Mayor Tom Murphy is headed toward a standoff with the city's state-appointed fiscal oversight board over his refusal to cede budgeting power to the board until it gives the Legislature its plan for fixing city finances.

But board members, who "see it exactly the opposite way," according to Chairman William Lieberman, say they will not release their budget recommendations, scheduled for June 12, until Murphy signs on the dotted line and agrees to hand over a measure of fiscal power.

"We should be cooperating on putting this [budget plan] together. He should not be waiting to see if he likes what we put down," board member Jim Roddey said. "He may not like it, but he doesn't have veto power."

Murphy "must not understand what the law says, or he wouldn't be saying that," said board member David O'Loughlin.

The state law approved in February creating the Intergovernmental Cooperation Authority board requires the city to do two things: It has to write five-year budget plans, subject to board approval, and it has to sign a cooperation agreement with the board.

Because state law gives final approval of city budgets to the board rather than the mayor or City Council, the city has to pass an ordinance that hands over that power. In that agreement, the city transfers "any function, power or responsibility" over budgeting to the board, the state law says.

The law does not give a time line for when the agreement must be reached, but says the city and its agencies cannot borrow money until the cooperation agreement and the final five-year spending plan are in place.

The oversight board sued last week over that provision and on Wednesday the city and its agencies agreed that they would not borrow until the cooperation agreement and spending plan were finalized.

Because the city's bond rating has dropped to junk status, it's effectively barred from borrowing. That is why Murphy said he will not hand over power to the board until he knows what budget fixes it recommends to the Legislature.

"There is a fundamental disagreement," Murphy said in a meeting with Pittsburgh Post-Gazette writers and editors yesterday.

Murphy and Tom Cox, his top aide and executive secretary, said they don't want to sign an agreement without knowing what the oversight board plans to recommend. Both expressed concern that the board might not recommend adequate new revenue sources.

"We're very concerned about what franchise we give them in the absence of them fulfilling their mission," Cox said.

Bucking state law has become an essential ingredient in Murphy's relations with the oversight board.

The initial five-year spending plan he issued on Wednesday was $36 million underfunded this year and $79 million underfunded next year, even though the oversight law required the budget plan be balanced.

Murphy suggested seven tax revenue ideas to fill the budget hole -- including payroll and commuter taxes -- but all need state approval. The oversight law barred him from balancing the budget with hypothetical revenue sources not yet approved by the Legislature.

"There is a very serious problem with what has been done," O'Loughlin said of Murphy's plan. "Clearly the law says a balanced budget has to be submitted to the oversight board."

Murphy said it is the job of the oversight board or the separate Act 47 "distressed city" team to recommend revenues to balance the city budget.

The city can raise only four major taxes -- on wages, property, business and parking -- and Murphy argues they cannot be raised further without driving out residents and businesses. City wage taxes are the highest in the county; the tax on gross business receipts is the highest in the county and a disincentive to small business; and the 50 percent parking tax is by far the highest in the country.

"There is very little that we can control," Murphy said, explaining why he left his spending plan unbalanced. "Give us the tools to run the city efficiently. Give us the tools to tax the city fairly is all we're simply asking."

Murphy's five-year plan includes $217 million in spending reductions through 2008, much of it through cuts to the Fire Bureau, salary freezes, increases in employee health care co-payments and other union-related matters that cannot be implemented without the help of the Act 47 team.

Through Act 47, the city can hold spending on future union contracts to the amounts budgeted in its recovery plan. While Murphy is battling with the oversight board, he said administration officials are working "very closely" with the Act 47 team, from Downtown's Eckert Seamans law firm and Philadelphia's Public Financial Management.

The Act 47 plan for stabilizing city finances is supposed to be released in the next two weeks. It will likely recommend a mix of spending controls and new taxes, possibly including commuter wage taxes.

While a commuter tax would be subject to court approval, the overall plan only needs approval by the mayor and City Council, not the state.

Council's vote on the Act 47 plan would come in late June or early July, at the same time Murphy and the oversight board could still be at an impasse over the power-sharing agreement.

Murphy's apparent strategy, for now, is to hope that the Act 47 plan provides a commuter tax. If it does, that might spur the oversight board and Legislature, which both have balked at a commuter tax, to find some other revenue option.

But if the Act 47 process does not produce a commuter tax, Murphy and the oversight board could remain at an impasse.

"I think until the Legislature acts, Act 47 reigns," Cox said.

First Published: May 14, 2004, 4:00 a.m.