Posted 9 months ago on July 27, 2013, 11:17 a.m. EST by JeffSoke
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PEL: Scranton could be looking at $18 million deficit, 117 percent tax hike in 2014
By Jim Lockwood (Staff Writer)
Published: July 21, 2013
Scranton taxpayers could face a 117 percent increase in taxes next year as the city's finances continue to spiral out of control.
A new analysis by the Pennsylvania Economy League projects an $18 million deficit for 2014, an amount so massive it outpaces the approximate $17 million the struggling city collects annually in just property taxes.
The property tax hike needed to balance the city budget, should a commuter tax fall through, would mean increasing the average Scranton taxpayer's bill from $506.98 to $1,100.14. That's based on land assessed at $2,398 and improvements assessed at $8,734.
PEL, the city's Act 47 recovery coordinator, detailed the worst-case-scenario estimate in a July 10 letter to the city. Councilman Bob McGoff mentioned during council's meeting Thursday that PEL projects a $15.4 million deficit for 2014.
However, that figure represents the city's structural deficit, or the difference between operating revenues and expenses. Add to that an expected $2.6 million increase in debt service next year stemming from the expected borrowing this year of $27.1 million and the deficit could rise to $18 million, said PEL Executive Director Gerald Cross.
The projection breaks down like this:
n A $15.4 million structural deficit would require a 70 percent tax hike to close;
n A $2.6 million increase in debt service would require a 17 percent tax increase; and
n A commuter-tax rejection by Lackawanna County Court, should that again occur, would require a 30 percent tax hike to make up for the loss of an estimated $4.2 million in commuter-tax revenue.
PEL prepared the projection as part of the city's effort to secure $27.1 million in a private-placement bond issuance through financial firm Janney Montgomery Scott. Unlike previous rounds of unfunded debt for which the city needed court approval, the city does not require court approval for the $27.1 million bond issuance because it included it in the 2013 budget, Mr. Cross said.
The $27.1 million in debt sought will pay:
$21 million in arbitration backpay awards overdue to the city's police and fire unions stemming from the 2011 landmark state Supreme Court ruling in the unions' favor;
$5.1 million increase in mandatory minimum pension contributions; and
$1 million for costs of issuance.
An independent audit of the backpay amount that is expected to peg it at $21 million has not yet been completed.
The city administration typically crafts a budget in the fall and it must be submitted by the mayor to council by Nov. 15.
The revised Act 47 recovery plan adopted last year by the mayor and council states numerous times that the city would replace any revenue that may not materialize with equivalent revenue, which likely would mean tax hikes and/or cuts. However, whether that will happen, and to what extent, remains to be seen.
Given that 2014 could have a $18 million deficit, is the revised recovery plan already failing?
"No," Mr. Cross said. "If you read the 2012 revised recovery plan, the goals the city set for itself were to reduce expenditures and create new sources of revenues. They've been successful in reducing expenditures and less successful in increasing revenues."
That's not to say all alternative revenues have not panned out, he said. For example, the city implemented a rental registration program and parking and amusement taxes. However, bigger ticket items failed to materialize, such as a commuter tax, a large increase in voluntary payments in lieu of taxes from nonprofit organizations and a 1 percent countywide sales tax that would benefit the city. As the county's largest municipality, Scranton would be the main beneficiary of a countywide sales tax, but it has not been enacted by the state Legislature and appears to be going nowhere in Harrisburg.
"The overall hit from the commuter tax, PILOTS, the sales tax (failing to come to fruition) have to be made up in 2014," Mr. Cross said. "The revised recovery plan anticipated the city would have to raise revenue to do this and the quickest way is to use (raise) the real estate tax. The revised recovery plan requires that shortfalls in revenue be made up through either revenue increases, expenditure decreases or a combination of both."
Council in the past balked at PEL recommendations for big tax increases. Though council members did not extensively discuss the PEL letter Thursday, council Finance Chairman Frank Joyce said after the meeting, "The tax increase they (PEL) recommend is far too expensive for taxpayers to handle."
Mr. Joyce suggested that perhaps the city could refinance debt to implement a financial maneuver called a "scoop," in which higher debt service payments due next year are scooped out of the budget and swapped with lower payments due in future years. The city implemented such a scoop for the 2013 budget by refinancing debt to have lower debt-service this year than it otherwise would have had, Mr. Joyce noted.
"The city's definitely going to need help," Mr. Joyce said. "Maybe we can refinance debt to lessen the tax impact through a scoop. It may be viewed by some as kicking the can down the road, but it may prove to the state that we need a (countywide) sales tax."
PEL's July 10 projection comes two months after PEL on May 22 gave an optimistic report that the city may end 2013 with a $356,000 surplus. However, that balanced budget is being achieving largely through borrowing and refinancing. PEL's May 22 review also carried caveats that 2014 could be far more challenging, and now PEL's July 10 letter begins to flesh out how deep the city's fiscal hole could be next year.
PEL's July 10 letter also includes the following:
n After reviewing figures through May, PEL projects that the city's 2013 budget could have a $181,000 deficit, rather than a $356,000 surplus as projected in May, due to revised lower estimates of real estate taxes, wage taxes, license and permits and departmental earnings. Although it's a deficit, a $181,000 shortfall essentially would still be akin to a balanced budget, Mr. McGoff noted.
n A $15.4 million structural deficit in 2014 could be reduced by commuter tax revenue of $4.2 million, if Lackawanna County Court allows the city to impose a 1 percent commuter tax in 2014 on earned income of nonresidents who work in the city. The city has not yet petitioned the court for a 2014 commuter tax. Last year, a panel of county judges rejected the city's request for a 1 percent commuter tax for 2013. It was initially estimated that a commuter tax would generate $4 million a year, but only $2.5 million in the first year due to a startup lag. Those estimates were revamped during commuter tax hearings in December to $6 million a year, but only $4.2 million in the first year of operation.
n The city in 2012 had $98.6 million in operating revenues, some $20 million of which came from a pair of unfunded-debt borrowing packages, and $91.1 million in operating expenses. The resulting $7.5 million surplus was wiped out by paying $7.3 million of the prior year's carryover deficit. That left a surplus of $208,000 for 2012.
n Operating revenues for 2013 are budgeted at $106 million, which includes $79.4 million in typical operating revenue and the $27.1 million bond issuance. Operating expenditures for 2013 are projected at $84.7 million. Spending the $27.1 million for the arbitration awards and pension increase would result in the $181,000 deficit, or essentially a balanced budget for 2013.
n Operating revenues for 2014 projected at $80.3 million and operating expenses projected at $95.7 million would result in a $15.4 million deficit.
n Though debt service on the $27.1 million bond issuance would cost $2.6 million next year, the city actually would have to set a millage rate for $2.9 million because the tax-collection rate is only around 90 percent. That $2.9 million increase would equate to a 17 percent tax hike.