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Winter 1994
   
America's Cities: Can We Save Them?
Hon. Edward G. Rendell
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The day I went down to the Academy of Music to be sworn in as mayor of Philadelphia, someone handed me a copy of USA Today. On the front page, in the column on the left, was a little box that said, “Edward G. Rendell, former district attorney of the City of Philadelphia, gets sworn in today as Philadelphia’s 121st mayor, and he faces the most horrifying municipal fiscal situation in the country.” And I almost told them to turn the car around and take me back home.

When I took the oath of office, Philadelphia was running at a $230 million deficit on a $2.3 billion annual operating budget. On my fourth day as mayor we were on the brink of missing a payroll. We were saved by the last-second intervention of a judge allowing us to stretch out the payments due to the employee pension fund. Our bonds, far from having an investment rating, were graded with the least creditworthy of the junk bonds. We had gone into the credit market a couple of months before I was sworn in to try to borrow money on a short-term note; no one on Wall Street would buy a nickel’s worth of that paper. The Philadelphia banks got together and loaned the city money for this six-month period, charging 21 percent in interest and fees. (Less than a year later, we borrowed the same amount of money, for the same period of time, and were charged only 4.6 percent in interest and fees.) The budget deficit was so big that, even with a wage freeze, it would have grown to $1.4 billion, or roughly 58 percent of our operating budget, if nothing changed during my four years as mayor.

Under normal circumstances the first course of action would have been to consider raising taxes. We simply didn’t have that luxury. Our local tax burden was already the third-highest in the United States, behind only Portland and Milwaukee. In the 11 years prior to my becoming mayor, Philadelphia had raised taxes 19 times—causing 16 percent of our tax base to leave. According to a study by the Wharton School, our wage tax alone had cost us 150,000 jobs during that period. Raising taxes would have been tantamount to shoveling sand on our own coffin, and I was determined not to do it.

We rejected the option of massive, across-the-board layoffs, because services were already so poor they were driving homeowners and businesses out of the city, and across-the-board layoffs would have made services deteriorate even further. So we were left with only one real option, and that was to cut the cost of the operation of our government. The good news is that in 18 months we eradicated a $450 million deficit, and we did it without raising taxes one penny. To be honest, it was relatively easy. I would like to tell you that I am a courageous genius, but the truth is that it was not so hard to do, because there was so much material to work with.

When I took office, our average city employee cost us more than $50,000. We were paying 55 cents in benefits for every dollar of wages. The average company in New York probably pays somewhere in the mid to high twenties. We are now in the high thirties, because we reduced our benefit package significantly. The contract we signed with our municipal unions produced almost $400 million in concessions over a four-year period—and we probably didn’t do all that we should have.

More than $300 million came from savings in health-care costs alone. For members of our four big unions, we were paying on average $490 per month per employee for health care. We now pay about $360, and we still have a great health-care plan. We have the best HMO managed-care coverage that any citizen in Philadelphia can obtain, with no copayments. We still have point-of-service virtually for free. We have Blue Cross and Prudential for a small stipend for a single person and a modestly small stipend for a married person with a family. Prescriptions arc covered with only a one- or two-dollar copayment. We also have a dental and optical plan with no copayments.

When I became mayor, our workers could take a total of 47 days off a year. A city worker had two weeks paid vacation—or 10 days. He also had 20 sick days and 14 paid holidays, including some you have probably never heard of. And because we have Good Friday off, we have three administrative leave days that any employee can take at will so that Jewish employees can have the three major Jewish holidays off. That makes 47 days—and we haven’t even begun to talk about our funeral leave policy.

We reduced the paid holidays from 14 to 10. Last Tuesday was the first Election Day in more than a half-century that hasn’t been a paid holiday in the City of Philadelphia. And these aren’t just productivity issues. About 40 percent of a city workforce has to work on holidays anyway, so they get paid overtime. For each holiday we eliminated, we saved about $2.7 million in overtime. Everyone said what a mean and rotten guy I was during these negotiations, but I said that I thought that our city workforce could overcome the emotional stress of being away from their families on Flag Day.

We also went after our disability system. Our workers could get a partial pension and worker’s compensation at the same time. Our disability system paid them more for not working than for working. We had frequent cases of double-dipping. We had some famous cases, like the one the Philadelphia Inquirer broke in which a man claimed he was injured at work when he slipped on some ketchup during lunch at a seafood restaurant. He claimed this was work-related because he was out with two other employees of his department discussing business matters. He wound up getting an award from the pension board of well over $1 million.

The city’s benefit package was totally out of control. So we negotiated a thirty-month wage freeze and we got many concessions from the unions on benefits. Why were we able to do it? For two reasons. First, people were fed up. Second, from the day I took office, I never stopped communicating two facts: that we were out of money and that the benefit package, when compared to what the average Philadelphian gets, was outrageous.

This worked enormously well. Every citizen, from every segment of our public, was convinced that we were out of money. I often said to people, “Look, I wish we had money, I wish we could do something for our workforce, just like I wish we didn’t have to cut the budget and reduce some services. But we don’t have any money, and we can’t print it.” And I would tell them, “I would also love to wake up tomorrow morning and look in the mirror and say, ’Gee, I am going to comb my hair in a pompadour today.’ But that is not likely to happen, and neither are we going to find any money.” People understood.

They also understood that the benefit package was out of control. During the negotiations we were visited by virtually every leader of every national union in the United States, and they weren’t friendly visits. But it didn’t affect me one bit—not because I am equipped with an extraordinary amount of courage, but because the local private-sector unions never said boo. Their workers knew that city workers were getting benefits that far outstripped their own. Their workers knew that if we didn’t do something they were going to have to pay the tab.

The municipal unions tried virtually everything they could to stop us. They ran television ads against privatization that showed people being fired and a father coming home saying he wouldn’t be able to feed the family anymore. They claimed that we were only going to privatize blue-collar jobs when, in fact, we have privatized as many white-collar as blue-collar services in the 21 months I have been mayor. They made unabashed appeals to race, with ads that said Mayor Rendell and his advisers are a bunch of white guys in suits who want to take away benefits and jobs from poor, hardworking blacks. But all that fell on deaf ears, because black citizens of Philadelphia were fed up with paying higher and higher taxes and seeing union workers get benefits that they could barely dream of.

So demanding concessions from the unions really didn’t take that much courage. They went on strike, but in 16 hours the strike folded, and the unions signed the most concessionary contract in the history of Philadelphia. We didn’t ask for any salary cuts, but we negotiated a contract that gave no salary increases for two years.

All along I had made the point that we weren’t going to balance this budget solely on the backs of our workforce: everybody was going to have to bear part of the burden. Everyone I appointed to a management position took a 5 percent pay cut, and so did I.

We created the Mayor’s Private Sector Task Force on Management and Productivity. In my first year in office, three hundred executives were loaned to us. They worked either full- or part-time in the city’s departments, coming up with ideas for saving money and improving services. I cannot overestimate the value of this task force; it saved us a ton of money in a number of ways.

In the first year we privatized 15 different functions, and we have 15 more on the drawing board now. With those 30 we will save about $34 million a year. Privatization has not proven nearly as hard to do as everyone expected. And it is more than just a money-saver: in almost every case we are delivering a better product to the citizens of Philadelphia.

Then we took a look at our vendors. During the campaign, when I announced our five-year recovery plan, I said that we would seek at least a 5 percent reduction in the cost of doing business with all vendors that were in a no-bid system. And we did. Law firms that do business for the City of Philadelphia must cap their fees in advance. Some firms decided they did not want to cap their fees; we moved to other firms. As for investment bankers, we do not pay them just for being part of a bond issue. They get paid when they go out and sell, and if they do an excellent job, they get more work the next time. As a result, when we went into the bond market in June to take advantage of the interest rates and refinance, we sold $15 million in bonds at about 6.38 percent interest, even though our rating is still one level below investment grade. The City of New York, which has a fairly stable credit rating, sold $15 million in bonds the same day at 6.27 percent interest.

So we have done very well, because we have put heat on the people who do business for us. Vendors of a major city have a tendency, intentionally or not, to look upon the city as a fatted calf. This is because most of the bureaucrats who deal with contracts don’t care. They take the “OPM” approach—it is other people’s money. Also, the relationship between vendor and government is often a relationship between contributor and candidate, and the vendors do not believe the candidate will do anything detrimental to their interests. And government has never applied sufficient personnel to oversee their contracts.

We created an Office of Management and Productivity for the first time in the City of Philadelphia, and made it responsible for overseeing our vendors. We examined every single contract we had, and we saved millions of dollars. During my second month in office, the Office of Management and Productivity caught something unbelievable: we had a year-to-year lease for a Grade C building that housed our Department of Public Welfare. We were paying $32 a square foot. That may not sound like much in New York, but in Philadelphia you can get space in the newest, highest, most architecturally dramatic building for about $27 a square foot. We went to the landlord and said, “Unless you renegotiate our lease we are out of here.” And we renegotiated that lease for $8 a square foot. Better still, we renegotiated every single lease we had and, except for one, renegotiated them downward.

The Office of Management and Productivity also looked at things like outside insurance for city businesses. We have something called the Philadelphia Parking Authority—don’t ask me why—that operates garages and parking lots, and that requires a lot of property and casualty insurance and worker’s comp. In the past the mayor’s favored broker got the contract, found a national company to write the insurance, and the city paid whatever it asked.

We decided we were going to introduce a little competition into the process. We asked the mayor’s three favorite brokers to find us a company that would quote us a good price. The low bidder in this competition came in $1 million under the previous year’s quote for the insurance. That bidder won the contract and handled our claims so effectively it saved us another $1 million.

But the most amazing part of the story is that the incumbent firm, which had the good sense to contribute to my campaign and therefore was allowed to bid again, reduced its bid by $750,000 compared with the previous year. You know they were not going to take a loss on the new bid, or they would have just dropped out. So the year before they had ripped the citizens of Philadelphia off for three-quarters of a million dollars.

We also went after collection of revenue. In this fiscal year, we collected about $42 million more than we did last year by better collection of fees and taxes. And we started taxing people who had never paid the taxes they owed. If we wanted to avoid raising taxes, we had to make sure that everybody paid their fair share.

About 18 percent of the companies that were doing city business, particularly in construction, didn’t even have a business privilege license, never mind paying taxes. Lawyers and doctors who routinely came into Philadelphia to practice and make big fees paid no taxes. We found one doctor who came in from an office in Montgomery County to one of our eye hospitals twice a week, forty weeks a year, to perform cataract operations. According to our best estimate, he made about $2.2 million for those eighty days in Philadelphia and didn’t pay one nickel of taxes. He does now. Be assured that we also taxed accountants, lawyers, and visiting athletes. We routinely took out Philadelphia wage tax for, say, the eight days a plumber spent working on our new convention center, and nobody ever complained about that. Darned if we were going to take our wage tax away from plumbers who make $28,000 a year and not take it from baseball players who make $7.5 million.

Lastly, if you examine the operation of government, there is no telling how much money you can save in the area of productivity and management. We didn’t do something as plain and simple as use nine-digit ZIP codes on our mail, but we do now. We didn’t have an effective means of getting Medicaid reimbursements for people who used our district health centers. Now, before you get treatment, you must fill out a form to apply for Medicaid. As a result, we will recoup about $6 million of additional revenue this year, and somewhere between $12 million and $15 million in the next full fiscal year. It is unbelievable how many things like that there are to do.

We also changed our management rights, our work rules, and our past practices. One notorious result of our union rules was that it took three people to change a light bulb at the airport: a mechanic, an electrician, and a custodian. We had union rules that banned “working down,” so that if you were a tractor-truck driver for the City of Philadelphia, and you came in to work and your truck was in the shop, we could not force you to drive a smaller truck whose driver was out sick that day. Instead, you sat and collected your salary while the smaller truck stayed idle.

We couldn’t use volunteer workers. The Pennsylvania National Guard cleaned and scaled crackhouses in Harrisburg and wanted to do it in Philadelphia, but the union said that under the contract the Guard was barred from coming in. I am happy to tell you that two months ago the National Guard cleaned and sealed its first crackhouse in Philadelphia, and it is going to do more than a thousand this year.

We have tried to change the culture of the city’s workforce, too. Civil service and union rules had robbed city workers of every ounce of incentive in doing their daily jobs. We have tried in every way we can to put incentives back in. Let me give you just one example. Most city departments complained that things were so tight in city government that they never had money to buy the things they needed to do their job better or to save money. So we took $20 million and instituted something called a productivity bank. We have a loan committee, just like a bank, that reviews applications from the departments. But the rules are that in five years you have to save double the amount you borrowed from us, and during that time the department must pay the money back, with interest, out of its own budget.

The results have been staggering. Our Revenue Department borrowed $5.8 million for a new package of computer software, which this year alone is going to net $9 million in increased collections. Our Streets Department borrowed $350,000 for energy-efficient lamps, and this year alone they are going to save about $740,000. The Streets Department also borrowed $800,000 for a computer system to allow it to deploy sanitation trucks more intelligently. They will save $4 million in overtime and eliminate six middle-management jobs.

The great thing is that, apart from repayment of the loan and interest, the savings are kept by the individual departments. It has our people really thinking about ways that they can improve their departments. Privatization has them on their toes, too, of course, because not only do city workers lose their jobs when we privatize, but managers do, too. All of a sudden people are thinking about how to save money, because it’s no longer just other people’s money—their own jobs are at stake. We have put cost-saving and performance incentives back into the city government.

All of those things are necessary and important, and we have done a very good job. That’s the good news. But there is bad news facing Philadelphia and every other American city, whether or not they have done what we have done.

I often use the analogy that I was elected to be the doctor of the city. And on January 6, 1992, I found a very sick patient suffering from two ailments. The first was a serious cancer that would become fatal if it didn’t receive good innovative treatment. The second was a gunshot wound to the chest. Like any good doctor, you treat the gunshot wound first, because if you don’t, the cancer is academic. It took us 18 months to treat our gunshot wound, and the good news is the patient will survive. The bad news is that the cancer remains unabated. The cancer is the terribly debilitating loss of tax base and jobs faced by this city and every other American city. It used to be just the older northern and midwestern cities, but today the cities that are hurting the worst have names like San Diego.

We are all suffering from the same problem. We have hundreds of thousands of citizens who were born into single-parent families. In many instances, that single parent, although perhaps a loving parent, was addicted to heroin or crack and totally unable to provide children with any sort of motivation. Many of these children wind up with foster parents, who in many cases, though not all, see the child as just an income producer. Teachers from all over our school system tell me that kids routinely come to class beaten, sick, or hungry. Teachers have told me that they will dip into their own pockets to buy their kids food on the morning of state or national testing, so the kids don’t have to sit there for three hours thinking about how hungry they are while taking tests that are important to their future. By the time these children reach middle school, they are dead on arrival. Their basic skills are so far behind that they can never catch up. In our school system we bump kids up and up and up, because we leave no one behind, and by the ninth and tenth grades many kids are gone.

What does that produce? We have kids today in Philadelphia who use automatic weapons to mow down a mirror image of themselves in disputes over a girlfriend. When a person doesn’t place any value on his own life, he surely doesn’t place any value on the life of the person staring across the barrel of the gun. They place no value on life because they have no hope.

Now, we have prided ourselves in Philadelphia on curing the bullet wound. We eliminated that budget deficit without raising taxes, and we did it ourselves. We didn’t go whining to Harrisburg or Washington about not getting enough help. One, because the whining ceased to work; two, because it was a cop-out; three, because it diverted your energy. We took all of our energy and dealt with our own problems.

And we are going to do the same thing with this cancer. We are going to try to develop the city economically. It is my goal within the next year-and-a-half to begin a slow and steady reduction of taxes in Philadelphia. We must reduce our business, wage, and real estate transfer tax. We are faced with all the problems of a global economy and a national recession; we can’t further burden ourselves against our most immediate competition, our suburbs and South Jersey, by being the most heavily taxed city in the area.

We are going to be business-friendly. If a business makes a request and we can do it, we will get it done in record time. But that is not going to cure the cancer. Unlike the bullet wound, I could be the best mayor in God’s creation and have the best people working with me and we won’t, on our own, cure the cancer.

In my judgment, there are only two ways to cure the cancer. First, we need to seriously look at metropolitan governments. There are three good examples of metro government in North America: Toronto; Portland, Oregon; and the twin cities of Minneapolis and St. Paul. Real metro government means sharing taxes. The cities and the suburban towns and counties keep about 60 percent of their own taxes and put 40 percent into a pool that is distributed by a metropolitan government made up of the leaders of the counties and cities, according to common problems and the needs of each locality. Unless we do that, it is going to take a miracle to save American cities.

Second, the Federal Government must get back involved. Do you think the government of France would let Paris deteriorate the way New York City has? Do you think the Dutch would let Rotterdam decay the way we have let Newark and Detroit decay? Not on your life. It is time for the Federal Government to do something for cities. I am not talking about revenue sharing or massive handouts; I am not talking about Great Society programs. I am talking about simple things that can help us. I’ve got a lot of ideas about how the Federal Government can help us without spending a lot of money.

For example, the recent budget reconciliation bill created empowerment and enterprise zones. But Congress, in an effort to lessen the burden on the federal budget, provided no more than modest incentives for business to move into such zones. Without spending any additional money, however, there is a way to provide an incentive that will have companies virtually falling over each other to locate in the zones and hire indigenous workers. We simply have to amend the legislation to require that 10 percent of all federal procurement must be from firms located inside the zones. This would have a dramatic impact and go a long way toward leveling and even tilting the economic playing field in favor of American cities.

We ought to do things like these for two reasons. First, because it is the right thing to do—most of the people who are trapped in the hopeless situation I described are there through no fault of their own and deserve a chance. Second, because it is in all our interest to help the cities.

Consider a tale of two cities: Los Angeles, and a city in Latin America. You all know about the riots in Los Angeles. After those riots, the street gangs who caused most of the trouble were saying that next time they weren’t going to riot in South Central, they were going to go up into the hills—to Mulholland Drive, Bel Air, and Beverly Hills.

There is a city in Latin America that has one of the most beautiful golf clubs in this hemisphere. This club is surrounded by a ten-foot stone wall with barbed wire. Airplanes land right in the club, and visitors are told not to go into the city.

But a friend of mine rented a car and went to the city. It was right at ocean level, surrounded by beautiful hills. He drove up into the hills and saw houses worth millions of dollars, surrounded by armed security guards carrying automatic weapons. Finally he stopped and asked one of the homeowners, “Why are all these men here with weapons? Is something special going on?” The homeowner said, “No, we hire them to keep the people down in the city from coming up into the hills.” And down at the bottom of the city my friend found some of the worst poverty imaginable. People literally ate mice to stay alive.

In Los Angeles, the street gangs say they are going up into the hills. In Latin America, they hire private security guards with automatic weapons to keep people from going into the hills. I don’t think we want to see America become like that. It is imperative that all of us help cities cure that cancer.

 

 

 
Reflections of an Innovative Mayor
City Journal Winter 1994.
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