Budget Administration

October 31, 2005

Honorable Council President Spencer, City Council and Citizens of Reading:

In accordance with the City Charter, I submit to the City Council an annual operating budget for the City of Reading for the fiscal year beginning January 1, 2006 and ending December 31, 2006 (FY 2005).

This budget represents all the challenges things that could happen to a city in a financial sense. We know progress is being made in neighborhoods, and economic development and my expectations are high for more positive results. Our war on crime is ongoing. Homicides this year are up, almost all involving drugs or domestic violence but many other indicators show good progress. As a wider community, we must work together to contend with violent crime. The 2006 Proposed Budget describes Reading’s continued financial struggles and suggests our time has come to re-think the scope of local government, and be willing to act on our convictions.

It is no longer suitable for this city to avoid the hard decisions that will enable us to begin to move forward to achieve financial viability and regain the position in this region that Reading once enjoyed. This is going to be harder than ever since I am proposing some increases in taxes, more expenditure reductions including reductions in force, which also includes service level reductions.

We recognize that our citizens deserve the highest quality service that we can provide within a realistic budget. Compromises will have to be made in this decision process. But we are confident that with the support of city council and the citizens of Reading, we can achieve the goals in our core values:

1) Sustain and advance our goals in public safety by continuing to develop effective strategies for crime reduction and improvement of quality of life of our citizens. However, our work will need to continue with fewer resources in 2006.

2) Retain and create family-supporting jobs for our citizens through coordinated economic development efforts working with city, county, state and federal organizations. This includes downtown development along with aggressive marketing of our city to bring in responsible businesses.

3) Continue to engage our citizens in neighborhood rebuilding through increased code enforcement, building neighborhood organizations and coordinating sustainable housing programs. The City’s budget along with the 2006 Community Development Block Grant allocation enables these efforts to continue.

4) Achieve financial stability by designing systems to make government operate more efficiently, obtaining the technology and tools to help city workers do their jobs efficiently, and carefully examine the business that the city should be in and not be in so that we can do everything possible to avert becoming a distressed city if no action is taken now.

This final goal is proving to be very elusive. Labor and associated costs such as pension far outpace the city’s ability to pay. The City of Reading has reduced costs through better procurements systems estimated at $300,000 in General Fund savings; Emergency Medical Services’ financial stress is largely resolved at annual savings estimated more than $500,000; reduced debt service by nearly $1 million; and resume downsizing efforts estimated at another $1 million in savings. However, these efforts will not be sufficient to address a structural deficit that we have. I proposed we address this structural deficit of $2.7 million by using various one-time revenues. This is no long term solution, and actually could be the precursor to more financial stress in the future, which we will need to address by constant attention to cost reduction and revenue enhancement.

The basis for this budget will take the full commitment of all our elected representatives at the local, state and federal level. It will also take persistence once we commit to a real community and financial turnaround in Reading. Some goals may take many years to reach and overcome seemingly impossible obstacles when encountered. This financial, like all such plans, provides a blueprint to buy time for the city of Reading and allows us to consider the merits of Act 47, the State program for financial recovery.

This budget contains estimates of revenues and expenditures for both the current and upcoming fiscal years. Detailed breakdowns of expenditures by program are included in each departmental section.


The Proposed Fiscal Year 2006 General Fund Budget is summarized as follows:

The General Fund has direct impact on the tax burden for Reading citizens and businesses. The cost of city operations is proposed to be higher in 2006 by 4.7 million. Labor and pension costs are driving expenditure requirements well beyond the City’s ability to pay. The situation has been exacerbated by a recent arbiter’s award for police officers resulting in a $2,940,452 budgetary impact and pension requirements increasing by $1.1 million. The police arbitration award also presents conflicting realities for the city. On one hand, we need to acknowledge that employees, particularly public safety employees need to be compensated at an equitable and appropriate manner. On the other hand, however, it is entirely unreasonable to expect any 3rd class city in Pennsylvania to absorb essentially three years worth of wages at one time and without some redress for health insurance costs. Escalating pension costs are other factors that threaten long term viability.

Revenues continue to be sluggish in 2005, and will be reflected in 2006. Revenues are projected to be higher in 2006 compared to 2005 by $4,508,284. However, this increase comes at high price. A property tax increase is proposed for 2006 at the maximum amount allowed by the Reading City Charter. The city can increase property tax revenues by 5 percent more than the previous year. This clause is particularly harmful in light of planned economic development projects expected in the near future. The city would not benefit from significant redevelopment projects if it has to implement tax cuts to keep revenues within the statutory cap. An increase of .5 percent increase in the real estate transfer tax (to 4%) is also proposed for 2006 for an increase of $1.2 million. I fully understand this rate is likely one of the highest, if not the highest in Pennsylvania, but there are few choices and local real estate sales will remain strong in order for the city to reap the financial rewards. The City expects to earn $3.2 million in real estate transfer tax revenues in 2005, but the pace of transactions and number of high valued properties is not expected for 2006 – thus the rate increase to achieve similar results. The city will also need to use $2.7 million in one-time revenues for 2006. This practice especially pains me since the city will have to find other revenues or further reduce expenditures to compensate for this source in 2007 and beyond in addition to ordinary needs.

Increases in various expenditures demonstrate how vulnerable the city is to the same experiences of many others. For example, energy costs are up anywhere from 10 to 35% in 2006 according to the U.S. Department of Energy. The city recently relocated the Public Works Department to a sorely needed new facility on 6th Street, but the proverbial bill has come due and the first debt service payment increases facility costs by $88,000. I believe the city should be responsive wherever possible, and that is why I propose modest increases in code inspection training to better prepare existing staff rather than increase personnel, and even a small addition in temporary labor for faster tax return processing.

Fiscal Year 2005 Update

The approved General Fund budget for fiscal year FY 2005 is $54,560,449. The City has been in a cost containment mode since early October in response to projecting revenues with certainty. The City employed a cost reduction consultant in August 2004. Cost reduction recommendations have focused on office supplies, utilities, and contractual services. The accepted recommendations total $236,918 as of this publication and are included in the Proposed 2005 Budget. Other recommendations valued at $379,502 are under consideration and may be included later in 2005. In the meantime, 2005 Budget performance will suffer due to the police arbitration award, a $3.2 million one-time expense; rising energy costs estimated at $200,000, and absorbing the cumulative deficit of emergency services operations estimated at $2 million.

For the 2004 budget, the shortfall was about $2 million on a $49 million budget representing about 4% shortfall. The City has taken several steps to mitigate this shortfall in the form of tax swaps ($650,000), real estate sales ($500,000 to date), and debt ren structuring ($1.4 million) in 2005. There is much more to be done in the form of finishing various real estate sales previously denied by the City Council ($250,000) and getting to resolution on the Antietam Lake issue valued at $3 million or more.

National and State Economy

The economic outlook shows optimism amongst business owners has receded from the record levels reported this past spring. Business owners are more guarded in their expectations for sales and hiring, and are seeing their profit margins under pressure, much like the city of Reading, from rising energy prices, increasing costs for employee compensation and benefits, and rising interest rates. These concerns were evident before Hurricane Katrina. A healthy level of business confidence is a key element of what has become a self-sustaining expansion in the U.S. economy, as this optimism is behind decisions to increase hiring and capital spending. A majority of business owners still expects sales and profits to rise over the coming six months, but a greater share plans to hold the line on hiring and spending on technology. Rising energy prices and the likelihood of further increases in interest rates are adding to cost pressures. In light of these rising costs, 46 percent of business owners plan to raise prices.

One source of uncertainty involves the reactions of households and businesses to higher prices of petroleum products and natural gas. Although households seem to have cut back spending moderately in response to increases in energy prices this year, surveys suggest that they are now feeling the pinch of higher energy prices. Prices of gasoline should continue to retrace their post-Katrina upsurge, but natural gas prices are likely to remain high for some time, and consumers could cut spending by more than is currently anticipated over coming months, which could then feed back on business capital spending.

Pennsylvania’s economy remains in the midst of a steady expansion. Data suggest the state is on course for its most rapid pace of job growth since 2000. More encouragingly, job gains have been spread across most major industry groups; implying broad-based growth has taken hold. One notable exception is manufacturing, which continues to shed jobs, albeit at a slower pace than has been the case in recent years. In addition, industry restructuring has led to a drop in jobs in financial services, which nonetheless remains a key part of Pennsylvania’s economy.

We also have reason to be optimistic here in Reading. The Goggleworks Arts Center opened with much acclaim, and we anxiously await the opening of the Sovereign Bank Center on 5th and Penn. The city is also showing progress in the housing development arena with the approval of projects at the 1000 block of Penn Street, consensus reached on the Neversink housing plan, and other projects that will be announced in the near future. These are tangible signs that the middle class are ready to return to Reading and play a major role in our economic renaissance. It is unfortunate these efforts could not bring results sooner.

FY 2005 BUDGET PREPARATION PROCESS

The Budget Review Team met with the Department Directors/staff and reviewed the preliminary budget. After careful analysis and discussion with administrative staff, additions and deletions were made. The leadership of all city departments also met with the City Council’s Finance Committee in September and early October. The budget was then presented to the Mayor for review and approval.

Budget discussions also began in June with policy discussions between the City Council and the Administration. Additional research was conducted through surveying in July. Budget priorities were further refined in October to further define the City priorities and tolerances for service reductions and revenue increases.

Revenues

In terms of General Fund Reserves for the 2006 budget, the basic structure of revenues was continued from prior years. Property tax rates are proposed to increase by .515 mills (or 5%) in the 2006 budget. This is the maximum amount allowed by the city charter and is the first property tax increase since 1994. The financial impact, normally estimated at $742,000, is mitigated by more reasonable assumptions (89% collection rate and actual collections) described earlier. The impact of this proposed tax increase is $25 per year on an average value home in Reading.

Act 511 Taxes, which include a full year’s impact of last years EIT rate increase to 1.7%, are proposed to increase by $1.5 million. In the future, EIT revenue will also increase as incomes and employment in the city increase. It is the goal of the administration to aggressively pursue economic development, including job retention and job creation to raise the base of the income of city residents so they will be able to afford the level of service needed.

The major category of Intergovernmental Revenues is the pension contribution from the Commonwealth of Pennsylvania. These revenues are expected to decrease from the $3,083,125 budgeted in 2005 to $3,046,766 for 2006. The amount is stable, but hardly compares to the $1.1 million increase in pension costs. These revenues are based on the number of full-time employees (units) where uniformed employees are allotted two units and non-uniformed employees have one unit. The value of a unit is determined on an annual basis based on insurance proceeds and number of units for municipalities in the Commonwealth, as well as being impacted by the lackluster financial market.

Non-revenues (transfers from enterprise funds and the fund balance carry forward amount), continue to be a major factor in the General Fund Budget. The General Fund receives $3,910,000 as a financing fee and for indirect costs from the Water Authority. Therefore, the financial stability of the Authority is very important to the City, to ensure that the Authority can make legally obligated payments.

In addition, the General Fund receives $4.5 million from the Sewer Enterprise Fund, down another $750,000 based on a yet to be consummated consent decree. The City recently committed to a Consent Decree with the U.S. Department of Justice, which contains a commitment to reduce the dependence on Sewer Enterprise Fund transfers. The transfer will continue to decline by $750,000 per year until it reaches $3 million in 2008. The City continues to be very dependent on non-revenues to maintain current levels of service, but not at the expense of neglecting its utility infrastructure. As service level demands increase, the City will need to continue relying on revenues from user fees and enterprise fund contributions.

The proposed increase in the property taxes does not come without significant concerns regarding Reading citizens’ ability to pay. However, I believe capacity exists for the City to increase these taxes for two reasons. One, this taxing source has not changed since 1994. I also asked the Water and Parking Authorities to increase their transfers to the City by $720,000 and $500,000 respectively. The City has assisted both entities in the past and I ask them to reciprocate.


Fiscal Year 2006 Operations

The 2006 Budget proposes that the revenue increases define the amount of government the citizens of Reading can pay. The question then turns to what services can this amount afford to pay. There are several cues that provide insight. First, the Mayor’s Priorities are:

1. Financial Stability
2. Public Safety
3. Strong Neighborhoods
4. Encourage Redevelopment

The Proposed 2006 Budget embodies financial stability. It includes revenue increases, expenditure reductions, and service restructurings that intend to deliver the results the public expects. The following programs and services will be affected by reductions in force proposed for 2006:

Service/Program
Hazardous Materials Team
Purchasing Manager
Information Technology
Tax Administration
Public Works Administration, Garage, Highways, and Parks
Police special Services

These services and activities are necessary for optimal service delivery, but were deemed able to accommodate the organization’s need to reduce expenditures. However, careful attention was directed to opportunities to reduce layers of supervision and achieve more reasonable employee-supervisor ratios where possible. Reductions in these areas will create difficulties for our customers and other City operations. Such impacts range from slower response to technological problems to longer cycle times for mowing to less than immediate response from the Police Department in some cases.

The city will continue identifying better ways of doing business. Our most promising effort lies in the Early Intervention Program sponsored by the Governor’s Office. That process has already helped the city in fine-tuning our revenue projections for this budget, and we have high expectations from management audits in the financial services and public safety areas. The process is unique in Pennsylvania in that this joint effort has a persistent eye toward consolidation opportunities.

This budget is not without some carefully placed investments that are consistent with my priorities, and responsive to clearly identified needs of the community. This Budget proposes several policy initiatives that respond to Mayoral priorities.

Public Safety

· Increased training and consultation to implement a recent settlement regarding minority recruitment in the Police Department valued at $75,000

Neighborhoods

· Increased training and development for Codes Inspection Services ($20,000).
· Increased neighborhood outreach capacity in the Office of Neighborhood Development through the CDBG Allocation ($35,000).
· Re-enter the lot cleanup business after a four-year absence at a cost of $90,000.

Economic and Community Development

· Increase the bandwidth on the city’s website to enable better access at a cost of $75,000.

Of course, the ability to maintain resources in planning and development during these austere times also demonstrates our commitment to our strategic priorities.


Sewer Enterprise Fund

The Sewer Enterprise Fund has an operating budget of $21,620,000 a $3.4 million increase over 2005. This fund operates the City’s sanitary sewer system and its wastewater treatment plant. The operations of the Fund are under the oversight of the Public Works Department. The revenues can be categorized into five basic sources:

Consumers within the City of Reading $12,000,000
Outside Municipalities 7,660,000
Industrial Waste 1,200,000
Other 760,000
Total $21,620,000

For the 2006 Budget, the Sewer Fund transfers $4.5 million to the General Fund, which is $750,000 less than the 2005 budget. As stated previously, the transfer will continue to decline until it settles at $3 million in 2008. Factors which are important on the revenue side are flows within the outside municipalities, changes in the water rate and industrial waste pre-treatment by industries. The sewer system needs extensive capital improvements as prescribed in the Consent Decree.

Liquid Fuels Fund

Funding for the Liquid Fuels Fund is provided by revenues shared by the Commonwealth of PA totaling $1,218,984. The City uses this funding for various street projects such as cleaning of streets, snow removal, paving of streets, and traffic engineering. Funding from the Liquid Fuels Fund is included with the programs of Streets and Traffic Engineering. In addition, the Liquid Fuels Fund provides the funding for all of the capital purchases in the Streets Program. The amount of this fund is set by the state of Pennsylvania according to population statistics and is not changeable.

Self Insurance Fund

The Self Insurance Fund provides payments for the City’s Property, Liability, and Worker's Compensation Insurance. The projected expenditures of $2,987,671 represent an increase of $572,010 from the 2005 Budget. Most of the expenditure increase is in the worker’s compensation area to more accurately reflect the city’s experience. However, the city plans to restructure it risk management program by better creating a competitive environment and setting deductibles more attuned to Reading’s profile. The Self Insurance Fund receives income from its own investments and from damages recovered. It is important that the 2005 budget provide more funding than anticipated expenses because reserves in the fund have declined to low levels since 2003.

Debt Service

General Fund Debt Service for 2006 will be $750,000 less than in 2005, because of the debt service restructuring completed in September 2005. Sewer debt service is paid directly out of that fund. This debt service restructuring also allows the city to begin its capital improvements program after a one-year hiatus. The city should not see an increase in debt service over the next three years. The City repaid $3.7 million in 2004 and will repay an additional $4.5 million in 2005 in principal and interest.

Debt service for the Sewer Fund will reduce in 2005 to approximately $4.8 million. Outstanding principal in the Business Activity Funds are $64.9 million. The City repaid $5.3 million in 2004 and will repay an additional $4.8 million in 2005 in principal and interest in the Sewer Fund.


CONCLUSION

The proposed FY 2006 budget describes a city government that needs to continue reducing costs where possible while many costs, sometimes referred to as fixed costs escalate at alarming levels. However, the city has to lower its costs through creative means such as debt service restructuring and tough-minded methods such as layoffs. We will be pursuing cooperative efforts with the Reading School District, Berks County, and other municipalities on what is truly regional in nature, and how the city may be helpful in meeting their service delivery needs. This budget also proposes that the City not shy away from its priorities to create a safe community, strengthen neighborhoods, and encourage redevelopment. This budget does not make the financial performance gains necessary, but buys time until suitable strategies are developed including the possibility of Act 47. I ask the City Council to put the community’s interests first, and show the willingness to make tough decisions that can periodically adversely affect citizens in their districts. People make sacrifices all the time to make sure a family member can go to school. We need to think of Reading as our family and think about what we are willing to do for its well-being. In addition, innovation will continue to be sought with all organizations willing to collaborate with the City.

ACKNOWLEDGMENT

The preparation of this budget on a timely basis could not be accomplished without the efficient and dedicated participation of the administrative staff. The budget process reflects a team effort among the Mayor’s/Managing Director’s and Finance offices and the City’s operating departments. I would like to express special appreciation to Ryan Hottenstein, Acting Finance Director; JoAnne Frantz, Confidential Secretary; Cindy Weidel, Tax Manager and Budget Analyst, Mary Jo Salerno, Secretary and Leon Churchill, Managing Director; for coordination of the budget preparation. I also thank all the City staff who prepared sections of the budget. They are to be commended for their cooperation and assistance, and willingness to make tough decisions.

Sincerely,

Thomas M. McMahon
Mayor

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