PEL letter to Scranton 9-30-13.pdf
Content
OFFICE OF THE MAYOR
CITY HALL • 340 NORTH WASHINGTON AVENUE • SCRANTON, PENNSYLVANIA 18503 • PHONE: 570-348-4101 • FAX: 570-348-4251
To Our Investment Community Attached please find an updated report from the City of Scranton's Act 47 Recovery Plan Coordinator, the Pennsylvania Economy League ("PEL"L regarding the progress on the implementation of the City's 2012 Act 47 Recovery Plan. This report provides an update of fiscal year 2013 based upon the City's monthly financial reports through August 2013, as well as a budget outlook for 2014.
Christopher A. Doherty Mayor
88 North Franklin Street, Suite 200 ·Wilkes-Barre, PA 18701-1 393 phone: 570-824-3559 ·fax: 570-829-8099 www.pelcentral.org ·email: [email protected] Serving the Commonwealth and its communities from offices in:
Information, Insight, Integrity.
Harrisburg
• Philadelphia
• Pittsburgh
•
Wilkes-Barre
September 30, 2013
Ms. Janet Evans President of Council City of Scranton 340 North Washington Avenue Scranton, PA 18503 Dear Council President Evans and Mayor Doherty:
Mayor Christopher Doherty City of Scranton 340 North Washington Avenue Scranton, PA 18503
The Pennsylvania Economy League (PEL), acting as the City of Scranton's Act 47 Recovery Plan Coordinator (Coordinator), has the responsibility for overseeing the City's implementation of the 2012 Revised Recovery Plan (2012 RRP) as adopted by Council and signed by the Mayor in August 2012. This oversight includes reviewing the City's progress on implementing the mandates included in the 2012 RRP and monitoring the City's financial position. PEL has previously presented the City with actual financial results and progress on implementation of the RRP through the end of May 2013, as well as an update of the City's financial position as of early July. This letter provides for a review of actual financial results through the end of August 2013; a financial outlook for the remainder of 2013; and projections for fiscal year 2014 in the context of the RRP mandates and the City's current fiscal position. In order to ensure that the City maintains sufficient cash flow to meet its obligations, reestablish and maintain its creditworthiness, and establish a sound financial position to provide for the health, safety and welfare of its citizens, it is critical that the City implement all provisions of its adopted RRP. 2013 Operating Budget Surplus/Deficit Following a review of the City's 2013 operating budget, the City's progress on its RRP initiatives and the City's actual financials through August 31, 2013, combined with the City's historical revenue collection patterns, PEL projects that the City will experience an operating budget deficit of approximately $340,000 for 2013. This is an update of our most recent projection issued in July 2013, which was based on the City's actual data through May 31, 2013. The July projection estimated a 2013 operating budget deficit of $181,111. However, a reliable current estimate of the City's 2013 year-end financial position is complicated by the unrealized borrowing of approximately $28 million that includes $21 million for the public safety union court award and $5.1 million for the 2013 increase in the pension Minimum Municipal Obligation (MMO). The above budget deficit assumes that the borrowing for the pension payment is completed by the end of the year. If the borrowing is not completed, PEL projects that the City will experience a budget deficit of $5.4 million. Moreover, the City must make provisions now for paying the 2013 MMO in the event that the borrowing does not occur. PEL recommends that the City pay as much as possible from cash on hand toward the 2013 MMO increase of$5.1 million, provided the amount ofthe payment is not so large as to effect payroll or delay critical payments to vendors that would adversely impact the health, safety and welfare of citizens. Any unpaid 2013 MMO obligation plus accrued interest must be included in the 2014 operating budget. The interest paid to the pension fund on the unpaid 2013 MMO balance might be less than what the City can expect to pay in interest on the total $28 million borrowing over the same period. Regardless, the total2013 MMO must be paid by the end of January 2014.
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September 30, 2013
20 13 Revenues and Expenditures In terms of revenues, the City's Earned Income Tax (EIT) collections are projected to be approximately $1.8 million over the 2013 budgeted amount for resident collections. However, the City did not receive authority for the $2.5 million that was budgeted for the non-resident EIT, thus this amount will not be realized. Other significant shortfalls are anticipated in PILOTS ($1.1 million) and in budgeted bond proceeds, assuming that the $28 million borrowing is not realized by year end. In addition, real estate taxes, refuse fee payments, real estate transfer taxes, mercantile/business privilege taxes, fines, interest earnings, departmental earnings and MBROs are all projected to be less than 2013 budgeted levels. On a positive note, total employee expenditures and total other departmental expenditures are both expected to be below 2013 budgeted amounts by approximately $1.4 million and just over $100,000, respectively. Given the uncertainty regarding the status of the $28 million borrowing, PEL continues to recommend that the City delay payment on some nonessential bills over the next several months in order to end 2013 with a cash balance of approximately $500,000. 2014 Budget Outlook The City's adopted 2012 RRP assumed that the City's 2014 budget would have to address a $10.75 million deficit. However, based on the City's 2013 financial and adopted RRP implementation history, PEL anticipates a shortfall for 2014 of$19.73 million. The new projection eliminates the adopted 2012 RRP estimated $3.48 million "carryover" surplus for 2013, includes the $2.0 million increase in the 2014 MMO payment, and reduces the amount of PILOT payments based on the City's inability to date to increase contributions. In addition, savings and/or revenues anticipated in departmental expenses, parking enhancements and MBRO have all been reduced based on the City's RRP implementation record in 2013.
2014 Recovery Plan Deficit Revision (In Millions of Dollars) Estimated 2014 Deficit 2012 RRP -$10.75 -3.48 Estimated 2013 Surplus Eliminated Increase in 2014 MMO -2.00 Reduction in 2014 PILOT Revenue -1.75 -1.20 Reduction in 2014 Departmental Savings Reduction in 2014 Parking Enhancement -0.30 Reduction in 2014 MBRO -0.25 Total -$19.73
As stated in the adopted 2012 RRP, the City must compensate for shortfalls in revenue as outlined in its RRP through revenue sources and/or expenditure reductions. Options available under the adopted 2012 RRP to increase revenue include an increase to the real estate property tax, an increase to the resident EIT and/or an increase in the garbage fee. A reduction in expenditures through a refinancing of 2014 debt service is not considered a viable option by the Coordinator. Such a move would further jeopardize the City's already weak creditworthiness and the placement of the current $28 million borrowing by indicating an inability or even an unwillingness to pay back prior borrowing despite the City's approval of dedicated debt millage for the court approved 2012 and 2013 borrowings.
It is critical that the City prepare a realistic 2014 budget that eliminates the estimated deficit with appropriate revenue and expenditure levels given the factors outlined above. City officials should also understand the continuing impact of rising legacy costs, which must be accounted for in the operating budget before funding payment for current employees and current obligations. Legacy costs and debt service for 2014 total over $30 million- $12 million for pension, $8 million for retiree health care and
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September 30, 2013
over $10 million for debt service. In order to mitigate the future impact of increasing legacy costs on annual budgets, the City should investigate an asset sale as stated in its adopted 2012 RRP. The most likely candidate is the Scranton Sewer Authority (SSA). If the SSA is sold, the City should consider using the proceeds to fund long-term legacy costs rather than using the proceeds to cover current expenses. Possible 2014 Legislative Changes to Act 47 The Coordinator is aware of proposed legislative changes to Act 47 that are currently being discussed by the Commonwealth's Local Government Commission. If the Legislature approves these changes, the City will have expanded revenue options available. However, approval of the Act 47 amendment is not expected before the beginning of 2014 at the earliest, too late for the City to estimate and include new revenues within the 2014 budget. The proposed new revenues include increases to existing funding sources, increases in tax rate limits for the Local Services Tax, and an alcohol consumption tax. The City's adopted 2012 RRP projects deficits for 2015 that may be reduced from the adoption of these new revenue sources. Revenue from these new revenue sources should not be included in the City's adopted 2014 budget because they have not been legislatively authorized. However, these new sources, if approved by the Legislature, will reduce the City's future reliance on real estate tax increases to eliminate budget deficits. Conclusion Based upon our review, the Coordinator must reiterate that it is imperative for the City to prepare a realistic and responsible budget for 2014 in order to avoid the potential of jeopardizing the City's ability to provide for the health, safety and welfare of its citizens. The Coordinator has repeatedly emphasized the necessity of realizing all of the City's adopted 2012 RRP individual mandates or, in the absence of achieving any of the individual mandates, replacing them with the appropriate revenue increase or expenditure reduction. Given the fact that numerous alternative revenues in the adopted 2012 RRP have not materialized, it is incumbent on the City to follow its adopted 2012 RRP and budget realistic increased revenues as necessary for 2014. As previously stated, the City's realistic options for raising revenue include appropriate increases in the real estate tax, EIT and/or the refuse fee. The ability to provide sufficient revenue for the 2014 budget is crucial to meet employee, vendor and creditor obligations, to avoid a repeat of the 2012 cash flow crisis and to provide necessary and vital services to Scranton residents and businesses. PEL will continue to monitor the City's 2013 operating budget performance, and the Coordinator will assist the City in preparing its 2014 budget. Please feel free to call us to discuss these estimates or to discuss any questions you may have. Sincerely,
fJ1~-~
Executive Director
cc: Gina McAndrew Members of City Council Champ Holman, DCED Fred Reddig, DCED Marita Kelley, DCED James Rose, DCED
~/
CITY HALL • 340 NORTH WASHINGTON AVENUE • SCRANTON, PENNSYLVANIA 18503 • PHONE: 570-348-4101 • FAX: 570-348-4251
To Our Investment Community Attached please find an updated report from the City of Scranton's Act 47 Recovery Plan Coordinator, the Pennsylvania Economy League ("PEL"L regarding the progress on the implementation of the City's 2012 Act 47 Recovery Plan. This report provides an update of fiscal year 2013 based upon the City's monthly financial reports through August 2013, as well as a budget outlook for 2014.
Christopher A. Doherty Mayor
88 North Franklin Street, Suite 200 ·Wilkes-Barre, PA 18701-1 393 phone: 570-824-3559 ·fax: 570-829-8099 www.pelcentral.org ·email: [email protected] Serving the Commonwealth and its communities from offices in:
Information, Insight, Integrity.
Harrisburg
• Philadelphia
• Pittsburgh
•
Wilkes-Barre
September 30, 2013
Ms. Janet Evans President of Council City of Scranton 340 North Washington Avenue Scranton, PA 18503 Dear Council President Evans and Mayor Doherty:
Mayor Christopher Doherty City of Scranton 340 North Washington Avenue Scranton, PA 18503
The Pennsylvania Economy League (PEL), acting as the City of Scranton's Act 47 Recovery Plan Coordinator (Coordinator), has the responsibility for overseeing the City's implementation of the 2012 Revised Recovery Plan (2012 RRP) as adopted by Council and signed by the Mayor in August 2012. This oversight includes reviewing the City's progress on implementing the mandates included in the 2012 RRP and monitoring the City's financial position. PEL has previously presented the City with actual financial results and progress on implementation of the RRP through the end of May 2013, as well as an update of the City's financial position as of early July. This letter provides for a review of actual financial results through the end of August 2013; a financial outlook for the remainder of 2013; and projections for fiscal year 2014 in the context of the RRP mandates and the City's current fiscal position. In order to ensure that the City maintains sufficient cash flow to meet its obligations, reestablish and maintain its creditworthiness, and establish a sound financial position to provide for the health, safety and welfare of its citizens, it is critical that the City implement all provisions of its adopted RRP. 2013 Operating Budget Surplus/Deficit Following a review of the City's 2013 operating budget, the City's progress on its RRP initiatives and the City's actual financials through August 31, 2013, combined with the City's historical revenue collection patterns, PEL projects that the City will experience an operating budget deficit of approximately $340,000 for 2013. This is an update of our most recent projection issued in July 2013, which was based on the City's actual data through May 31, 2013. The July projection estimated a 2013 operating budget deficit of $181,111. However, a reliable current estimate of the City's 2013 year-end financial position is complicated by the unrealized borrowing of approximately $28 million that includes $21 million for the public safety union court award and $5.1 million for the 2013 increase in the pension Minimum Municipal Obligation (MMO). The above budget deficit assumes that the borrowing for the pension payment is completed by the end of the year. If the borrowing is not completed, PEL projects that the City will experience a budget deficit of $5.4 million. Moreover, the City must make provisions now for paying the 2013 MMO in the event that the borrowing does not occur. PEL recommends that the City pay as much as possible from cash on hand toward the 2013 MMO increase of$5.1 million, provided the amount ofthe payment is not so large as to effect payroll or delay critical payments to vendors that would adversely impact the health, safety and welfare of citizens. Any unpaid 2013 MMO obligation plus accrued interest must be included in the 2014 operating budget. The interest paid to the pension fund on the unpaid 2013 MMO balance might be less than what the City can expect to pay in interest on the total $28 million borrowing over the same period. Regardless, the total2013 MMO must be paid by the end of January 2014.
Page 2
September 30, 2013
20 13 Revenues and Expenditures In terms of revenues, the City's Earned Income Tax (EIT) collections are projected to be approximately $1.8 million over the 2013 budgeted amount for resident collections. However, the City did not receive authority for the $2.5 million that was budgeted for the non-resident EIT, thus this amount will not be realized. Other significant shortfalls are anticipated in PILOTS ($1.1 million) and in budgeted bond proceeds, assuming that the $28 million borrowing is not realized by year end. In addition, real estate taxes, refuse fee payments, real estate transfer taxes, mercantile/business privilege taxes, fines, interest earnings, departmental earnings and MBROs are all projected to be less than 2013 budgeted levels. On a positive note, total employee expenditures and total other departmental expenditures are both expected to be below 2013 budgeted amounts by approximately $1.4 million and just over $100,000, respectively. Given the uncertainty regarding the status of the $28 million borrowing, PEL continues to recommend that the City delay payment on some nonessential bills over the next several months in order to end 2013 with a cash balance of approximately $500,000. 2014 Budget Outlook The City's adopted 2012 RRP assumed that the City's 2014 budget would have to address a $10.75 million deficit. However, based on the City's 2013 financial and adopted RRP implementation history, PEL anticipates a shortfall for 2014 of$19.73 million. The new projection eliminates the adopted 2012 RRP estimated $3.48 million "carryover" surplus for 2013, includes the $2.0 million increase in the 2014 MMO payment, and reduces the amount of PILOT payments based on the City's inability to date to increase contributions. In addition, savings and/or revenues anticipated in departmental expenses, parking enhancements and MBRO have all been reduced based on the City's RRP implementation record in 2013.
2014 Recovery Plan Deficit Revision (In Millions of Dollars) Estimated 2014 Deficit 2012 RRP -$10.75 -3.48 Estimated 2013 Surplus Eliminated Increase in 2014 MMO -2.00 Reduction in 2014 PILOT Revenue -1.75 -1.20 Reduction in 2014 Departmental Savings Reduction in 2014 Parking Enhancement -0.30 Reduction in 2014 MBRO -0.25 Total -$19.73
As stated in the adopted 2012 RRP, the City must compensate for shortfalls in revenue as outlined in its RRP through revenue sources and/or expenditure reductions. Options available under the adopted 2012 RRP to increase revenue include an increase to the real estate property tax, an increase to the resident EIT and/or an increase in the garbage fee. A reduction in expenditures through a refinancing of 2014 debt service is not considered a viable option by the Coordinator. Such a move would further jeopardize the City's already weak creditworthiness and the placement of the current $28 million borrowing by indicating an inability or even an unwillingness to pay back prior borrowing despite the City's approval of dedicated debt millage for the court approved 2012 and 2013 borrowings.
It is critical that the City prepare a realistic 2014 budget that eliminates the estimated deficit with appropriate revenue and expenditure levels given the factors outlined above. City officials should also understand the continuing impact of rising legacy costs, which must be accounted for in the operating budget before funding payment for current employees and current obligations. Legacy costs and debt service for 2014 total over $30 million- $12 million for pension, $8 million for retiree health care and
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September 30, 2013
over $10 million for debt service. In order to mitigate the future impact of increasing legacy costs on annual budgets, the City should investigate an asset sale as stated in its adopted 2012 RRP. The most likely candidate is the Scranton Sewer Authority (SSA). If the SSA is sold, the City should consider using the proceeds to fund long-term legacy costs rather than using the proceeds to cover current expenses. Possible 2014 Legislative Changes to Act 47 The Coordinator is aware of proposed legislative changes to Act 47 that are currently being discussed by the Commonwealth's Local Government Commission. If the Legislature approves these changes, the City will have expanded revenue options available. However, approval of the Act 47 amendment is not expected before the beginning of 2014 at the earliest, too late for the City to estimate and include new revenues within the 2014 budget. The proposed new revenues include increases to existing funding sources, increases in tax rate limits for the Local Services Tax, and an alcohol consumption tax. The City's adopted 2012 RRP projects deficits for 2015 that may be reduced from the adoption of these new revenue sources. Revenue from these new revenue sources should not be included in the City's adopted 2014 budget because they have not been legislatively authorized. However, these new sources, if approved by the Legislature, will reduce the City's future reliance on real estate tax increases to eliminate budget deficits. Conclusion Based upon our review, the Coordinator must reiterate that it is imperative for the City to prepare a realistic and responsible budget for 2014 in order to avoid the potential of jeopardizing the City's ability to provide for the health, safety and welfare of its citizens. The Coordinator has repeatedly emphasized the necessity of realizing all of the City's adopted 2012 RRP individual mandates or, in the absence of achieving any of the individual mandates, replacing them with the appropriate revenue increase or expenditure reduction. Given the fact that numerous alternative revenues in the adopted 2012 RRP have not materialized, it is incumbent on the City to follow its adopted 2012 RRP and budget realistic increased revenues as necessary for 2014. As previously stated, the City's realistic options for raising revenue include appropriate increases in the real estate tax, EIT and/or the refuse fee. The ability to provide sufficient revenue for the 2014 budget is crucial to meet employee, vendor and creditor obligations, to avoid a repeat of the 2012 cash flow crisis and to provide necessary and vital services to Scranton residents and businesses. PEL will continue to monitor the City's 2013 operating budget performance, and the Coordinator will assist the City in preparing its 2014 budget. Please feel free to call us to discuss these estimates or to discuss any questions you may have. Sincerely,
fJ1~-~
Executive Director
cc: Gina McAndrew Members of City Council Champ Holman, DCED Fred Reddig, DCED Marita Kelley, DCED James Rose, DCED
~/
