Philadelphia Isn't Paying Bills, but Has No Shortage of Eager Lenders : Budget: The city is borrowing funds at towering rates to meet its payroll. A long-term solution to the crisis has not come together because of a leadership vacuum.

By DALE RUSSAKOFF

Nov. 3, 1991 12 AM PT

WASHINGTON POST

PHILADELPHIA — More than a year has passed since Philadelphia was supposed to have run out of cash, since Wall Street banished it with a credit rating worse than that of junk bonds, since the mayor aired proposals to sell everything that was not nailed down and some things that were, such as Veterans Stadium and parking meters.

But Philadelphia remains afloat. It simply has stopped paying its bills. The city is stiffing the phone company, the transit authority and the employee pension fund. Foster parents who had not been paid for expenses since June marched on City Hall recently, saying they could barely care for their children. “Stop the Madness” read one mother’s placard.

Now the nation’s fifth-largest city has been down so long that it is starting to look like up, at least to some people. Paradoxically, another line is forming outside City Hall, one composed of local corporations and institutions that want to loan the city money.

With a rock-bottom credit rating and desperate for cash, Philadelphia can sell its notes only by paying almost twice the going municipal interest rate and putting up extraordinary collateral.

“We feel that the rate is prudent, and we want to help the city,” said Scott Lederman, treasurer of the University of Pennsylvania, one of several institutions negotiating to buy the latest round of city notes at 8% interest. He observed that some risk remains because, if the city declares bankruptcy, the collateral may not stand.

Even so, underwriters recently announced that several local corporations want in on the deal, along with hospitals and universities. The deal would allow note-holders to withhold city wage taxes if the city defaulted--equivalent to paying taxes in advance and getting interest on them. The notes also are secured by next winter’s city property-tax revenue. The city, originally seeking $90 million, now stands to raise more than $100 million.

This is the third time that Philadelphia has borrowed money at towering rates to meet its payroll since losing its investment-grade credit rating a year ago. The first time, the effective interest rate was 27%. This time, with tax revenue as collateral, it is to be much lower. The interest payments will be piled atop an accumulated deficit of $170 million.

“It’s like the federal government,” said city Controller Jonathan A. Saidel, an elected fiscal watchdog. “One day, they’ll be borrowing so much money that current revenues won’t be available for current expenses. You’ve got elected officials who only hope the world doesn’t blow up during their term of office. Somebody has to force them to the precipice to make them look down into the world below.”

Even Finance Director David W. Brenner, architect of the short-term borrowing strategy to “pull one more rabbit out of the hat,” as he recently put it, said this is the last time the city can go this route. Without a long-term solution by spring, he said, “all the rabbits will be dead, all the hats will be crushed and we will run out of cash.”

Philadelphia has had the pieces of a long-term solution in hand since last summer. In June, Democratic Gov. Robert P. Casey signed legislation creating the Pennsylvania Intergovernmental Control Authority to oversee the city’s writing of a five-year plan to bring spending in line with revenue--a Draconian prospect--and then to borrow money on Philadelphia’s behalf, at about half the interest rate the city now pays.

The legislation also increased the city’s sales tax to ease the cash crunch and allowed the city to pledge its tax revenue as security, as it is doing in the note deal under negotiation.

But the pieces have not come together because of a paralyzing leadership vacuum in the city. With elections Tuesday for mayor and the entire City Council, Democratic Mayor W. Wilson Goode, a lame duck, appears to have surrendered the mapping of a rescue plan to his successor. One draft plan that he floated unsuccessfully in September relied in part on legalizing riverboat gambling--an apt metaphor, some business leaders said, for the city’s approach to the crisis.

The inaction, alongside a shiny set of new tools to attack the problem, has prompted debate about whether things are getting better or worse.

On Wall Street, Philadelphia still has a CCC rating, the worst short of a default. In June, Standard & Poors Corp. placed the city on a “credit watch,” signaling possible improvement with creation of the authority, but on Oct. 21 even that mitigator was dropped. “Despite . . . financial problems that reach well over a year ago,” S&P; said, “actions to resolve them have been slow to come.” The CCC rating is to stand “for the foreseeable future.”

Philadelphia illustrates the classic urban crisis, only more so. It receives less state aid than most major cities and is both a city and county, so it cannot turn to wealthier suburbs to share the exploding cost of social services.

“Our daily prison population is twice what it was in 1980,” City Council member John Street said. “We have two times the number of children under our human services department as in 1983.” In the same period, the city has eliminated more than 2,000 police, fire and sanitation workers through attrition.

“Basic services have decreased dramatically, and that’s why people are totally dissatisfied,” Street said. “They say: ‘My taxes are going up, and I can’t even get a police car when I call 911.’ ”

The state recently agreed to assume tens of millions of dollars of human services costs, but city spending nevertheless is growing twice as fast as revenue and the tax base is eroding. Its population at 1.6 million, the city lost 100,000 middle-class taxpayers from 1972 to 1988, a decrease of $4 billion in taxable income. With the highest individual taxes on the East Coast, Philadelphia has ruled out another tax increase to balance its books.