[NOTE: This material was part of the draft 2008 budget provided by the Borough Manager to members of Borough Council and the Mayor.]

TO: Borough Council Mayor
FROM: Ernie B. McNeely, Borough Manager
DATE: October 3, 2007
Subject: 2008 Budget Message

Attached is the first draft of the 2008 Budget. This draft of the 2008 Budget reflects the ongoing financial strain faced by the Borough of West Chester as revenues from the archaic local tax structure fail to keep up with growing cost of services. This draft of the Budget is balanced only by including a 9.75% real estate tax rate increase in order to fund operating expenses. The real estate tax increase in this initial draft is needed just to fund the existing level of municipal services, not any new programs or services.

Despite the success the Borough has experienced with downtown revitalization and sharply appreciating real estate values none of that translates to additional revenue to meet the demand for services from the success or even the increasing cost of existing services. The Borough due to antiquated state law has no tax revenue that tracks business or economic development success. The Borough receives the same amount of business tax revenue from a company doing $25,000 in business a year as it does from one doing $25 million. Only new taxable construction of which the Borough has very little brings modest new revenue from real estate tax. Earned income tax is paid to the municipality where a person lives so without new housing development this tax source sees little growth reflecting only the modest wage increases of existing residents.

To make matters worse, in 2008 the state Legislature decided to fix a local tax source that was not broken. The Legislature revised what for the last three years had been called the Emergency <& Municipal Services Tax (EM5T) into the Local Services Tax (LST) effective for 2008. The EMST was a simple $52 per year tax paid by persons working in a community. The employers were allowed to withhold it from employees one time or in increments but it had to be paid to the tax collector one time per year. Municipalities were allowed to set exemption thresholds for paying the tax up to $12,000 per year in income. West Chester retained the exemption level of $1,200 per year from the old Occupational Privilege Tax from which the EMST was created. The new LST also up to $52 per year has to be withheld by the employer according to payroll period so up to 52 times a year at $1 per week for a weekly payroll. It has to be paid to the tax collector four times a year or quarterly and the exemption level has to be set at $12,000 per year. An employee claiming exemption has to go through a complicated process that involves getting a state produced form and filing it with their employer. The crux of all this Legislative "improvement" to the tax will cause the Borough of West Chester to lose over $160,000 in revenue in 2008.

Predominant themes in this 2008 Budget draft include the following:

• The draft $16,060,550 General Fund Operating Budget is only $36,632 higher than the 2007 Budget but requires a 9.75% real estate tax due to the damage caused by the Legislature to the EMST Tax and other flat tax revenues.

• The real funding crisis in this 2008 Budget is that there are almost no available funds for capital projects and equipment requests. Departmental capital requests for projects and equipment including the 2008 paving program total $1,060,098 while available funds only total $368,608.

• Earned Income Tax revenue is very flat and is only projected to grow 1% over the 2007 Budget, which according to current collection rates may not make budget.

• Real Estate Tax revenue growth without the projected 9.75% tax rate increase would also be negligible in the 2% or less range. That modest growth comes from the couple new private office buildings that opened in 2007.

• Other non tax revenues are similarly flat and are projected to remain static with 2007 budgeted numbers.

• Parking ticket revenue projections for 2008 had to be adjusted down to reflect 2007 year to date experience as it does not appear current budget estimates will be met but were also partially adjusted up to reflect the fine increases Council earlier approved for next year plus the possible new enforcement position.

• Expenses of providing municipal services continue to grow regardless of flat revenue growth.

• The two main sources of Borough revenue the Real Estate Tax and Earned Income Tax together do not grow at any where near a pace to keep up with the primary cost of providing municipal services which is personnel costs.

• The increase in the amount the Borough has to fund employee pensions is $58,162 in 2008.

• Employee benefit costs continue to increase by an additional $32,333 in the General Fund.

• Wage and salary increases for Borough employees are projected to cost an additional $225,037 in the 2008 general Fund Budget.

• The Sewer Fund based on the consulting engineer's study indicates a need for a 15 percent increase in the sewer rate for 2008.

This draft of the 2008 Budget includes a real estate tax rate of 5.68 mills, which is a .47 mill increase over the tax rate of 5.21 mills in 2007. The tax rate would amount to $676 per year for the average single family residence with an assessed value of $119,000 and that is a $56 increase over the 2007 average tax bill. It should be noted that this average tax bill of $676 still includes most of the cost of trash collection service which in neighboring municipalities cost residents anywhere from $250 to $450 per year as a separate fee.

Budgets are attached for the major funds that make up the 2008 West Chester Borough Budget which include the (Seneral Fund, Sewer Fund, Parking Fund, Highway Aid Fund, the UbA<5 Fund and the Capital-Operating Reserve Fund. The Capital Improvement Fund Budget has not been included and will be drafted after Council sets priorities for that fund. Again, tax revenues in the Seneral Fund are not sufficient to pay for any capital needs and so capita! projects such as road reconstruction and equipment purchases are all left to the Capital Improvement Fund, which is primarily funded with interest earnings from the Capital-Operating Reserve Fund.

Selections have not been made from the extensive list of capital requests submitted by the departments. That task should be accomplished with Borough Council. The list of needs so far exceeds the available earnings in the Capital Operating Reserve Fund (requests exceed revenue by $691,490) that Council will have a difficult task to set priorities. The projects and equipment on the capital request list all reflect very legitimate needs.

The Home Rule Charter requires that a balanced budget is delivered to Borough Council this early in the current fiscal year so there are many assumptions made about contracts, insurance renewals etc., that are not yet finalized for next year which could mandate budget revisions. Those assumptions and the entire budget document should be reviewed and considered by Borough Council during this budget preparation process. Borough Council has until November 17, 2007 to vote to propose a 2008 Budget and until December 31, 2007 to formally adopt. This is problematic due to a calendar nuance which has the November Council meeting falling on November 21, 2007 so a special meeting will have to be scheduled by November 17th to propose a budget.

General Fund

The 2008 General Fund Budget as drafted totals $16,060,550, which is $36,632 more than the $16,023,918 Budget in 2007 or a zero percent, increase.

Capital projects and major equipment purchases are not funded out of the General Fund.

The Budget maintains a Police Department of 46 officers of which 8 are devoted to the East Bradford contract leaving 38 for the Borough or one officer per 470 residents.

The Budget maintains the personnel complement and current level of services in all Borough departments. There is only one additional parking enforcement position considered in the 2008 Budget.

Sewer Fund

The 2008 Sewer Fund Budget of $4,843,266 is $511,892 or 12% higher than the 2007 Sewer Fund Budget.

The Sewer Fund Budget based on the consulting engineer rate study performed in 2007 projects and incorporates a need for a sewer rate increase of a minimum of 15 percent.

The increase in the Sewer Fund expenses is driven by the need to replace aging sewer lines in the northern portion of the Borough, replace other infrastructure and restore an adequate fund balance.

Parking Fund

The 2007 Parking Fund Budget of $2,699,494 is $156,099 less than the 2007 Budget in 2006 which is a 5% decrease.

The support for the Business Improvement District is allocated in this fund and reflects the same $85,000 provided during 2007.

The Parking Fund in 2008 is continuing to provide financial support of $796,506 to the General Fund without which there would have to be an even greater increase in the real estate tax rate.

Highway Aid Fund

This fund utilizes dedicated state monies for highway maintenance related activities and totals 305,040 for 2007 a 4% decrease.

Capital-Operating Reserve Fund

This fund was established with water system sale proceeds by Resolution #1 of 1998 and may support either capital or operating needs according to the resolution adopted by Borough Council. The stated intent for this fund is to utilize the interest earnings of the fund for capital and operating purposes to be approved by Council.

The capital requests for equipment and projects from this fund total $1,060,098 and exceed projected available revenue by $646,890 so there are major decisions to be made about projects to fund.

Capitol Improvement Fund

This fund budgets and pays the expense of capital projects with monies set aside by the Seneral Fund and Capital-Operating Reserve Fund. The projects in 2008 will include those selected for funding by Council as well as projects which are ongoing and carried over from previous years.