Presentation Transcript

1. 2014 Budget & Pension Presentation

2. General Budget Facts Approximately 34% of the property in the community is tax exempt. Borough resident taxes pay for approximately 31% of the cost of Borough services. Only 46% of the 2014 General Fund Budget or $8.5 million comes from tax revenue at 2014 projected rates. Over $15 million or 80.6% of the Borough’s General Fund Budget is consumed by personnel wages, employee benefits, utility costs, insurances and debt service payments. The State only allows 2 main sources of tax revenue to most local governments in Pennsylvania (Philadelphia and Pittsburgh are treated differently) - Real Estate Tax and Earned Income Tax. Earned Income Tax is only imposed on wages, not investment income like a personal income tax. State legislation mandates collective bargaining for police, paid firefighters and non-uniformed public employees. Police - rights to binding arbitration but not allowed to strike. Arbitrator has no legal requirement in the process to consider the community’s ability to pay. State law dictates police are provided with a defined benefit pension plan - 50% of final average wage earnings calculated over the last 36 months of employment. Retire at age 50 with 25 years of service. The State mandates how a municipality must pay into its defined benefit pension plans, provides limited State Pension Aid assistance and restricts police pension plan member contributions to help pay for the pension plan to 0-5% of pay.
3. General Fund Expenses by Cost Center
4. 2014 Budget Draft The Finance Committee recommended draft of the 2014 Budget includes a real estate tax rate of 6.96 mills in 2014, the same as in 2013. The tax rate if adopted would set the real estate tax levy at $828 per year for the average single family residence with an assessed value of $119,000. 2014 Budget 10-3-13 Draft 20132014 General Fund $ 19,772,057 $ 20,259,717 Sewer Fund 5,436,500 5,436,500 Parking Fund 13,169,923 4,373,379 Capital Improvement Fund 994,800 2,788,547 Capital Operating Reserve Fund 375,000 336,900 Highway Aid Fund 302,439 344,050 UDAG Fund 5,13528,690 TOTAL $ 40,055,854 $ 33,567,783 The draft budget maintains the current level of services and funds wage increases that both union contract negotiations require for 2014. Payroll $8.33 million. The Budget reflects very positive results obtained by negotiating the right to revise the 2013 medical insurance plan to an HSA/ High Deductible Plan. Avoided a large medical premium expense for 2013 and earned zero premium increase for 2014. The General Fund shows an increase of $487,660 or 2.5% over the 2013 Budget and nearly all of that is attributable to increased wage, benefit and pension costs. The Sewer Fund, one of two major operating funds is balanced without any remarkable revisions to services or revenues. The Finance Committee has recommended a capital project with an estimated cost of $380,000 to finance deployment of new credit card capable smart parking meters, smart pay stations for several lots, new technology for permit zone enforcement and new parking management systems to enhance productivity and customer service. The investment is to be financed with an increase in parking meter rates to $1.50 per hour, an overtime meter fine increase from $20 to $24 and extended meter enforcement hours to midnight on Thursday, Friday and Saturday nights.
5. 2014 Budget The budget is proposed for advertisement and public hearing without the need for a real estate tax increase. The question then is whether the pension funding issue should be faced in 2014 or deferred to 2015? The Borough has at least a $14.3 million unfunded liability in the two pension plans. The draft budget provides funding to continue paying the pension obligation at 75% in 2014 as allowed by state law but that will increase the unfunded liability by at least $600,000. In 2015 the Borough will have no choice other than to increase pension funding by at least $650,000 per year. Borough Council has proposed an ordinance that would increase the earned income tax rate by .25% which would raise revenue of approximately $800,000-$900,000 in 2014 and allow the pension contribution to be fully funded in 2014 thus avoiding the increase in unfunded liability of over $600,000. Any balance over full pension funding could be directed to other capital or operating needs.
6. Capital Improvements & Equipment The Capital Improvement Fund finances most major capital projects or purchases and is partly financed with expected interest earnings from the Capital Operating Reserve Fund, grants, left over bond proceeds, proceeds from projected financings and for one project in 2014 the possible storm water assessment fee. Department Heads submit request for capital projects. Departments do not submit vehicle replacement requests and have not since the position of Fleet Manager was created. Every vehicle scheduled for replacement in 2014 is because the Fleet Manager listed it as a vehicle that needs to be replaced due to age, condition or both. The road projects included are needed infrastructure repair and road projects will not be funded by the eventual storm water fee even if it is adopted by the new Council. The only road resurfacing that can legally be done with the storm water assessment funds if adopted is on streets where the storm sewer line must be completely replaced rather than relined. Most capital replacement needs submitted for this budget are funded in this draft. The request to begin setting aside $80,500 per year for the next 5 years for an anticipated police radio system replacement in 2018 has not been included nor has a replacement Pick-Up Truck in Public Works requested by the Fleet Manager.
7. The Pension Issue Total combined funding requirement for the plans is a minimum $1,954,473 in 2014 up from $1,866,010 in 2013 an $88,463 increase at the 75% level. Police Non Uniformed MMO Amt. State Aid__ Borough__ 2014 $1,170,801 $783,672 $1,954,473** $710,838* $1,243,635 2013 1,143,156 722,854 1,866,010** 710,838 1,155,172 2012 757,893 581,210 1,339,103** 675,885 663,218 2011 739,354 563,126 1,302,480** 1,057,644 244,836 2010 671,211 611,367 1,282,578 595,111 707,023 2009 698,782 603,341 1,302,123 575,555 726,578 2008 701,813 587,635 1,289,448 599,030 690,418 2007 619,129 612,157 1,231,286 589,976 641,310 2006 353,881 622,102 975,983 528,137 447,846 2005 357,899 579,014 936,913 515,112 421,801 2004 232,706 458,148 690,854 489,108 201,746 2003 217,724 438,097 655,821 503,626 152,195 2002 171,824 275,577 446,861 464,184 0 2001 136,190 269,579 405,769 439,186 0 * Estimated ** MMO reflects use of Act 44 Relief allowing payment of 75% of the actuarial required contribution. The growth in pension funding burden has not exploded over the last dozen years because of benefit giveaways the plans are mostly unchanged since 2001-2002. The cause of the Borough’s pension issues are primarily investment market driven coupled with state law that allows little flexibility in plan designs.
8. The Pension Issue Earnings assumptions and the miss-match with investment performance over the last decade has been the driver. Earnings assumption 8% now 7.5% vs. 4.7% - 5.5% average returns over the last 16 years as of June 30, 2013. Without use of Act 44 relief and using updated 1-1-13 actuarial report cost figures the total funding requirement in 2014 would be $2,567,386 or an additional $612,913.That is the amount that really should be going into the plans and more closely reflects the amount that will have to go into the plans in 2015 when Act 44 relief is no longer available.  In 2014 if pension funding is not increased the unfunded pension liability will grow by at least $600,000. In 2015 the Borough will have to increase pension funding by at least $650,000 on top of the $1.95 million required in 2014. There is no way the pension plans can grow their way out of the unfunded liability problem which has both of them at a funding ratio of less than 70% so the only answer will be increased Borough funding of the pension plans.
9. Earned Income Tax Borough Council has proposed an ordinance to increase the earned income tax rate by .25% in 2014 to fully fund the Borough pension obligations which will require in excess of $613,000 and to address other capital or operating needs with any funds remaining. This would avoid adding over $613,000 in additional unfunded pension liability to the current $14.3 million unfunded liability total. Directly related to ability to pay unlike real estate tax which can more heavily impact those residents on fixed income. Imposed only on earned income – wages, net profits not on investment income, social security, pensions or unemployment assistance. The Borough as a Home Rule community has the right to increase the earned income tax rate for Borough residents. There are 21 out of the 73 municipalities in Chester County that are receiving an earned income tax rate higher than .5%. The proposed .25 percent increase equals $250 per year for someone earning $100,000 per year and that translates to $9.61 per pay for someone paid every two weeks. The proposed .25 percent increase equals $187.50 per year for someone earning $75,000 per year and that translates to $7.21 per pay for someone paid every two weeks. The proposed .25 percent increase equals $62.50 per year for someone earning $25,000 per year and that translates to $2.40 per pay for someone paid every two weeks. The .25 percent increase will generate over $800,000 per year allowing the Borough to increase pension funding by more than $613,000 in 2014, avoid increasing the unfunded liability by that amount and fund other needs as identified by Council.
10. Other Pension Issue Options There are no other likely options that could provide the same amount of needed funding for the pension plans in 2014. A large settlement or judgment from on-going litigation is unlikely in 2014. If a lump sum is obtained in 2014 Council could choose to decrease earned income tax or real estate tax rates in 2015. Council could explore sale of the sewer system but it would take over a year to go through the process so it could not be counted on in 2014 to help with pension funding. Council could cease providing trash service and let residents contract with private haulers. That action would generate nearly the same amount to apply to pension funding but residents would not likely find that option attractive. The stormwater assessment fee that will be proposed by the Advisory Committee will if adopted generate some funding that would provide relief to the General Fund for costs already being incurred for stormwater activities. Maximum General Fund relief is likely to range around $200,000. If Council adopts a stormwater fee late in early 2014 the earliest that billing and implementation could occur is third quarter 2014 too late to generate more than a portion of the above stated amounts. When Council decided to proceed with the stormwater study it was with the understanding that if the fee is adopted the consultant cost of $205,000 would first be repaid to the Capital Operating Reserve Fund. The stormwater fee if adopted will not be able to provide any real help with pension funding in 2014.