Economic Presentation Wilkes Barre, PA 2017 Fire Act 111 Interest - PowerPoint PPT Presentation

Economic Presentation Wilkes Barre, PA 2017 Fire Act 111 Interest Arbitration Vijay Kapoor April 3, 2017 vkapoor@kapoorco.com

Experience with Third Class Cities § Serve as part of the Act 47 Recovery team in Reading, PA and New Castle, PA § Led a 5 year economic plan analysis of the City of Bethlehem § Other work with Pennsylvania Third Class Cities: – Allentown (Expert in fire arbitrations, 2010 and 2011 and police arbitration in 2016) – Bethlehem (Expert in fire arbitration, 2011 and 2015) – Chester (Expert in police arbitration, 2011) – Coatesville (Expert in fire arbitration, 2013) – Easton (Expert in fire arbitration, 2009 and 2017) – Lancaster (Expert in police arbitration, 2011; Expert in fire arbitration, 2012) – New Castle (Assisting Act 47 Coordinator handling workforce issues, current) – Pottsville (Expert in police arbitration, 2012) – Reading (Assisting Act 47 Coordinator handling workforce issues, current; Expert in fire arbitrations, 2010 and 2016; Expert in police arbitration, 2012) – York (Expert in fire arbitration, 2013) 2

Presentation Overview § The City of Wilkes Barre faces severe and immediate financial difficulties and stands at the precipice of entering Act 47 § The City is currently in the Early Intervention Program (EIP). Analysis completed as part of the EIP projects that the City will run a nearly $5.7m operating deficit in 2018 increasing to $7m in 2019 thus exhausting any General Fund reserves in 2018 § The City has significant cash flow problems which requires it to take out annual bridge loans and hold payment of larger bills to meet immediate cash obligations. It faces a real likelihood of running out of cash to meet obligations • While the 2015 audit shows a General Fund balance of $10,681,151, only $557,576 or 5.2% of that amount is in cash or cash equivalents § The City also has significant unfunded pension and retiree health care obligations totaling $107,630,086 in 2015 3

City Financial Condition § The City of Wilkes Barre is exhibiting many of the characteristics of cities who have entered Act 47 including: – Weak economic demographics – Severe cash flow problems – Stagnant tax revenues – Significant and growing retiree benefit liabilities – Projected structural deficits that compound in later years 4

City Demographics 5

City Demographics § The City of Wilkes-Barre suffers from having below average key economic demographics including median household income, median home value and individuals living in poverty § As noted in 2005 in a report by the Joint Urban Studies Center, “Throughout this study, the economic and demographic statistics provided will serve to highlight the declining condition of Luzerne County: The lower the indicators, the greater the turnaround challenge.” (p. 5) § The study further warned: “The Scranton/Wilkes-Barre/Hazleton MSA needs to be proactive to reverse its trends. The continuing decline of the young population, the increase of the older generation, the lack of economic competitiveness, and the drifting economy are all elements that will eventually take our area from below average to nonexistent.” (p. 6) 6

City Historical Demographics Population Wilkes-Barre’s population continues to decline and it currently stands at less than half of its peak population Wilkes Barre Population (1900 - 2015) 100,000 90,000 86,626 86,236 76,826 80,000 73,833 70,000 67,105 63,068 58,856 60,000 51,721 51,551 47,523 50,000 43,123 41,498 40,780 40,000 30,000 20,000 10,000 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015 7

City Historical Demographics Median Household Income Median Household Income (2015) $60,000 $53,889 $53,599 $50,000 $45,897 $40,000 $30,945 $30,000 $20,000 $10,000 $0 Wilkes-Barre Luzerne County Pennsylvania United States 8

City Historical Demographics Median Home Value Median Home Value (2015) $200,000 $178,600 $180,000 $166,000 $160,000 $140,000 $122,700 $120,000 $100,000 $77,700 $80,000 $60,000 $40,000 $20,000 $0 Wilkes-Barre Luzerne County Pennsylvania United States 9

City Historical Demographics Individuals Living Below Poverty Percentage of Individuals Below Poverty Level (2015) 35.0% 28.9% 30.0% 25.0% 20.0% 15.8% 15.5% 15.0% 13.5% 10.0% 5.0% 0.0% Pennsylvania United States Luzerne County Wilkes-Barre 10

City Cash Flow Problems 11

City Financial Condition Cash Flow Problems § Though it may seem basic, a city requires having cash on hand to operate - from making payroll to paying bills. Wilkes-Barre has among the most severe cash flow problems of any community that I have analyzed: – The City issues a $3m tax anticipation note (TAN) annually. However, rather than pay it back as soon as tax proceeds come in (as is typical for TANs), it repays it very late in the year and then immediately obtains another in the next year – The City withheld payment on its health insurance bills at the end of 2016 – The City’s general fund cash balance at the end of 2015 was $557,556 or the equivalent of less than a week of expenditures 12

City Financial Condition Cash Flow Problems - General Fund Reserves Although the City’s 2015 audit shows a general fund balance of almost $10.7m, only $557,576 or 5.2% of that amount is in cash or cash equivalents. This leaves the City in a precarious position if it needs to access reserve funds to support cash flow or for emergencies such as the Solomon Creek wall City General Fund Balance as of Dec. 31, 2015 $12,000,000 $10,680,151 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $557,576 $0 Reported GF Balance Reported GF Balance - Cash City 2015 audit, p. 21. 13

City Financial Condition Cash Flow Problems - General Fund Reserves City General Fund Reserves as of Dec. 31, 2015 Reported GF Balance - Cash, $557,576 , 5% Reported GF Balance - All Other, $10,122,575 , 95% 14

City Financial Condition Cash Flow Problems § Though the EIP baseline projections (discussed later) show a negative general fund balance at the end of 2018, the City risks running out of cash in the General Fund in the final months of 2018 – The City’s audit reflects accounting adjustments by the City whereby it takes revenue received in one year and applies it back to the prior year (e.g., EIT revenues received in Jan. 2016 appear as part of 2015 since that is when they were accrued). The problem from an operational perspective is that the City must make debt service and MMO payments in the prior year and thus cannot rely on the revenues received in the next year • The City’s debt service payments are projected to increase from $5.3 million in 2017 to $7.4 million in 2018 and its MMO payments are projected (tentatively – we don’t year have the 2017 valuation) to increase from $4.4 million in 2017 to $6.4 million in 2018 – an increase of $4.1 million from just those two areas 15

Stagnant Revenues and High Debt 16

City Financial Condition Stagnant Revenues § Property taxes and Earned Income Tax together comprise approximately 45% of the City’s General Fund revenues § Unfortunately, those line items are not growing organically which further exacerbates the City’s financial condition – As seen previously, the City’s residents have very weak economic demographics making tax increases a difficult route to pursue § If revenues from those taxes continue to be stagnant, expense growth will quickly surpass revenues leaving the City with few options to address its deteriorating financial condition – This problem will not get better with time 17

City Revenue Sources City Revenue Sources (2016 Budget) Other, $1,340,350, 3% Financing, $8,280,000, 16% Property Tax, $10,150,000, 20% Transfers, $1,205,259, 2% PILOTs/Grants, $468,996, 1% Fines, $966,000, 2% Charges for Services, $5,460,000, 10% Earned Income Tax, $12,700,000, 25% Intergovernmental, Other Taxes, $3,454,973, 7% $5,408,600, 10% Licenses, Permits & Fees, $2,063,330, 4% 18

City EIT Taxes EIT – the City’s largest general fund revenue source – has been stagnant during years where the national economy has improved CIty Earned Income Tax (2010-2016) $14,000,000 $12,700,000 $12,630,752 $12,596,290 $12,506,065 $12,000,000 $11,279,621 $11,138,921 $11,136,275 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 2010 2011 2012 2013 2014 2015 2016 19

City Property Taxes Accounting for the tax increase in 2013, the City’s property tax revenues have been stagnant City Property Tax Revenues (2010-2016) $12,000,000 $10,243,058 $10,215,748 $10,150,000 $10,142,389 $10,000,000 $7,933,926 $7,832,226 $7,795,366 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 2010 2011 2012 2013 2014 2015 2016 20

City Debt Problem In order maintain its cash flow and make debt payments, the City has been taking on new debt to pay off older debt (referred to as “scoop and toss”). This is unsustainable over the long term and is akin to getting another credit and transferring the balance from the previous one 21

Severe Retiree Benefit Liabilities 22