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(January 2007) In the coming year, The Pennsylvania Economy League will be taking a close look at municipal fiscal health, how it is impacted by state policy, and the impact on economic and community vitality. Periodically, IssuesPA will provide a glimpse of the work PEL is doing at the state and local levels to help strengthen Pennsylvania’s communities.

First, a look at Reading

Two Pennsylvania Economy League studies for the city of Reading that predicted ballooning deficits helped prompt city officials to take action and avert a financial crisis. It looks as though the city will have ended 2006 in the black. Still, city officials say, the underlying problem identified by PEL in its 1999 report and 2004 update remains. A structural imbalance between ongoing revenues and escalating expenses continues to exist.

PEL’s analysis that showed deficits would grow dramatically if left unchecked helped city leaders like current Mayor Thomas M. McMahon tackle the looming deficits and overcome skeptics who questioned the existence of a future sea of red ink, according to city officials. The 1999 report, noting there was no single solution, identified various opportunities and strategies to fix the city’s financial woes. PEL warned that "quick fixes," such as the use of one-time revenues, were not the solution. Instead, broad-based strategies such as tax increases, regional cooperation, and controlling employee benefits and wage increases were recommended.

So far, city officials have combined the approaches of short-term cash infusions with long-term solutions like tax increases, debt service reduction, and lower pension payments to wipe out a large cumulative deficit and to end 2006 with a fund balance. But annual revenues are still not keeping pace with escalating costs for health care, salaries, utilities and other expenses, according to city officials.

Reading officials hope to knock down one significant rising expense, health care costs, by requiring police to contribute to health insurance premiums. This change, however, must come through current collective bargaining for the police union’s new contract. Talks to make the same change for firefighters must wait until that union’s contract expires. Other city workers do contribute, but public safety workers make up the bulk of the increases in health care costs.

The city also is attempting to control health insurance costs by shopping for other providers and by making changes in prescription plan coverage.

Highlights of Reading’s financial plan

The city’s wage tax has been increased twice since 2003 from 1.0 percent to the current 1.7 percent. The hike served to overcome a problem PEL identified in its 1999 report of Earned Income Tax collections that were growing too slowly to keep pace with expenses. A wage tax increase was one of PEL’s recommendations. Collections have more than doubled from $4 million in 2002 to $8.7 million in 2006.

Reading’s real estate transfer tax was raised 1.0 percent from 2.5 percent to 3.5 percent. Because the increase coincided with a large number of property sales fueled by lower property costs compared to surrounding municipalities, the city saw a huge increase in transfer tax collections from $756,000 in 2002 to $7.4 million anticipated for 2006. City officials do not anticipate sustaining those collection amounts, however, since the volume of sales is expected to slow as City property increases to area market values.

Property taxes were increased in 2006 from 10.3 mills to 10.4 mills, the first property tax hike since 1998. City Council has agreed to increase property taxes to 10.9 mills for 2007, netting another $650,000 to $700,000. Declining real estate collections were another problem identified by PEL in its original 1999 report.

In 2005, the city generated over $3.4 million in one-time cash infusions through four bond swaps and the sale of some 25 properties. A 2005 debt restructuring allowed the city to save another $1.4 million annually. The one-time revenues and other measures helped shrink Reading’s cumulative deficit in 2005 by $6.1 million from $7.2 million to $1.1 million.

The red ink changed to black in 2006 with a bond sale that fully funded the city’s pension. As a result of the bond sale, Reading eliminated its $3 million portion of the $6.5 million total “minimum municipal obligation" (MMO) – or the minimum pension obligation - for 2006. Going forward, the city will pay debt service of about $4.2 million for the bonds but will be able to defray that expense with the state’s annual MMO contribution of about $3.5 million. The exact amount of Reading’s expected year-end fund balance, which may also be helped by a pending sewer bond swap, is unknown right now.

Reading enacted a handful of other PEL suggestions from the 1999 report as well. For example, the city closed one of its eight firehouses, and the administration is seeking to merge two others. A law firm was hired to more aggressively collect taxes. The city continues to explore more cooperative purchasing with the county and to market city services on a regional basis.

Reading’s situation is not unique. As PEL has observed in municipalities across the state, Reading is suffering from a declining tax base and the need to meet costs associated with past collective bargaining agreement, among other growing expenses. PEL believes Reading, like other cities, cannot solve all of its problems alone. Municipalities facing fiscal problems must work with their counties and the state to address the root causes of distress.

The PEL work mentioned in this article was completed by the Pennsylvania Economy League’s Central Office in Wilkes-Barre. With four offices throughout the state, PEL is the state’s leading regionally based, statewide public policy organization. PEL provides independent research and insight on emerging issues to stimulate public and private action to make Pennsylvania a better place to live, work and do business. IssuesPA is an initiative of the Pennsylvania Economy League’s State Office in Harrisburg.