Five Year Financial Plan

Transcription

1 Five Year Financial Plan Luzerne County Commonwealth of Pennsylvania Prepared on behalf of the Governor s Center for Local Government Services Department of Community and Economic Development Commonwealth of Pennsylvania and Luzerne County October 2015 Public Financial Management Two Logan Square, Suite th and Arch Streets Philadelphia, PA

2 Table of Contents Chapters 1. Introduction 2. Revenue 3. Assessor s Office 4. Debt 5. Capital Program 6. Budget & Financial Services 7. Workforce 8. Criminal Justice System 9. Human Services 10. Emergency Management Agency Communications Center 12. Building and Grounds 13. Road and Bridge 14. Engineer s Office 15. Planning and Zoning 16. Administrative Services 17. Purchasing 18. GIS and Mapping 19. Elective and Executive Offices Appendices Appendix A: General Fund Baseline, FY Appendix B: Initiative List Appendix C: General Fund with Initiatives, FY

3 Introduction Five Year Financial Plan 1 Introduction

4 Introduction Overview Luzerne County has made great progress since the last Early Intervention Plan report in Most notably, in 2010 County voters approved a new Home Rule Charter replacing a three-commissioner government structure with a larger elected County Council and a strong County Manager. Several row offices were eliminated, with the related duties transferred to operating agencies under the County Manager. Subsequently, the County elected new Councilmembers who retained a County Manager. In turn, the Manager reorganized the executive branch to conform to the Charter, completed an Administrative Code and hired Division heads. Although the County has revised its structure, it continues to provide the basic services common to most counties in Pennsylvania. While many elected and appointed leaders are new, much of the day-to-day work is executed by dedicated County employees of long tenure. This report is primarily focused on how the County can provide those services that are required and those optional services that the County desires in the most cost-efficient manner. In particular, it seeks to provide a roadmap for the County to achieve and sustain consistently balanced annual budgets. This goal is defined by the nature of County government. Like any public sector institution, the County can provide less of some services or provide them less expensively. There are other services it could stop providing at all. However, as in most counties in Pennsylvania and many nationwide, Luzerne County is primarily a provider of human services and criminal justice services. Over 55 percent of the 2015 General Fund budget and over 80 percent of represented County personnel are dedicated to the Courts and related agencies, the County jail, the District Attorney and Public Defender, or the Countyfunded portion of various human services agencies. These are critical services, and the public relies heavily on them for safety, justice, and fair treatment for the most vulnerable populations. However, the level of service provided is also closely related to the number of people who need the service, and is not always controlled by the County. The number of children at risk and a mandated number of related caseworkers defines many human services costs, and the number of prison inmates drives a substantial portion of County criminal justice costs. Most of these services are personnel-intensive, requiring skilled probation officers, correctional officers, prosecutors and defenders, and case workers to interact directly with children, the aging and those who need behavioral health assistance. The concentration of such a large portion of the budget in a few key areas makes change and financial reform challenging. In addition, prior financial decisions and years of austerity and down-sizing have created some critical issues that loom over any effort at long-term financial sustainability. First, the County needs to extricate itself from unfavorable financial arrangements entered into earlier this century. This process is well under way with the recent achievement of an investment grade credit rating for the County and the execution of related financial transactions to reduce exposure to growing debt service costs. Next, the County needs to invest in the people who provide services. After years of workforce reductions and pay freezes for many employees, especially non-represented managerial employees, the County must prioritize its remaining services and fund them adequately. Finally, with reorganization complete and the establishment of a roadmap on financial matters, the County must focus on improving and making more efficient the delivery of its core services. Increased collaboration between and among agencies that provide criminal justice, human services and support Five Year Financial Plan 2 Introduction

5 functions is needed. The implementation of methods to measure and regularly report on service levels and overall performance will be welcomed by County residents and will help inform and sharpen debates about where and how the County provides services. Progress and challenges As noted at the outset, Luzerne County has made great progress since the last Early Intervention Plan in In addition to successfully changing its form of government, the County has had several key achievements: Securing an investment-grade credit rating and executing related financings. As discussed in the debt chapter of this Plan and elsewhere, the County annually must dedicate an extremely high portion of its budget to debt service and related payments. The receipt of an investment grade BBB rating with a stable outlook in March 2015 was a critical step that was followed in May 2015 with the execution of a complex financial transaction that refunded some of the County s high-coupon debt terminated an unfavorable swap transaction entered into in Improved tax collection performance. The County has increased the percentage of real estate tax bills collected in the first year after issuance from 88 percent in 2007 to 92 percent in This improves annual revenues, reduces costs for collection of delinquent taxes, and builds taxpayer confidence in the fairness and efficiency of the tax system specifically and the County generally. Contracting out tax claim. In 2010 the County outsourced its delinquent real estate tax collection services. The move has dramatically increased the amount of overdue taxes collected and provided a publicly-accessible database of tax payments. As in the case of improved current year collections, this strengthens revenues and builds taxpayer confidence in the County. Halting an unsustainable approach to tax liens. For several years in a row, the County s weak finances forced it to sell the right to collect its delinquent taxes each year in order to generate immediate revenue. In conjunction with the contracting out of tax claim services described above, the County stopped monetizing its tax liens in While this caused a $4.3 million one-time reduction in General Fund revenue, it allowed the transition to a more sustainable delinquent tax collection system, one in which the County receives a greater percentage of delinquent taxes collected. Ending dependence on other one-time funding strategies. In addition to the annual tax lien sale, the County had in recent years issued new debt to fund annual debt service payments a process sometimes referred to as scooping debt service. The County also relied on asset sales especially the sale of the former County nursing home, Valley Crest to balance proposed budgets. While the County will continue to benefit from the appropriate, timely disposition of assets, it is no longer a key aspect of annual budget balancing exercises. Transferring transportation services. The County has stopped directly providing transportation services for the elderly and the disabled, a function which is performed by transit agencies or private firms in most Pennsylvania counties. Since this function frequently faced financial challenges despite state funding, its transfer has benefited the County s finances. Managed employee costs. The County spends about half of its General Fund budget on employee salaries and benefits, a figure that was 60 percent at the time of the last plan in There has been a substantial reduction in headcount in the last five years, and the County has made its benefit plans more affordable over the same period. Along with this major progress, the County has continued to struggle with the legacy and effects of poor financial management earlier in this century. In particular, one-time transitional events such as those described above have caused annual budget shortfalls and a negative General fund balance. Five Year Financial Plan 3 Introduction

6 In addition, the new management team at the County s Human Services agencies has found a challenging financial situation in the Children & Youth area, and there continues to be less coordination between human services and the County Manager s office than would be ideal. Turnover in the County s small fiscal management group has forced focus on only the most major, pressing financial problems. Timely delivery of annual financial reports and execution of some accounting procedures has been a challenge. There is limited availability for management analysis and the development and monitoring of a performance measurement system. The change in the County s organizational structure has caused some disruption in the criminal justice area. Although the overall situation is better than at the time of the last EIP, increased coordination and a reduction in the jail population remains key to more manageable costs for the administration of justice in Luzerne. Finally, salaries for non-represented employees most County managerial employees have been frozen for seven years, creating issues with morale, retention, and recruiting. About this Plan In light of the dramatic changes in the County in recent years, the County Manager approached the Commonwealth of Pennsylvania s Department of Community & Economic Development for grant assistance to update the 2009 Early Intervention Plan. The Manager asked Public Financial Management (PFM) to reprise its earlier role as Plan drafter, and provided access to necessary information and personnel. The work was initiated with a series of group meetings open to all County employees to explain the Plan process. Over a period of months, PFM met with almost all division and department heads. PFM also provided an account through which employees, citizens, business owners and others could submit ideas for improvement in County operations. The available account resulted in a small number of respondents; however, the thoughts and perspectives voiced were incorporated into the plan when and where appropriate. For instance, two citizens raised concerns regarding the amount of County expenditures directed towards the judicial branch and prison system, specifically focusing on construction of a new prison and a reduction in administrative judiciary costs. Initiative CJ02: Explore alternative facility opportunities directly coincides with the respondent s suggestion to consider different opportunities to build and operate a new facility. The Criminal Justice System chapter and initiative CJ01: Improve outcomes, enhance efficiency, and reduce the cost of the criminal justice system also lays out a comprehensive approach to reducing costs associated with all facets of the system, including better management of cases at the onset of the process through to prisoner management. This thorough approach to addressing the growing expenditures in the prison system was in part born of the commentary provided by these citizens. Additionally, another citizen articulated myriad recommendations related to improved oversight and analysis ranging from a review of utility bills and the related development of projects to reduce utility expenses to an audit and financing review of the amount and cost of copiers, IT software and other equipment. Rather than address each of these particular ideas separately, we recommended two initiatives in the County Manager s Office that address the issues raised - initiative EE01: Establish a Deputy County Manager Position to Focus on Performance Management and initiative EE02: Establish a Productivity Bank. The first initiative allows the County Manager a staff person to pursue innovative policy changes and operational improvement strategies for implementation and the second initiative allows for a bank of money used as a loan for County improvement projects that have projected cost savings. The savings are then allocated back into the productivity bank for further or future investment purposes. Five Year Financial Plan 4 Introduction

7 Together these initiatives provide the backbone for developing a County government focused on wisely managing County costs while providing high quality services. Lastly, a proposal for the County to examine changes in employee retirement plans was raised via the account. We reviewed this option further and as a result developed initiative number WF05: Retirement plan redesign which recommends the County strike a better balance between employee contributions and benefits as allowable under the state s County pension law. Key Budget Drivers Like most counties, Luzerne s revenue is highly dependent on property taxes. As shown in the chart below, current and prior year property tax revenues are projected to comprise almost 87 percent of 2015 budgeted County revenues. Licenses, fees and permits are expected to make up an almost 6 percent, with all other sources bringing in just over 7 percent of revenue General Fund Revenue Budget 2% 4% 7% Real Estate Taxes Licenses, Fees and Permits Grants All Other Revenues 87% Luzerne s spending is somewhat more diverse, but is heavily dominated by the cost of wages and benefits for its employees. The following chart shows that almost half of all County spending is for wages and benefits. An additional 22 percent is needed for debt service, and 16 percent for transfers to pay the County share for human services, the Luzerne County Community College and other obligations. These three areas wages and benefits, debt service and transfers comprise 86 percent of budgeted County spending in Five Year Financial Plan 5 Introduction

8 2015 General Fund Expenditure Budget 1% 2% 16% 6% Healthcare Benefits (7%) 4% Salaries and Wages (33%) Pension (5%) 33% Other Personnel Expenses (4%) Debt Service (22%) Transfers (16%) Supplies (2%) Utilities (1%) 22% 7% Contractual Services (6%) 4% 5% Other Expenses (4%) The message from the overview of key budget drivers is straightforward. To maintain fiscal balance in the long term, the County must ensure that property taxes are collected and seek to diversify its revenues. It also must work to manage spending growth for wages, employee health care and pensions, while reducing its legacy borrowing costs and controlling its subsidy of other funds and enterprises. Key Budget Drivers Before reviewing the County s baseline budget projection for future years, it is helpful to see the County s historical revenues and expenditures from 2011 to The following table shows the audited results for the County over the last four years. Luzerne County General Fund Results, Audit Basis, FY Audited Audited Audited Audited Revenues Taxes 89,894,724 94,914,677 99,030, ,555,637 Intergovernmental 3,700,603 3,688,840 2,558,610 2,517,115 Charges for Service 5,894,150 4,894,906 5,192,536 4,963,493 Licenses and Permits 0 3,163,111 3,251,169 3,067,826 Fines and Forfeits 1,814,033 1,446, ,261 1,244,643 Interest and Rent 946,109 44,248 27,778 38,528 Contributions and Other 3,038,043 1,307,374 1,430,597 1,349,531 Tax Monetization 7,819, Transfers In , ,000 1,674,329 Total Revenue 113,107, ,159, ,249, ,411,102 Five Year Financial Plan 6 Introduction

9 Expenditures General Government Audited Audited Audited Audited Administration 11,337,001 7,654,186 7,888,622 8,508,109 Judicial 22,792,045 29,503,959 29,075,069 29,343,829 Corrections 0 31,366,561 30,510,171 31,850,053 Other 780,649 2,923,223 3,574,786 3,646,490 Public Safety 41,158,784 2,457,157 2,036,103 1,954,309 Public Works 2,372,876 4,082,041 4,203,919 3,692,162 Human Services 2,388,055 1,541,818 1,280, ,112 Culture and Recreation 74,810 70, ,549 45,802 Conservation and Development 274, Debt Service 3,166, , , ,600 Payments to Related Agencies 1,872,508 9,838,418 8,017,001 7,532,449 Payments to LCCC 7,172, Transfers 26,208,417 28,022,984 35,161,429 38,306,613 Total Expenses 119,598, ,591, ,034, ,804,528 Annual Surplus/Deficit (6,490,973) (7,431,574) (8,784,972) (4,393,426) Ending Total Fund Balance 2,995,555 (3,755,713) 1 (12,540,685) (16,934,111) Baseline Projection A key part of the development of an Early Intervention Plan is the establishment of a budget baseline that uses the County s recent financial performance, current budget and known future events to project financial outcomes over the next several years if no changes are made to current spending and policies. For Luzerne County, the projection model assumed that there would be no positive or negative change in the tax rate and that other revenues would have limited growth over the years through At the same time, it was assumed that most expenditure categories would grow at an inflationary rate estimated at 2.0 percent. There are important exceptions to this, however. First, a substantial increase in County pension payments is expected in 2016 as a result of a decision to lower the assumed earning rate of the County s pension funds. Pension costs are assumed to grow at 4-5 percent in subsequent years. Also, the projection assumes that health care costs will grow at rates of 6-8 percent annually as projected in the County s report on other post-employment benefits. Next, most of the County s employee bargaining units have reached new labor agreements with the County in the last year. The actual amounts negotiated are assumed for each bargaining unit, and a placeholder rate of 2.0 percent in other years not covered by agreements. The result is a wage and salary growth rate of 1.6 percent in 2016 and about 2.0 percent in most subsequent years. Finally, there is a one-time jump of almost $1.0 million in existing debt service between 2015 and It is important to note that the baseline projection assumes the debt service the County is scheduled to pay after the May 2015 refunding and swap unwind. The debt refunding generates between $3.3 and 1 The 2012 Comprehensive Annual Financial Statements (CAFR) also shows a $680,306 restatement in fund balance, which is included in the total ending fund balance. Five Year Financial Plan 7 Introduction

10 $3.6 million in savings each year for the County. Using this approach, as requested by the County, means that the 2015 figures blend budgeted and revised spending amounts and will not equal the totals in the County s approved budget. The result of this exercise is shown below. With revenues almost flat and expenditures growing by at least inflationary amounts in most categories, this year s positive result generated by a balanced budget as enacted plus debt restructuring savings would become a $784,000 shortfall in The shortfall grows to $3.2 million in 2017 and that amount would grow by about $2.6 million in each subsequent year if no corrective action is taken. Luzerne County General Fund Baseline, FY Adj. Budget Projected Projected Projected Projected REVENUES Taxes 113,062, ,064, ,067, ,070, ,073,683 Licenses, Permits and Fees 7,467,645 7,613,004 7,761,267 7,912,491 8,066,736 Court Costs and Fines 787, , , , ,091 Interest Rents and Leases 883, , , , ,318 Federal Grants 804, , , , ,270 State Grants 1,977,884 1,977,884 1,977,884 1,977,884 1,977,884 Other Income 1,645,700 1,645,700 1,645,700 1,645,700 1,645,700 Reimbursements 2,714,992 2,765,672 2,817,365 2,870,093 2,923,874 Operating Transfers in 895, , , , ,464 General Fund Transfer Total Revenues 130,238, ,468, ,702, ,941, ,185,020 EXPENDITURES Wages and Benefits 62,526,269 66,232,900 68,075,370 70,231,981 72,366,348 Supplies 2,304,282 2,164,826 2,206,180 2,248,362 2,291,387 Services 10,649,277 10,772,938 10,996,432 11,225,784 11,461,169 Fees 4,178,023 4,405,583 4,636,255 4,868,300 5,099,831 Debt Service 25,124,910 26,051,028 26,350,480 26,356,216 26,360,587 Contingencies 438, Transfers 20,967,521 21,023,869 20,975,491 21,183,681 21,389,492 Other 589, , , , ,202 Criminal Justice Savings Total Expenditures 126,777, ,252, ,853, ,740, ,607,016 FY Surplus / (Deficit) 3,460,951 (784,044) (3,150,946) (5,798,517) (8,421,997) FY Ending Fund Balance (13,473,160) (14,257,204) (17,408,150) (23,206,666) (31,628,663) While the recurring shortfalls must be addressed, this baseline projection is far better than what faced the County at the time of the 2009 EIP, when annual deficits of $30.0 to $40.0 million were projected without corrective action. With the impact of the May 2015 debt transaction, the implementation of the other initiatives included in this Plan, and additional revenue and expenditure changes, the County should be able to achieve balanced budgets in coming years while addressing some of the key challenges described above. Five Year Financial Plan 8 Introduction

11 A Five-Year Plan While the County has a stronger financial position than at the time of the two previous plans, it still must manage carefully to generate balanced budgets in the future. As noted earlier in this chapter, key budget drivers indicate that to achieve and maintain long-term fiscal balance, the County must: Ensure that property taxes are collected; Seek to diversify its revenues; Manage spending growth for wages, employee health care and pensions; Reduce its legacy borrowing costs; and Control its subsidy of other funds and enterprises. This Plan includes a score of initiatives to help the County achieve annual balanced budgets and eliminate its negative fund balance. They include: Improved tax collection. The real property tax will remain the predominant source of County revenue. While the County has made great improvement in collecting property taxes, additional progress is achievable and will be financially meaningful. The Plan suggests that the County further improve its first year collection rate from 92 percent to 95 percent, similar to the best-performing Third Class counties. It also identifies an opportunity to grow the County s taxable assessed value and to negotiate a modest payment-in-lieu of taxes for tax-exempt entities that benefit from County services. It is important to note that the Plan does not assume additional property tax increases during the five-year projection period ( ), but also does not assume resumption of the homestead exemption eliminated for The capacity for a future tax increase provides a substantial safety valve for the County if required by budget contingencies. While it may be possible to avoid further property tax adjustments in the next few years as the County takes advantage of the revenue and expenditure initiatives in this Plan, in the long run additional taxes will surely be necessary if the same level of service is to be provided. Primarily, this is because most County expenditures are for materials, supplies and services that grow at the rate of inflation, or for wages and benefits that often grow at a faster pace. Therefore, over time the growth in expenditures will exceed the growth in revenues without a rate adjustment. In addition, the national economy is now in the 76th month of an economic upturn dating to the end of the recession in June 2009; the length of the average recovery since World War II is just under 59 months. While the County is somewhat insulated from economic cycles due to the gradual rate of change in the property tax roll relative to overall economic activity, some moderation in overall County revenue is likely in the next several years when the economy eventually slows. Workforce and health benefit adjustments. The most critical issue facing County personnel policy at this point is the morale of non-represented County managers, who have not had a salary adjustment in seven years. In addition, the salaries of other workers have been adjusted unevenly, and may or may not reflect regional market comparables. This Plan provides some resources for market adjustments for managers, and assumes some targeted moderation in the baseline wage growth for non-represented employees. In addition, the Plan suggests that the County could benefit by negotiating future labor agreements that bring employee health care and retirement contributions and the number of holidays into line with market norms. Pension. The County has taken the responsible step of reducing its assumed investment return on its pension funds from 7.25 percent to 7.00 percent. This recognizes the lower annual investment returns for diversified portfolios over the last decade, and will reduce the unfunded liability in pension plan. However, increasing the assumed investment return will also cause the annual required pension Five Year Financial Plan 9 Introduction

12 contribution from the County s General Fund to increase significantly by an estimated $630,000 beginning next year, and $700,000 annually in future years. This Plan does not assume any additional reduction in the pension earnings assumption. A similar 0.25 percent change downward in the later years of this Plan could create a budget deficit or make an existing deficit deeper. The County Manager and the Pension Board should engage in dialogue about the balance between an appropriate earnings expectation and the County s financial capacity. Human Services. The Human Services departments covering Children & Youth, Aging, Mental Health & Developmental, Veterans Affairs, and Drug & Alcohol services to County residents are a critical part of Luzerne s support to residents and others. The Plan assumes some basic restructuring, including reclassifying Veterans Affairs staff and reducing one position, and identifies some modest revenue opportunities. The major financial focus for the Human Services department must be to address the timeliness of payments to vendors and an accumulated budget deficit in the Children & Youth department. Because the new County Human Services leadership is still in the process of quantifying the budget issues, and has to engage in extensive discussions with state officials, no cost for addressing these budget issues is included in this Plan. Criminal Justice. County agencies related to the justice system spend about half of the County s annual budget, mostly for the courts and the jail. The new Home Rule Charter has rearranged justice agencies and provided some opportunities for increased efficiency and budget economies. However, the County has not taken full advantage of these opportunities, especially in the area of cross-training in the new Judicial Services & Records Division and the potential for reduction in the costly jail population. This Plan analyzes the situation and provides specific policy alternatives for reducing justice system costs based on lowering the County s level of incarceration. Debt. In 2015 the County achieved two long-desired goals: receiving an investment grade credit rating and extricating itself from a costly financial structure known as a swap. While the County will continue to have relatively high debt service payments for over a decade, those payments will be millions of dollars lower than they were before the recent debt transaction. Moreover, mounting costs related to the swap no longer exist, eliminating a major threat to the County s financial stability. This Plan further assumes that the County will continue to meet its financial goals, thus releasing an annual payment of $1.5 million from a debt service reserve, and that the County will achieve some marginal savings from additional debt service refunding as it becomes available later this year or next year. Fund balance policy. Despite progress on other financial matters in the last several years, the County retains a negative fund balance, reflecting the accumulation of prior year shortfalls. Over time, the County must achieve a series of positive year-end results in order to reduce and ultimately eliminate the negative fund balance. 2 Typically, it is recommended that the proceeds of one-time events be directed to a capital reserve or other sources of spending for non-recurring items so that proceeds of asset sales are reinvested in similar long-term assets. However, given the need to eliminate the County s accumulated shortfalls in the fund balance, this Plan assumes that in the next several years these funds will be kept in the General Fund to help achieve a positive balance. In particular, the Plan assumes that the proceeds of the sale of the Valley Crest Nursing Home, the release over several years of the debt service reserve fund, and the benefit of any additional refunding opportunities will be maintained in the General Fund to help it move towards a positive balance. Improved performance, efficiency, monitoring, and reporting. Several initiatives in this Plan are focused on upgrading the County s ability to devise and implement efficiency measures and alternative service delivery based on more complete financial and performance information. In particular, the 2 Over time, the County should also accumulate a positive fund balance in order to provide working capital and guard against financial contingencies. The Government Finance Officers Association suggests that general purpose governments maintain a General Fund balance of approximately two months of revenues or expenditures. For Luzerne County that figure would be approximately $20.0 million. In comparison, the County ended 2014 with a negative fund balance of $16.9 million. Five Year Financial Plan 10 Introduction

13 appointment of a Deputy County Manager and the establishment of regular financial and outcome reporting are key to this improvement. Combined Impact of Initiatives. If the County is able to implement all of the initiatives described in this Plan, combined with the effect of the recent debt transaction, it should be able to eliminate its negative fund balance by 2018 and maintain a positive fund balance in subsequent years. However, the slow pace of revenue growth compared to expenditures means that it will have to take additional steps after 2019 to maintain the positive fund balance and grow it to recommended levels. Luzerne County General Fund with Initiatives, FY Projected Projected Projected Projected Projected REVENUES Taxes 113,062, ,402, ,119, ,805, ,237,103 Licenses, Permits and Fees 7,467,645 7,643,404 7,823,267 8,006,091 8,192,336 Court Costs and Fines 787, , , , ,091 Interest Rents and Leases 2,883, , , , ,318 Federal Grants 804, , , , ,270 State Grants 1,977,884 2,008,284 2,039,884 2,071,484 2,103,484 Other Income 3,594,418 1,709,618 1,774,136 1,789,936 1,805,936 Reimbursements 2,766,274 2,766,954 2,819,929 2,872,657 2,926,439 Operating Transfers in 895, , , , ,464 General Fund Transfer Total Revenues 134,238, ,931, ,009, ,010, ,762,440 EXPENDITURES Wages and Benefits 62,641,678 66,940,016 67,746,923 69,389,880 71,462,508 Supplies 2,304,282 2,164,826 2,206,180 2,248,362 2,291,387 Services 10,649,277 10,772,938 10,996,432 11,225,784 11,461,169 Fees 4,178,023 4,405,583 4,636,255 4,868,300 5,099,831 Debt Service 25,124,910 25,317,978 26,257,635 26,353,867 26,358,764 Contingencies 438, Transfers 20,967,521 21,023,869 20,975,491 21,183,681 21,389,492 Other 589, , , , ,202 Criminal Justice Savings (626,436) (1,828,910) (2,428,231) (2,578,156) (2,736,591) Total Expenditures 126,266, ,397, ,004, ,317, ,964, FY Surplus / (Deficit) 7,971,978 3,534,155 2,005, ,154 (1,202,323) Change in Fund Balance 0 1,500,000 1,500,000 1,500,000 1,500,000 FY Ending Fund Balance (8,962,133) (3,927,978) (422,691) 1,770,463 2,068,140 The remainder of this Plan is comprised of individual chapters which describe the recent and current status of County divisions, departments, and operations, and which recommend a variety of initiatives to reach the Plan s projected financial results. Five Year Financial Plan 11 Introduction

14 Revenue Five Year Financial Plan 12 Revenue

15 Revenue Overview Luzerne County supports its operations with revenue from multiple sources, although the real property tax is by far the largest source of funding. In 2015 the County budgeted $112.9 million in property tax revenue, approximately 86.9 percent of all General Fund revenue. The County s other revenue sources include licenses, permits and fees, federal and state grants, and payments in lieu of taxes from taxexempt entities. Millions Summary of Luzerne County General Fund Revenue, ($ Millions) 0 Actual Actual Actual Actual Actual Budget Budget Real Estate Tax Revenue Other Revenue Bond Proceeds and One-Time Adjustments 2009 (Audited) 2010 (Audited) 2011 (Audited) 2012 (Audited) 2013 (Audited) 2014 (Budget) 2015 (Budget) Real Estate Tax Revenue Other Revenue Bond Proceeds and One-Time Adjustments Total Revenue Revenue Less Bond Proceeds and One-Time Adjustments The County used $26.5 million in bond proceeds in 2009 to support the General Fund, but since then has significantly reduced its reliance on borrowing and one-time funding sources. Revenues increased by 20.4 percent from 2009 to 2013 when one-time revenues are excluded. The increase is primarily driven by the 25.7 percent increase in real estate tax revenues through the same period, as shown in the table above. The County s 2015 budget included $129.9 million in revenues. The following chart and table illustrate the sources of the County s General Fund revenues. Five Year Financial Plan 13 Revenue

16 Luzerne County 2015 Revenue Budget Revenues 2015 Budget Federal and State Grants 2% Other Taxes 1% Other Revenues 3% Real Estate Taxes 112,879,000 Licenses, Permits and Fees 9,111,220 Federal and State Grants 2,725,154 Licenses, Permits and Fees 7% Other Taxes 1,380,000 Other Revenues 3,843,459 Total Revenues 129,938,833 Real Estate Taxes 87% While most Pennsylvania county governments rely on real estate taxes for the bulk of their general operating revenues, Luzerne County appears to be more heavily dependent upon real estate taxes than other Third Class counties. The following table shows real estate tax as a percentage of the General Fund budget in selected Pennsylvania third class counties Budget Revenue Breakdown Luzerne Berks Chester Cumberland Lancaster Lehigh Real Estate Tax 112,879, ,469, ,326,179 50,545, ,680, ,763,582 Real Estate Tax as a % of GF Budget 86.9% 63.3% 69.0% 71.2% 70.5% 81.5% Real estate taxes range from 63 to 87 percent of these counties budgets. Because different counties manage certain grant funds and other revenues differently, the table above cannot provide a definitive comparison of Luzerne s property tax dependence compared to its peers. However, it suggests that Luzerne County is probably more reliant on real estate taxes than other Third Class counties, and that it should continue to diversify its revenue sources. This could include seeking more Federal and State grants, indexing service fees to inflation rates, and seeking additional PILOT payments, as discussed in the initiatives section. Property Tax Revenue History As noted above, the property tax is the County s single largest source of revenue. Since the 2009 Early Intervention Plan, the County made a number of significant changes to its property tax collection structure. First, in 2009, the County completed a countywide property reassessment and the baseline millage rate was reset so that the total amount of County revenue generated by the new assessed value would equal the revenue generated the prior year. The County also introduced a homestead exemption of $10,000 during the same year; more than 86,000 properties were approved to receive the homestead Five Year Financial Plan 14 Revenue

17 exemption. The homestead exemption program reduced the County s revenues by approximately $4.0 million. 1 In 2010, the County privatized its Tax Claim Bureau and contracted its delinquent property tax collections to Northeast Revenue Service LLC. The company collects back taxes and seizes and auctions properties. Collections have increased substantially since 2010, as described below. The contract was rebid in 2014, and once again Northeast Revenue Service was the successful vendor. The following table shows the process of property tax collections in Luzerne County. Luzerne County Real Estate Tax Collection Calendar Date/Event February 1st February 1st to April 1st April 2nd to June 1st June 2nd to December 31st After December 31st July 1st Upset sale Judicial sale Repository sale Action Tax notices mailed out by each municipality's tax collector Rebate period Face period Penalty period Taxes considered delinquent and notices of claim are sent out Property advertised for upset sale Offered together with any mortgages, judgments or non-tax liens Property offered for sale divested of mortgages, judgments or liens Held as unsold properties The County also made significant changes its tax rates since After reassessment, the County s millage rate was in Tax rates increased in 2010, 2012 and The real estate tax rate in the 2015 budget is mills, unchanged from the prior year. However, revenue is budgeted to grow this year by $4.6 million due to the elimination of the homestead tax abatement program. The following table and chart show Luzerne County s historical property tax rates and current year property tax collections from 2009 to Luzerne County Property Tax Millage and Collections, Actual Actual Actual Actual Actual Budget Budget Current Real Estate Tax 73,601,822 85,619,105 87,280,468 91,137,932 91,131,944 99,360, ,989,000 Tax Revenue Growth N/A 16.3% 1.9% 4.4% 0.0% 9.0% 4.7% Millage Rate Millage Rate Growth N/A 15.0% 0.0% 2.0% 0.0% 8.0% 0.0% 1 Calculated by multiplying the number of properties approved (86,000) by the exemption amount ($10,000) by the 2009 millage rate ( mills). Five Year Financial Plan 15 Revenue

18 Millions $120 $100 $80 $60 $40 $20 $ Actual Actual Actual Actual Actual Budget Budget Current Real Estate Tax Millage Rate Current real estate taxes have been increasing since Based on the County s unaudited numbers, current real estate taxes increased from $85.6 million in 2010 to $91.1 million in 2013, representing a 6.4 percent increase and outpacing the real estate tax millage increase of 2.0 percent over the same period due to increased collections. Taxable assessment values, however, have been declining since 2010, as shown in the chart below. Taxable Assessed Value 2010 to 2015 (in $ Millions) $19,900 $19,880 19,891 19,884 $19,860 $19,840 19,844 19,827 19,829 19,853 $19,820 $19,800 $19, Taxable Assessed Value Assessed Values, Millage Rates, and Yield 2010 to 2015 (in $ millions) Unaudited Unaudited Unaudited Unaudited Budget Budget Current Year Revenue $85.6 $87.3 $91.1 $91.1 $99.4 $104.0 Taxable Assessed Value $19,890.6 $19,883.7 $19,844.4 $19,826.6 $19,828.8 $19,852.5 Number of Taxable Parcels 157, , , , , ,454 AV Growth N/A 0.0% -0.2% -0.1% 0.0% 0.1% Millage Rate Yield $103.7 $103.7 $105.6 $105.5 $113.9 $114.1 Note: Shaded fields indicate years when the County s millage rate changed. Five Year Financial Plan 16 Revenue

19 Collection Performance The 2004 and 2009 Plans both recommended that the County increase current and delinquent real estate collections to 99 percent, with current year collections reaching at least 95 percent, to ensure that residents and businesses were paying their fair share and that the County was maximizing revenue capture from its most important and stable revenue source. While the County s collection performance has improved, its collection rate is still behind other Third Class counties as shown below Current Year Collection Rates 98.0% 96.0% 95.4% 96.7% 96.9% 97.1% 97.2% 94.0% 92.0% 91.9% 90.0% 88.0% 87.6% 86.0% 84.0% 82.0% Luzerne 2007 Luzerne 2014 Berks Chester Lancaster Cumberland Lehigh Delinquent Tax Collections In 2010 the County contracted out the collection of delinquent taxes to Northeast Revenue Services, LLC. Since then, the County s delinquent tax revenues have increased from $2.2 million to $7.7 million in 2013 as shown below. Prior Real Estate Tax, (in $ millions) $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $8.6 $8.9 $7.7 $5.9 $2.2 $2.2 Unaudited Unaudited Unaudited Unaudited Budget Budget Five Year Financial Plan 17 Revenue

20 Other Revenue Grants The County s 2014 General Fund budget includes approximately $2.7 million in state and federal grants. As shown in the chart below, this revenue category has varied significantly over the past five years. State and Federal Grant Revenue 2010 to 2015 (General Fund Only) Millions $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 $3.5 $3.4 $2.6 $2.7 $2.7 $2.2 Actuals Actuals Actuals Actuals Budget Budget Federal Grants State Grants More than half of the County s grants are related to correctional and criminal justice services that the County provides, with the majority provided by the Pennsylvania Commission on Crime and Delinquency (PCCD). The following table shows a breakdown of grants in the County s 2015 budget Luzerne County Federal and State Grants 2 Department Description 2015 Budget % of Budget Courts State Grants - PCCD 865,500 32% Probation Services Other Grants - State 551,180 20% District Attorney Other Grants - Federal 256,270 9% District Attorney State Grants - PCCD 214,200 8% Road and Bridge PennDoT 208,000 8% Planning and Zoning Highway 194,000 7% Minimal Offenders' Unit State Housing Inmate Reimbursement 175,000 6% Probation Services State Grants - PCCD 80,051 3% Recreation Title IV-E 75,000 3% Road and Bridge PennDoT 52,000 2% Planning and Zoning PennDoT 33,500 1% Other Other 20,453 1% Total 2,725, % 2 The $2.7 million in state and federal grants does not include grants accounted for in the Liquid Fuels, Road and Bridge, 911 Wire and Wireless, and Human Services Funds. The County had $68.6 million in grants in funds other than the General Fund in the 2014 budget. Five Year Financial Plan 18 Revenue

21 Locally-Generated Non-Tax Revenue Fees, Fines, Licenses and Permits The County annually produces over $9.0 million in locally-generated revenue, including charges, fees, fines and commissions. The County received $2.7 million in 911 expense reimbursements in 2012 and received additional revenues related to reimbursements for security services from its Human Services Department in 2013, leading to an increase in the licenses and permits category. Locally-Generated Non-Tax Revenue 2010 to 2015 (General Fund Only) 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 (Audited) (Audited) (Audited) (Audited) (Budget) (Budget) Charges for Services Licenses and Permits Fines and Forfeits (This chart does not include fees for collection of municipal property taxes, Valley Crest revenue, 911 cost reimbursements, indirect cost allocation reimbursements, or rent) (Audited) (Audited) (Audited) (Audited) (Budget) (Budget) Charges for Services 5,682,857 5,894,150 4,894,906 5,192,536 5,334,990 5,185,110 Licenses and Permits 165, ,309 3,163,111 3,251,169 3,417,373 3,865,660 Fines and Forfeits 1,952,926 1,814,033 1,446, , , ,450 Total 7,801,450 7,951,492 9,504,566 9,301,966 9,312,957 9,597,220 Five Year Revenue Projections In 2015, budgeted revenues are expected to increase by $5.4 million (or 4.4 percent) over the 2014 budgeted amount, mostly due to the elimination of the homestead tax abatement program ($4.9 million), a $10,000 exclusion from taxable value for qualifying properties. Projected baseline growth in revenue from 2016 to 2019 is projected to grow on average by 0.2 percent annually due to a relatively flat tax base and no anticipated increases in real estate tax rates. The baseline projections also do not assume restoration of the homestead tax abatement program. Departmental earnings and most licenses, permits and fees are projected to grow at the assumed inflation rate of 2.0 percent according to the 2015 to 2019 average projections in the Q Survey of Professional Forecasters published by the Federal Reserve Bank of Philadelphia. Overall, this means revenues will grow by just $1.0 million from 2015 to 2019 in the absence of a tax rate change or reassessment. Five Year Financial Plan 19 Revenue

22 Five Year Revenue Projections 2014 to 2019 (in $ millions) $130.2 $130.5 $130.7 $130.9 $131.2 Millions $ Budget Budget Projected Projected Projected Projected The following initiatives are intended to help the County offset baseline expenditure growth with increased revenues over the Plan period. Additional revenue initiatives can be found in the Human Services, Assessor s Office, Public Works, and Capital Chapters of this Plan. Initiatives RV01. Increase current collections to at least 95 percent Status: To be implemented from 2009 Plan FY2016 Impact: $1.0 million Five-year impact: $6.9 million As mentioned previously, while collection rates increased from 86.9 percent in 2010 to almost 92.0 percent in 2014, the County has historically lagged its peer Pennsylvania counties in real estate tax collection performance. The County must improve its collection performance to maximize income from its largest and most stable source of revenue. Luzerne County has the potential to match its peer counties in the Commonwealth and achieve a collection rate of 95 percent or greater. By increasing current collections to 95 percent, the County would reduce its prior year collections slightly because there would be less delinquent taxes to collect. However, it would create additional revenue overall both in the years of collection improvement and in the future. In addition, improved property tax collection will increase public confidence in government and the fairness of the taxation system, reduce the need for future tax rate increases, and help municipal governments and school districts in the County. The following table illustrates how increased current year collections would impact both current and prior year revenues. The County would generate an additional $6.9 million over five years if current collections are gradually increased to 95 percent by Five Year Financial Plan 20 Revenue

23 Current Collections as a % of Current Levy Current Collections Fiscal Impact Prior Collections Fiscal Impact Fiscal Impact Total 91% 92% 93% 94% 95% N/A $0 $950,000 $2,091,000 $3,232,000 $4,372,000 $10,645,000 $0 $0 ($439,000) ($1,159,000) ($2,133,000) ($3,731,000) Net Fiscal Impact $0 $950,000 $1,652,000 $2,073,000 $2,239,000 $6,914,000 RV02. Increase taxable assessed value Status: To be implemented from 2009 Plan FY2016 Impact: TBD Five-year impact: TBD The County currently has five full-time assessors with one assessor on short-term disability leave. Even with five active assessors, each assessor on average has responsibility for over 33,000 parcels with a taxable value of almost $4.0 billion. The International Association of Assessing Officers recommends approximately one staff person per 10,000 parcels for the most effective level of assessment work. While this standard is not widely met in Pennsylvania counties, Luzerne County s Assessor s Office has a higher level of parcels per assessor than other Third Class counties, as shown in the table below. Taxable Assessed Value Luzerne County Assessed Value ($) Number of Parcels Number of Assessors Taxable Assessed Value per Assessor Number of Parcels per Assessor Luzerne 19,852,514, , ,970,502,940 33,180 Berks 18,333,213, , ,037,023,733 17,778 Chester 36,384,005, , ,032,000,468 16,045 Cumberland 22,935,673,700 98, ,276,524,814 14,005 Lancaster 31,416,491, , ,490,721,300 21,039 Lehigh 28,319,498, , ,831,949,800 13,044 Average 27,477,776, , ,970,570,435 16,657 Median 28,319,498, , ,146,610,889 17,778 As discussed in the 2009 Plan, property additionals such as new home construction, new rooms, sheds, garages and decks and the purchase of new land provide the principal means through which assessed values change to reflect current value. The additionals process is therefore an important tool for generating revenue that reflects increasing property values. The County should more promptly and accurately identify property additionals by increasing the number of assessors on a trial basis and increasing the use of technology as detailed below. 3 The fiscal impact projected assumes the City collects an increased amount of current year real estate taxes as shown in the table. It also assumes that the County collects 50 percent of the uncollected revenues from one year prior to the current year, 25 percent of the uncollected revenues from two years prior to the current year and another 25 percent of the uncollected revenues from three years prior to the current year. The assumptions are based on historical trends in the County s collection performance. Because the initiative assumes increased collection rates in current real estate taxes, uncollected prior year revenues decrease since there is less delinquent tax to collect. Five Year Financial Plan 21 Revenue