PHILADELPHIA - Philadelphia will take out a $275 million short-term loan from JPMorgan Chase to pay vendors that have gone without compensation since July because of one of the the worst budget crises in nearly 50 years, Democratic Mayor Michael Nutter said on Tuesday.
The privately placed loan has an interest rate of 3 percent until December 1 when the rate is scheduled to rise to 8 percent, Nutter said at a news conference. The city aims to refinance the loan before the higher rate comes into effect.
Philadelphia has been unable to borrow money in the public market since July 1 because state lawmakers have not approved measures that would allow it to pass a balanced budget for fiscal 2010. The anticipated refinancing assumes eventual state approval for the city's plan to raise sales tax and defer pension payments.
The loan will be used to pay about $200 million out of $225 million owed to thousands of vendors. The remainder will be used to help maintain an adequate cash balance.
JP Morgan Chase has recently offered loans to other state and local governments that are struggling to balance budgets in the recession. They include California, New Jersey, and Wayne County, Michigan.
The loan does not solve the city's budget crisis, caused by a sharp fall in tax revenue, because the entire loan must be repaid during the current fiscal year, Nutter said.
Nutter also said he will defer plans to notify vendors and residents of cuts in city services, because of a scheduled Sept. 8 vote by state lawmakers on Philadelphia's budget measures.
The city's notice of service cuts, which would include closing libraries and recreation centers, and reducing trash collections, had been planned for this week but will now be deferred until the state House of Representatives votes on a bill containing the budget measures next week, Nutter said.
He urged the House to pass the bill without amendments that would delay its passage into law.
Next week is possibly the most critical week financially and operationally the city has experienced in half a century, Nutter said.
Without state approval of the measures, Nutter says Philadelphia will have to make $700 million worth of cuts including 3,000 job losses, the closure of some whole departments, and the reduction of many city services in a plan known as the doomsday budget.
Philadelphia's five-year financial plan is scheduled to be voted on by the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's finances, on Sept. 11.
Meanwhile, a bipartisan panel of state lawmakers met again on Tuesday to try to agree a fiscal 2010 state budget that is now more than two months overdue. Republicans and Democrats differ by about $500 million over their preferred size of the budget, said Gary Tuma, a spokesman for Democratic Governor Ed Rendell. (Reporting by Jon Hurdle; Editing by Andrea Ricci)