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In Philadelphia, no money for vendors -- and no IOUs, either

July 17, 2009 | 10:45 pm

Suddenly, California's IOUs don't look quite so bad. At least they're supposed to earn interest for the recipients until the state redeems them for cash.

Philadelphia, by contrast, on Friday just gave its creditors a no-interest sob story.

From Dow Jones Newswires:

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

Rocky 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.

"These steps come amid a growing cash crisis which must be addressed immediately," Nutter said at a press conference. He has attributed the city budget shortfall to broader economic weakness, which has eroded tax revenue, coupled with rising city pension obligations.

California's Legislature and Gov. Arnold Schwarzenegger have been battling over how to close a $26-billion budget shortfall. In the absence of a budget, state Controller John Chiang began issuing IOUs to vendors and other creditors this month.

The state's IOUs will earn tax-free interest at a 3.75% annualized rate until the redemption date, which Chiang says will be Oct. 2 -- assuming he has the cash he needs at that point to pay the bills.

-- Tom Petruno

Photo: "Rocky Balboa" in Philadelphia. Credit: Gina Ferazzi / Los Angeles Times

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