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PHILADELPHIA (CBS 3) ― Get ready to pay more in taxes.

As expected, Philadelphia Mayor Michael Nutter called for sales and property tax increases when he unveiled his 2010 budget Thursday morning.

"There is no easy way out. I will not sugarcoat this," the mayor said in his budget address before city council. To preserve core city services, tax increases are an "absolute necessity."

Perhaps more controversial, however, the mayor also called on the city's four major employees' unions to accept significant benefit cuts.

He wants employees to take pension cuts, pay more for health care, consider voluntary furlough days and sign new contracts without pay increases. They mayor says he must save $25 million a year on employee costs.

"Without these savings, I unfortunately must tell you layoffs will have to follow," the mayor said. "There is no question about it."

The mayor's widely anticipated budget address ran 50 minutes in a packed city council chambers. In the address, Nutter laid out how he would like the city to fill a five-year budget gap that has grown to nearly $1.4 billion.

That's on top of a $1 billion, five-year gap the mayor already took several steps late last year to fill.

The mayor's fiscal year 2010 budget is worth $3.84 billion. That's an 8.5 percent drop from last year's $4.2 billion budget.

Nutter says cuts are being made across the board, including to the city's fleet of 5,900 vehicles – something often criticized as wasteful by taxpayers. But he says cuts will not be enough.

The mayor wants to raise the city sales tax by a penny: from seven cents on the dollar to 8 cents.

The tax hike would last three years, and Mayor Nutter expects it to generate $340 million.

More controversial, however, is the mayor's request for a two-year hike in property taxes.

Property taxes would rise 19 percent next year, then be reduced to a 14.5 percent increase in fiscal year 2011. Property taxes would return to their current levels after that.

The mayor says the property tax increase would raise approximately $272 million over the two years.

Nutter says he's left with no choice but to focus on the sales and property taxes. He says raising the city's hated wage or business taxes would exact a "terrible price" on the city's economy and lead jobs to flee the city.

"Taken together, these changes put us close to a balanced five-year plan, but not completely," the mayor said.

That's where union concessions come in.

The mayor says he plans to force city unions to accept pension cuts by asking the state to declare the city's pension fund "severely distressed." Right now, the pension fund is about 55 percent funded.

The fund is worth $4.6 billion but has more than $8 billion in liabilities.

The mayor says cuts to employees' benefits and pay could save $600 million over the next 20 years.

He wants all four unions to agree to contracts without pay increases this summer – and with no pay increases for the foreseeable future.

"I can tell you with certainty, reform is not an easy process," said the mayor. But he says the city's benefits structure is 35 years old.

"Asking our city employees to contribute more toward their health care and pensions is in line with national trends."

"We are not making any concessions," said Herman "Pete" Matthews, head of the city's blue collar union, AFSCME District Council 33. "What we have, we keep."

"As for cutting back our health plans, you can't do it," said firefighters' union president Brian McBride. "Firefighters are a sicker population than anyone else."

All of the city's four major union contracts – including police and fire – expire this summer. Police officers and firefighters are not permitted to go on strike.

And the property tax increase did not draw favorable reaction from several city council members, who must okay the mayor's budget.

"I think there's a consensus on council [that] a 19 percent increase in property taxes is not the way we should go," said Councilman Bill Green. "I think there are other ways to raise the revenue without imposing a 19 percent tax increase on citizens."

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