadelphia has stayed afloat by ruthlessly cutting costs. Fire stations, libraries, homeless shelters and historic sites have been closed, local tax refunds and pension-fund contributions have been delayed, and a hiring freeze has been in effect since this summer. Even so, bond-rating agencies have lowered the city's bonds to CCC. That is just one notch above the "default" category.

The prospect of bankruptcy became more likely three weeks ago, when a proposed rescue plan fell through. Under the plan, the state treasurer in Harrisburg would have bought part of a $325 million bond offering with borrowed funds. But state law bars the treasurer from taking out loans to finance other debts. The state did manage to expedite $20 million in payroll funds to help the city buy time. But faced with the state's own $1 billion budget deficit, the general assembly is in no mood to provide more direct assistance. Says Republican state senator Richard Tilghman, head of the appropriations committee: "It's going to be awfully tough to find a handout for Philadelphia."

Pressures on the city's budget have been mounting since the mid-1980s. As spending on crime, homelessness and other costly social problems soared, revenues to pay for those services declined steadily. To make up for cuts in aid from Washington and Harrisburg, Philadelphia has had to assume an additional $60 million a year in outlays for mental health, AIDS treatment and youth-services agencies. At the same time, the city's tax base has eroded, as droves of businesses and middle-class workers have fled to the suburbs. While other cities managed to cope by imposing new taxes, Philadelphia's efforts to follow suit have been thwarted. In August the city's plan to hike sales taxes by $45 million was rejected by the legislature. Philadelphia, which has piled up deficits of $190 million since 1988, is facing a gap of $200 million this year.

With local primary elections five months away, the city's political leaders have poured more energy into finger pointing than into finding a way out of , the crisis. Mayor Wilson Goode, who in 1983 was elected the city's first black chief executive, is limited by law to only two terms. Goode paints himself as a "victim of circumstance," who just happened to be in City Hall when soaring crime, an influx of drugs and the AIDS epidemic placed an unbearable burden on his city.

The threat of fiscal collapse has added racial overtones to the battle to succeed Goode. The Democratic contest will pit one of two African Americans — City Council member Lucien Blackwell and former councilman George Burrell — against a white, former district attorney Edward Rendell. Another white, current D.A. Ronald Castille, is expected to be the Republican candidate in the November general election. About 40% of the city's residents are black. Blacks fear, says one politician, "that whites want to take back City Hall, and they're going to play on this crisis to make us look bad."

In the view of some local leaders, the only solution to the mess is for the state to bail out Philadelphia. In return, the city would have to turn over control of its finances to a state oversight committee. But Goode has rejected the proposal as an unwarranted and unconstitutional grab of the city's powers.

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