[NOTE: This material was contained in the Borough Manager's 2006 Budget Message to Borough Council and the Mayor.]

1. The Borough's overall financial condition remains strong but that is only because the water system sale proceeds from 1997 created the Capital-Operating Reserve Fund originally at $12.5 million and that fund creates an operating cushion plus interest earnings used to meet capital needs. The reality is however that the General Fund has had only a slim operating surplus over the last several years and finished 2004 with a very low fund balance of a little more than $300,000. Secondly, the interest earnings from the Capital Operating Reserve Fund is not sufficient to meet many important capital needs.

2. The Borough still derives most of its revenue from the archaic State imposed taxing system which has not been substantially changed since the 1960's. The State Legislature has not been willing to reform or modernize local tax structure. Their one failed attempt in 1988 was made dependent on a statewide referendum to amend the PA Constitution and it was soundly defeated by the voters. To make matters worse the 1988 legislation was so badly worded that municipalities through a court decision on that act actually lost the right to impose or increase several taxes like the Business Privilege Tax that were previously available to them. The Legislature also in recent years mostly eliminated another local revenue source, the Public Utility Realty Tax (PURTA) that had helped to fund municipal services. Also recently the state eliminated the Act 339 Sewer grant program which cost the Borough over $140,000 per year in state assistance.

3. The systemic problem is that the Borough has no major, inflation sensitive revenue source to support the primary cost of providing municipal services which is personnel cost. The Borough's expenditure budget is primarily personnel related because provision of local government service is inherently labor intensive. In fact $9,311,923 or 66% of the 2006 Budget is projected to consist of personnel related expenditures. After subtracting other non-discretionary expenditures such as utilities, insurance and mandated services, there is little left of the budget that can be considered discretionary operating expense.

Accordingly, when Council considers reducing the operating budget, the only options typically must involve personnel and service cuts. In 2006 even with a draft 8.3% real estate tax increase the two major tax revenues grow only $311,486 while overall personnel wage costs increase $284,984.

4. The Borough of West Chester as a County seat, a University cornmunity and the location of many churches and non-profit organizations provides services to a substantial amount of property which does not pay taxes. Approximately 28% of West Chester Borough's assessed value is tax-exempt. If this property were all taxable at the 2004 tax rate, it would pay over $1 million in real estate tax to the Borough. The State Legislature has also shown an unwillingness to deal with this problem which particularly affects County seats and University towns.

5. Since the Borough is basically 100% built out there is little hope that new development will grow the tax base and therefore help fund the growing cost of Borough services. As such, the Borough can only count on redevelopment and perhaps intensification of use on existing parcels to create a growing tax base but this of course must be balanced with quality of life issues. The alternative to such growth and redevelopment is regular tax rate increases for existing residents and businesses in order to maintain municipal services or reduction of those services.

6. As stated earlier personnel costs consume 66% of the 2006 Borough General Fund Budget. Debt, utilities, insurance and fuel consume another 13% of the General Fund budget. Those expenses combine to equal 79% of the budget and leave only 21% for all other operating costs. Examined from a departmental or service area cost allocation the Police Dept. represents the largest cost center at 36% of the General Fund operating budget.

7. The Borough has no inflation sensitive or gross receipts based business tax and real estate is only reassessed by Chester County every 20 years. Accordingly neither the growing success of the business district or the increased market value of property in West Chester does anything to create additional tax revenue for municipal services. In fact the success of the business district with more people and events in the downtown creates a growing demand and cost for services by the Borough. More police protection and public works services are definitely required as the success grows but without any offsetting revenue.