Lancaster, Pennsylvania

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LANCASTER,PENNSYLVANIA

FINANCIAL ANALYSIS AND OPERATIONSREVIEW

PROJECT REPORT

September 2007


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September 28, 2007

Mayor Richard GrayCity of Lancaster120 N. Duke StreetLancaster, PA 17608-1599

Dear Mayor Gray:

During the past several months, Management Partners has worked with your executive teamto conduct a systematic review of City operations. The City is in both an exciting andchallenging time. There is significant development occurring in the community, and newinvestment will continue to improve the economic environment.

At the same time, the Citys physical and administrative infrastructure is suffering from yearsof neglect and underinvestment and now, during a time of fiscal constraint, the City mustinvest in maintaining and improving its physical and technological assets.

The project report identifies recommendations for improvement for each of the CitysDepartments and Bureaus. Implementation of the recommendations will significantlyimprove the Citys financial position and improve operations.

Its been a pleasure to work with your staff. We especially appreciate the assistance of yourChief of Staff and Business Administrator, who have been very responsive to our manyrequests for information.

Sincerely,

Gerald E. NewfarmerPresident and CEO


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City of LancasterFinancial Analysis and Operations Review

TABLE OF CONTENTS

OVERVIEW ............................................................................................... 9EXECUTIVE SUMMARY ......................................................................... 11CITY FINANCES ...................................................................................................... 12CITY SUPPORT SERVICES,FACILITIES &EQUIPMENT ............................................... 12PUBLIC SAFETY ..................................................................................................... 12THE BOTTOM LINE ................................................................................................. 13

METHODOLOGY .................................................................................... 15BENCHMARK SURVEY............................................................................................. 16FOCUS GROUP SUMMARY ...................................................................................... 16OVERALL ............................................................................................................... 17FINANCIAL ANALYSIS .......................................................................... 19FINANCIAL FORECAST METHODOLOGY.................................................................... 20REVENUE ANALYSIS............................................................................................... 20EXPENSE ANALYSIS ............................................................................................... 32COUNTERMEASURES .............................................................................................. 36CONCLUSION ......................................................................................................... 43CITY OF LANCASTER ECONOMIC DEVELOPMENT STRATEGY ANDPLAN ....................................................................................................... 45ECONOMIC DEVELOPMENT TOOLS AND INCENTIVES................................................. 47ECONOMIC DEVELOPMENT OPPORTUNITY AREAS.................................................... 49ADMINISTRATIVE SERVICES ............................................................... 51


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DEPARTMENT OF ECONOMIC DEVELOPMENT ANDNEIGHBORHOOD REVITALIZATION .................................................. 116OVERVIEW ........................................................................................................... 116BUDGET AND STAFFING........................................................................................ 117ANALYSIS AND RECOMMENDATIONS ..................................................................... 122NEIGHBORHOOD REVITALIZATION DIVISION ........................................................... 136RESOURCE DEVELOPMENT DIVISION ..................................................................... 137POLICE BUREAU ................................................................................. 141OVERVIEW ........................................................................................................... 141ANALYSIS AND RECOMMENDATIONS ..................................................................... 146DETENTION STAFFING .......................................................................................... 160QUARTERMASTER ................................................................................................ 160CRIMINAL INVESTIGATIONS DIVISION ..................................................................... 160PERFORMANCE MEASUREMENT ............................................................................ 161SAVINGS/COST IMPLICATIONS SUMMARY .............................................................. 162FIRE BUREAU ...................................................................................... 163OVERVIEW ........................................................................................................... 163ANALYSIS AND RECOMMENDATIONS ..................................................................... 169PERFORMANCE MEASUREMENT ............................................................................ 176CONCLUSION....................................................................................... 177ATTACHMENT A LIST OF RECOMMENDATIONS .......................... 179ATTACHMENT B BENCHMARK COMPARISONS .......................... 190ATTACHMENT C ESTIMATED FINANCIAL IMPACT OFRECOMMENDATIONS ......................................................................... 200ATTACHMENT D MAP OF MAJOR ECONOMIC DEVELOPMENTPROJECTS ........................................................................................... 201ATTACHMENT E SUGGESTED PERFORMANCE MEASURESADMINISTRATIVE SERVICES ............................................................. 203


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ATTACHMENT I PUBLIC WORKS PERFORMANCE MEASURES . 215ATTACHMENT J STATUS OF ECON DEV RECOMMENDATIONS(25) AS OF FEBRUARY 2007 .............................................................. 221ATTACHMENT K - STATUS OF NEIGHBORHOOD IMPROVEMENTAND REVITALIZATION RECOMMENDATIONS (17) AS OF FEB 2007............................................................................................................... 223ATTACHMENT L ECONOMIC DEVELOPMENT ANDNEIGHBORHOOD REVITALIZATION SAMPLE PERFORMANCEMEASURES .......................................................................................... 227ATTACHMENT M POLICE BUREAU PERFORMANCE MEASURES............................................................................................................... 232ATTACHMENT N FIRE BUREAU PERFORMANCE MEASURES ... 244

TABLES

Table 1: General Fund Financial Projection 2007 - 2012 .......................... 19Table 2: General Fund Revenue Summary 2007 Adopted Budget ........ 21Table 3: Projected Lancaster City Real Estate Tax Revenue.................... 22Table 4: Projected Lancaster City Real Estate Tax Revenue Capped

Rate ............................................................................................................ 22Table 5: Projected Earned Income Tax General Fund Revenue At 0.6%

Rate ............................................................................................................ 23Table 6: Projected Local Services Tax General Fund Revenue At $52 Rate

.................................................................................................................... 24Table 7: Projected RETT General Fund Revenue At 1% Rate................... 24Table 8: Projected Police Service Revenue based on 4.5% Annual Growth

Rate ............................................................................................................ 25


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Table 14: Projected Miscellaneous and Other Revenue ........................... 32Table 15: 2007 Adopted Budget by Category of Expense......................... 32Table 16: 2007 Adopted Budget Salary and Benefit Components ............ 33Table 17: Cost of 3% Wage Adjustment .................................................... 34Table 18: Estimated Health Insurance Cost .............................................. 34Table 19: Estimated City Retirement Contributions ................................... 35Table 20: Estimated Workers compensation Cost .................................... 35Table 21: Projected Operating Cost .......................................................... 36

Table 22: Debt Service Obligations ........................................................... 36Table 23: Real Estate Tax Rate Required for Fiscal Stability .................... 37Table 24: Real Estate Tax Rate Required to Fund 3% Wage Adjustments

.................................................................................................................... 37Table 25: Impact of Management Audit Recommendations on Financial

Forecast ...................................................................................................... 38Table 26: Comparison of Real Property Appraised Value to Market Value*

.................................................................................................................... 39Table 27: Strategic Plan Indicators for Economic Development................ 46Table 28: DID Total Assessments* ............................................................ 48Table 29: Administrative Services Department 2007 Staffing and General

Fund Budget ............................................................................................... 51Table 30: Administrative Services Managed Accounts ............................. 52Table 31: Administrative Services Department Staffing, 2003 through 2007,

all Funds ..................................................................................................... 52Table 32: Administrative Services 2006 Staffing, Population and

Employees of Lancaster and Other Jurisdictions* ...................................... 53

Table 33: Administrative Services Managed Accounts ............................. 57Table 34: Estimated Applications per Advertised Position in Lancaster and

Other Jurisdictions* .................................................................................... 69Table 35: Lancaster IT Expenditures 70


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Table 40: 2007 Federal Funds Budget For EDNR................................... 117Table 41: Department Staffing by Bureau and Division ........................... 118Table 42: Total EDNR Department Staffing 2003 - 2007 ........................ 118Table 43: EDNR Bureau of Planning Staff .............................................. 119Table 44: Bureau of Structural Inspections Staff ..................................... 120Table 45: EDNR Bureau of Zoning and Inspections Staff ....................... 120Table 46: Summary of Expenditures EDNR Critical Repair and

Rehabilitation Loan Program .................................................................... 121

Table 47: EDNR Neighborhood Revitalization Division Staffing .............. 121Table 48: Economic Development and Neighborhood Revitalization

Activities and Projects 2007 .................................................................. 124Table 49: City Planning Workload Data 2004 - 2006 .............................. 128Table 50: Housing Inspection Data FY 2004-FY 2007 (as of March) .... 131Table 51: Comparison of Housing/Code Related Workload Data ........... 134Table 52: Total 2007 CDBG and HOME Funding Allocations ................. 138Table 53: Distribution of Personnel Between Direct and Support Service

.................................................................................................................. 142Table 54: Staffing History 2003 - 2007 .................................................... 143Table 55: Actual Part 1 and Part 2 Crimes 2002 - 2006 .......................... 146Table 56: Number of Patrol Officers Responding to DCFS ..................... 151Table 57: Adjusted IACP Staffing Requirements for Each Schedule

Alternative ................................................................................................. 155Table 58: Estimate of Financial Impact of Patrol Division

Recommendations .................................................................................... 158Table 59: Potential Savings and Cost of Police Bureau Management AuditRecommendations .................................................................................... 162Table 60: Lancaster Bureau of Fire 2007 Authorized Positions .............. 164Table 61: Lancaster Bureau of Fire Positions by Organizational Unit ..... 164Table 62: Lancaster Bureau of Fire Authorized Positions 2000 - 2007 165


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FIGURES

Figure 1: Changes in Pennsylvania State Pension Aid 1994 - 2005 ...... 28Figure 2: Administrative Services Department Organization .................. 51Figure 3: Average number of city employees per hr employee .............. 62Figure 4: Department of Public Works Organizational Chart .................. 82Figure 5: Department of Economic Development and Neighborhood

Revitalization Organization .................................................................... 117Figure 6: Bureau of Police Organization Chart .................................... 144Figure 7: Number of Hours Spent Responding to DCFS ...................... 156Figure 8: Bureau of Fire Organization Chart ......................................... 166


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OVERVIEW

The City of Lancaster, Pennsylvania, is a diverse community of 56,348

residents who live together in a dense environment that covers only 7.3square miles. The City operates under the Mayor/Council form ofgovernment. Lancaster is a full-service city that provides public safety,health, housing, parks, streets and highways, water and sewer for itsresidents.

Mayor Richard Gray took office in 2006 and began a process to developthe Citys first strategic plan. The plan is vital to focusing Lancasterresources on developing a culture of service and value. Such focus is

critical in light of the fiscal environment the administration inherited.

The City of Lancaster is the oldest inland city in the United States originally settled in 1718. The architecture and history provide asignificant amount of charm to the built environment, but the reality is thatthe City government operates with and maintains an old and rapidlydecaying infrastructure.

The statement relates not only to the streets, sidewalks, water and sewerinfrastructure, but also to the buildings the City owns and operates, andthe technology infrastructure upon which the Citys financial information isretained and management systems are housed.

Unfortunately this old house is in disrepair. Its as if prior owners onlypainted over the crumbling flaws in the house. The Citys house is not

just in need of an updated kitchen, but the electrical and plumbingsystems must be replaced as well. It is time for an extreme makeover

City edition.

In addition to the very real physical challenges the City faces, the City isalso operating in a constrained fiscal environment where operatingexpenses continue to increase at levels much faster than revenues.

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Management Partners was founded in 1994 with a specific mission to

help local government leaders improve their service to the public. Overthe past 13 years Management Partners has worked with hundreds ofpublic sector organizations in a variety of capacities, including providingfinancial analysis services. The firm is staffed by professionals who areexperienced public service managers as well as qualified managementconsultants. The Management Partners consulting team includesgeneralists as well as subject-matter experts.

Management Partners has extensive experience in helping improve both

the efficiency and effectiveness of local government services, includingimproving existing organizations as well as the operations of multiplegovernments through shared service delivery or merger/ consolidation.The firm has undertaken organizational improvement projects in virtuallyevery type of local government service, including reviews of entiregovernments as well as selected studies of individual departments andfunctional activities. Management Partners has specialized inperformance measurement development and training, having trained over

100 jurisdictions throughout North America as the trainer for theInternational City/County Management Associations (ICMA) Center forPerformance Measurement.


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EXECUTIVE SUMMARY

Over a period of four months, Management Partners conducted anextensive operations audit of the City of Lancaster that included

developing a multi-year financial plan. Management Partners consultantsinterviewed department and division managers; conducted focus groupsaffording almost 100 front-line employees an opportunity to participate;examined a range of budgetary, operational and planning documents;benchmarked some operational data against similar-sized cities; andapplied best practices to the knowledge we gained of the Citysprocesses.

The following report details our findings and observations, and specifically

recommends 182 actions that, when implemented, will substantiallyimprove service delivery across the entire government. Theserecommendations are listed in Attachment A.

While it is a review of City operations and recommends improvements inmanagement and operations, the report should not be read as anindictment of the employees, management or administration of the City ofLancaster.

Every organization, public or private, has opportunities to improve how itfunctions. The City of Lancaster has been bold enough to ask thequestion and this report summarizes the answer.

Organizations develop over time yesterdays solutions sometimesbecome todays problem. Perhaps it is best exemplified in the discussionabout the Citys computer technology. Each application, computer,mainframe and peripheral was an appropriate solution when originally

purchased. Today, the fact that the systems are outdated and no longeroptimal is a natural occurrence things need to be upgraded andreplaced -- but the initial purchase and movement to computers itself wascertainly the right solution at that time.

The primary findings of the report are that the City of Lancaster must


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oppose the position of those who benefit from existing systems,schedules and processes.

City Finances

The finances of the City require significant attention. If nothing is done toreverse the trend, initial projections show a $70 million cumulative deficitby 2012. Fortunately, the City has not maximized its ability to leveladditional taxes if necessary, and opportunities for cost savings havebeen identified.

At the same time, the City needs to invest millions in its corporate andphysical infrastructure. Developing a conscious strategy to address this inthe near term is a critical priority for the City.

City Support Services, Facilities & Equipment

The City has not invested in administrative and support services witheither human or technological capital. Critical internal services must beexpanded and improved so the City can operate more efficiently andeffectively. It is essential to address the issue because the Cityssustainability and the organizations effectiveness depend on it.

The report outlines a number of recommendations to strengthen the corecentral services upon which the rest of the organization depends. It

includes the need to continue on the path of becoming more data-drivenby implementing a corporate system of performance management supported on a strong backbone of performance measures extending toevery program of government.

Public Safety

As with many organizations in crisis, the City has only invested in publicsafety in recent years. The greatest investment has been in policeservices and that is critical because of the need to address crime trendsin the City to increase its vitality and economic potential. Fire Departmentmanpower has been cut, and it operates from a reduced number of firestations.


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The Bottom Line

The City of Lancaster is blessed to have a workforce that is trulycommitted to providing quality services to the residents of the community.The current administration has articulated a strategic future for the Cityand the organization and City government must work tirelessly to makethat happen.

Many of the recommendations in the report will bring about efficiencysavings and/or better service delivery; however, it will take hard work tomake the improvements happen. Those who will argue against makingchanges should consider that the City of Lancaster does not have theluxury of standing pat the fund balance will, in fact, be depleted andoperating and cumulative deficits are a very real part of the future if theCity does nothing.

The following quote from the controversial political leader Machiavelli ismore than 500 years old and yet could not be truer today. There isnothing more difficult to carry-out or more doubtful of success, nor moredangerous to handle, then to initiate a new order of things. For thereformer has enemies in all those who profit from the old order.


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METHODOLOGY

Through the DCED EIP grant, the City of Lancaster contracted with

Management Partners to conduct an operations audit and develop amulti-year financial plan. The initial activity consisted of conducting afinancial analysis that assessed financial trends and the current financialcondition of the Citys General Fund budget.

Management Partners prepared a multi-year projection of revenues andexpenses, called the base case that quantifies the future financialcondition based on current trends. The financial assessment alsoincluded an analysis of actions available to the Lancaster City Council forachieving a stable financial condition in the Citys General Fund. Theavailable actions analysis included a review of economic developmentstrategies, plans and projects, the financial impact of management auditrecommendations, and taxation alternatives. Alternative financialscenarios are presented based on the available actions analyzed.

An assessment helps the Lancaster City Council determine what might befeasible steps for stabilizing the General Fund financial condition.

Management Partners also developed a General Fund forecasting modelbased on the financial analysis so that Lancaster might implement amulti-year financial plan and update the plan each year in the future.

Management Partners conducted a management audit of the Citys majorBureaus and Departments, including Police, Fire, Public Works,Administrative Services, Economic Development and NeighborhoodRevitalization. The management audit identifies critical needs andopportunities for operational efficiencies and improvements.

The management audit analysis was based on interviews with keyLancaster staff in each department. The interviews were supplementedwith focus groups of City employees that drew out opinions on strengths,weaknesses and opportunities for improvement.


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Benchmark Survey

As part of the operational assessment of the City of Lancaster,Management Partners attempted to compare certain workload, staffingand budget data for City operations with other Pennsylvania cities withwhich Lancaster has historically compared itself. To do so, ManagementPartners conducted an on-line survey from June 21-27, 2007. Eight

jurisdictions were invited to respond to the multi-departmental survey.Individual surveys were created for the follow services: administration,police, fire, public works and housing/code enforcement. The jurisdictions

that were invited to participate in the survey were:

Altoona, Pennsylvania

Bensalem, Pennsylvania

Easton, Pennsylvania

Harrisburg, Pennsylvania

Reading, Pennsylvania

Scranton, Pennsylvania

Wilkes-Barre, Pennsylvania

York, Pennsylvania

Lancaster Mayor Gray personally requested the participation of the othercommunities by emailing the survey to the mayors and businessadministrators (as applicable) of these jurisdictions. Two remindernotices were sent to the jurisdictions and the deadline was extended toencourage broader participation. However, only Altoona, Bensalem,Easton, Reading, and York provided responses to at least one of thesurveys.

The complete results are included in Attachment B, and relevant data isincluded within the body of this report.

Focus Group Summary

An important part of the methodology for learning about and appreciatingthe current environment of an organization is to solicit input fromemployees who might not otherwise have an opportunity to provide it.


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exchange of thoughts and ideas in a group discussion. When wefacilitated employee focus groups, they were structured around gatheringinformation about:

Services and activities delivered well by the City and its agenciesin particular

Services and activities that can be improved Specific ideas to improve services and/or increase efficiency

In general, Management Partners was impressed by participants positiveattitude and interest in both doing a good job and continually improving

operations. The following information represents overall themes sharedby participants:

Overall

Special events are done well No employee recognition no incentives to work hard Lack of communication between different departments Union blamed for problems Inability to get rid of bad workers lowers morale Need to improve customer service eliminate citizen runaround Need to resolve technology issues no consistency, no planning

ahead Need to provide more opportunities for training Need a better mechanism for employee feedback Need a better understanding of each departments responsibilities

(i.e. who tests and maintains the fire hydrants?) Getting things from other departments depends on who you know


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FINANCIAL ANALYSIS

The City of Lancaster has adopted a balanced General Fund Budget for2007 by using approximately $3,466,000 of reserve funds. Estimated

2007 General Fund expenses exceed $43,257,000. Revenue for 2007 isestimated to be approximately $39,791,000 about 92% of anticipatedexpense. Lancaster enjoyed a total General Fund reserve of $15,221,000on December 31, 2006, but expects that reserve to shrink to $11,755,000by the end of 2007.

The Citys operating expenses continue to increase while its majorrevenue sources grow at a much slower rate. To develop a coherentstrategy for dealing with the challenge, the City retained Management

Partners through a grant from the Commonwealth of Pennsylvanias EarlyIntervention Program (EIP). Our job is to determine the current trends forGeneral Fund income and expense, to forecast future financial conditionsand provide a forecasting model that can be used for subsequent budgetdevelopment.

The analysis and financial forecast model developed indicates the City is,indeed, facing a serious financial challenge. Revenues are growing

slowly, if at all, while expenses increase due to higher labor cost and costof goods purchased. The financial forecast we developed, based oncurrent revenue and expenditure trends, predicts Lancaster will be unableto balance the 2009 budget and face an accumulated shortfall of morethan $69 million by 2012. Table 1 below summarizes the forecast.

TABLE 1: GENERAL FUND FINANCIAL PROJECTION 2007-2012

2007 2008 2009 2010 2011 2012Beginning

Balance $15,221,475 $11,755,104 $5,984,842 ($1,572,848) ($10,704,603) ($21,780,213)

Revenue $39,791,014 $39,621,298 $40,482,615 $41,370,574 $42,286,172 $43,230,453

Expense $43,257,385 $45,391,560 $48,040,305 $50,502,329 $53,361,782 $56,689,900

Surplus/(Deficit) ($3 466 371) ($5 770 262) ($7 557 690) ($9 131 755) ($11 075 610) ($13 459 447)


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Property tax rates will not increase above the current rate of $8.82 State Pension Aid revenue will continue in the future and increase

slightly each year Salary increases based on current labor agreements are included

in the expense projection, but no other salary increases areincluded

Cost of health insurance and workers compensation will increaseat the rate experienced since 2000 18% and 13% respectively

Retirement contributions are based on the actuarial assumptionthat there will be 8.5% return on retirement fund assets

Cost of goods purchased will escalate at 3.5% annually There will be a $10 million bond issue in 2007 for capital

improvements, maintaining debt service near to its current level.

Financial Forecast Methodology

The financial forecast has been developed after reviewing the 2007 City

of Lancaster Budget, financial projections prepared by Lancaster staff,and historic experience with General Fund revenue and expense items.Management Partners also held discussions with administrative staff todevelop background on revenue and expenditure history.

Revenue line items were bundled into common categories and analyzedfor historic performance. The historic performance trends were thenapplied to the 2007 Budget revenue estimates provided by the City

Administration.

On the expense side, known future cost increases, such as laborcontracts that already have been approved, were included in future yearestimates. The historic impact of inflation on the cost of goods purchasedalso has been factored into the expense side of the forecast.

The revenue and expense analyses have been formatted into aspreadsheet, with forecast formulae built in, so that financial staff can

easily use the model for future budget development and to analyze theimpact of financial options on future financial conditions.

Revenue Analysis


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TABLE 2: GENERAL FUND REVENUE SUMMARY2007ADOPTED BUDGET

Revenue Source$ Amount 2007

Adopted Budget% of TotalRevenue

City Real Estate Tax $16,448,400 42%

Earned Income Tax $3,550,000 9%

Local Services Tax $2,075,000 5%

Real Estate Transfer Tax $815,000 2%

Sale of Police Services $2,218,391 6%

Public Safety Fees $2,758,000 7%

Public Works Fees $3,263,448 8%

State Pension Aid $2,385,355 6%

Other Taxes $412,701 1%

Payments in lieu of Taxes $395,000 1%

Sale of City Tax Claims $875,000 2%

Housing and Regulatory Licenses $2,038,000 5%

Miscellaneous/Other Revenue $2,556,719 6%

TOTAL $39,791,014 100%

City Real Estate Tax

As a Pennsylvania Third Class City,1 the City of Lancaster may levy atax of up to 25 mils on the appraised value of commercial and residentialreal estate for general municipal purposes. The City currently levies an$8.82 real estate tax. With permission of the Court of Common Pleas, an

additional five mills may be levied on the same basis. Lancaster alsomay levy taxes on the appraised value of real estate without limitation asto rate or amount in order to pay principal and interest on debt. Specialpurpose levies are authorized for libraries (unlimited), shade trees (1/10thmill) and charity (10 mills). Lancaster does not levy any special purposereal estate taxes.

The two components that determine the amount of revenue received fromthe City real estate tax are the tax rate and the appraised value. The

Lancaster City Council determines the tax rate, within the limitsestablished by statute as noted above. The appraised value of real estateis established by the County Appraiser and is ostensibly based on marketvalue.

From 2001 to 2007, the property tax rate has increased from $6.84 to


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increased from $11,955,217 in 2001 to a projected $16,448,400 for 2007,an increase of 38%, or about 5.5% a year.For 2007, the real estate tax is projected to comprise 41% of the total

estimated General Fund revenue of $39,791,014, constituting the singlelargest source of income to the City.

For projection purposes, we have applied the 2001 2007 historicexperience for appraised value and tax rate to the 2007 estimated realestate tax revenue. Table 3 indicates the result of that methodology.

TABLE 3: PROJECTED LANCASTER CITY REAL ESTATE TAX REVENUE

2008 2009 2010 2011 2012

Appraised

Value$1,896,601,224 $1,928,843,445 $1,961,633,784 $1,994,981,558 $2,028,896,244

Tax Rate $9.17 $9.54 $9.92 $10.32 $10.73

Revenue $17,391,833 $18,401,166 $19,459,407 $20,588,209 $21,770,056

$ Increase $943,433 $1,009,333 $1,058,241 $1,128,802 $1,181,847

% Increase 5.74% 5.8% 5.75% 5.8% 5.74%

For projection purposes, we also projected the real estate tax revenuestream if the tax rate is capped at the 2007 rate of $8.82. Table 4 showsthat outcome.

TABLE 4: PROJECTED LANCASTER CITY REAL ESTATE TAX REVENUECAPPEDRATE

2008 2009 2010 2011 2012

AppraisedValue

$1,896,601,224 $1,928,843,445 $1,961,633,784 $1,994,981,558 $2,028,896,244

Tax Rate $8.82 $8.82 $8.82 $8.82 $8.82

Revenue $16,728,022 $17,012,399 $17,301,609 $17,595,737 $17,894,864

$ Increase $279,622 $284,298 $289,210 $294,128 $299,127

% Increase 1.7% 1.7% 1.7% 1.7% 1.7%

Comparing the two projections, increasing the real estate tax rate at its

most recent historical experience of 4% annually produces $5,321,656 ofadditional real estate tax revenue over the next five years. Capping thetax at the 2007 rate of $8.82 produces revenue growth of $1,446,385 overthe same period a difference of $3,875,271.

Earned Income Tax


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Potential for change in this revenue source in the future is a function ofthe number of persons residing in the City who have earned income(retirement income is not subject to the tax) and the tax rate levied by the

City. Under Pennsylvania law, The City may levy a maximum tax of 1.1%,of which 0.5% is available for the school district and 0.6% is available forthe City. The City of Lancaster currently levies the maximum rate allowedby law.

From 1994 through 2004, the EIT grew at an annual rate of approximately2%. Table 5 projects the EIT based on the historical growth rate with nochange in the tax rate.

TABLE 5:PROJECTED EARNED INCOME TAX GENERAL FUND REVENUE AT 0.6%RATE

2007 2008 2009 2010 2011 2012

ProjectedRevenue

$3,550,000 $3,621,000 $3,693,420 $3,767,288 $3,842,639 $3,919,486

$ Increase $249,182 $71,000 $72,420 $73,868 $75,351 $76,847

% Increase 2% 2% 2% 2% 2% 2%

Emergency Municipal Services Tax (EMST)

The EMST (which replaced the Occupational Per Capital Tax in 2004) islevied on all persons working in the City. The rate for 2007 is $52 perperson, of which $5 is for the Lancaster City Schools and $47 is for theCity. Actual 2005 revenue from the source was $2,070,802. The 2007adopted budget estimates that $2,075,000 in local service tax revenue

will be realized. The EMST comprises about 5% of General Fundrevenue. Prior to 2005 when the change from the Occupational PerCapita Tax to the EMST went into effect, the revenue stream for thissource was virtually flat, increasing from $241,669 in 1994 to $248,722 in2004.

Changes in revenue from the EMST will be governed by changes in thenumber of persons working in the City and the rate set for the tax by City

Council. The maximum rate allowable under Pennsylvania law is $52,distributed $5 for the local school district and $47 for City purposes. TheCity currently levies the maximum local services tax rate allowable by law.

The City estimates revenue from the source will grow at 0.5% annually.The growth rate assumption is reasonable, given the historic experienceof the revenue item and the fact that job growth is not expected to be


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TABLE 6:PROJECTED LOCAL SERVICES TAX GENERAL FUND REVENUE AT $52RATE

2007 2008 2009 2010 2011 2012ProjectedRevenue

$2,075,000 $2,085,375 $2,095,801 $2,106,280 $2,116,811 $2,127,395

$ Increase 0$ $10,375 $10,426 $10,479 $10,531 $10,584% Increase 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%

Real Estate Transfer Tax (RETT)

The City levies a tax of 1% on the sales price of any real estatetransaction in the City. Proceeds are shared equally with the SchoolDistrict. The 1% rate is the maximum allowed under Pennsylvania law.The adopted 2007 budget estimates the Citys income from the source tobe $815,000, about 2% of General Fund estimated receipts. Revenuefrom this source grew from $394,148 in 1994 to $894,574 in 2005, anaverage of 10.5% annually.

Changes in the Real Estate Transfer Tax occur based on the value of realestate sold during the year. Increasing market value of real estate wouldcertainly have a favorable impact on receipts from the source; however, abuyers market would dampen revenue expectations.

We believe that market forces are likely to significantly reduce the historicgrowth rate in the source. We suggest linking the projected income fromthe tax to the Federal Reserve target inflation rate. Typically, the Fed

aims to hold price growth to 3%. Applying that target to the RETT wouldbe prudent. Table 7 shows the outcome of that application.

TABLE 7:PROJECTED RETTGENERAL FUND REVENUE AT 1%RATE


$815,000 $839,450 $864,633 $890,572 $917,289 $944,808

$ Increase $0 $24,450 $25,183 $25,939 $26,717 $27,519

% Increase 3% 3% 3% 3% 3% 3%

Sale of Police Services

The City provides police services to other jurisdictions, including


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Lancasters cost of providing police service increases, increases arepassed on to the contracting jurisdictions.

There is no historic pattern to charges for police service that might serveas a trend line for future increases. In 1994, Lancaster provided policeservice to six jurisdictions on contract. Since then, three jurisdictions nolonger contract for service, but four new jurisdictions have beguncontracting. Since service levels varied from jurisdiction to jurisdiction inthe past, revenue trends are not apparent.

City staff has used an annual increase of 4.5% to project revenue from

this source into the future. The revenue projection based on the 4.5%factor is shown in Table 8.

TABLE 8:PROJECTED POLICE SERVICE REVENUE BASED ON 4.5%ANNUAL GROWTHRATE


$2,218,391 $2,318,219 $2,422,538 $2,531,553 $2,645,473 $2,764,519

$ Increase $174,989 $99,828 $104,319 $109,025 $113,910 $119,046% Increase 8.6% 4.5% 4.5% 4.5% 4.5% 4.5%

Public Safety Fees

The revenue group includes various public safety related income items,the largest of which are parking violations and aldermans fines.Aldermans fines are paid for the violation of municipal ordinances.Revenue from the sources has grown from $1,268,368 in 1994 to the2007 adopted budget estimate of $2,758,000 an increase of 117% -approximately a 6% annual growth rate compounded. The revenue groupcomprises approximately 7% of expected 2007 General Fund revenue.

Parking fines and alderman fines comprise $2,425,000, or 88% of the2007 total of the revenue group. The fine schedule for parking violationsis established by City Council. State law establishes the schedule for

aldermans fines. Changes in the revenue stream would result from achange in the volume of activity, such as parking enforcement or citationsto District Court, and, in the case of parking violations, changes to the fineschedule.

There is no indication that a change from historic experience should be


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TABLE 9:COMPARISON OF PUBLIC SAFETY FEES PROJECTED AT 5% AND 2%

2007 2008 2009 2010 2011 20125% AnnualRevenue Growth

$2,758,000 $2,895,900 $3,040,695 $3,192,729 $3,352,366 $3,519,984

2% AnnualRevenue Growth

$2,758,000 $2,813,160 $2,869,423 $2,926,811 $2,985,347 $3,045,054

AnnualDifference

$0 $82,740 $171,272 $265,918 $367,019 $474,930

CumulativeDifference

$0 $82,740 $254,012 $520,930 $887,949 $1,362,879

Public Works Fees

The category of revenue, estimated at $3,263,448 for 2007, is composedprimarily of fund transfers from the Water and Sewer utilities. Alsoincluded is income from rental of City property and facilities. The adopted2007 budget includes $3,022,077 in transfers from utility funds, of which

$1,014,949 is a charge for administrative services provided by GeneralFund agencies to the utilities for legal, personnel, financial and otheradministrative services. The remainder balance of $2,007,128 is a resultof the Citys ownership of the utilities and has its right to transfer all ornone of the fund balance from the utilities funds to the General Fund.Public Works fees comprise slightly more than 8% of estimated 2007General Fund revenue.

The transfer of utility funds for administrative costs is based on a formuladeveloped by the federal government (known as the A-85 review) fordetermining what percentage of federal grants the City may allocate toitself to pay for administrative costs of the grant. The federal governmentpermits periodic adjustments to the formula factors to account forincreased costs. General Fund revenue for the current item has increasedfrom $670,300 in 1994 to an estimated $1,014,949 for 2007, an average3.5% increase per year. City staff is using a 2.5% growth factor to projectrevenue from the source. We believe a higher factor would be more

accurate, given that the A-85 formula adjustments are more likely to trackwith inflation and 3.5% is closer to the true recent inflation experiencethan 2.5%.

The transfer of utility fund balance is theoretically unrestricted but theamount available to transfer -- i.e. the profit -- is a result of rate setting

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Miscellaneous revenue in the category accounts for $241,371 in theadopted 2007 budget. Income from the items in 1994 was $341,839,

indicating a decrease of over $100,000 from the sources between 1994and 2007. Between 1994 and 2005 revenue increased by nearly$125,000, which is an average annual increase of nearly 3%. City staffprojects a 1% annual growth rate for these revenue items in the future.

Table 10 below projects revenue from the category using historicalexperience and assuming that utility fund balance transfers will remain flatat the 2007 estimate.

TABLE 10:PROJECTED PUBLIC WORKS FESS AND UTILITY TRANSFERS

2007 2008 2009 2010 2011 2012Utility FundBalance Transfer

$2,007,128 $2,007,128 $2,007,128 $2,007,128 $2,007,128 $2,007,128

Utility Fund AdminCharge (3.5% Annual

growth rate)

$1,014,949 $1,050,472 $1,087,238 $1,125,292 $1,164,677 $1,205,441

Miscellaneous (3%Annual growth rate)

$241,371 $248,612 $256,070 $263,752 $271,665 $279,815

Total $3,263,448 $3,306,212 $3,350,436 $3,396,172 $3,443,470 $3,492,384

State Pension Aid

Pennsylvania provides assistance to local governments throughout thecommonwealth for pension payments. The amount of aid is a function ofthe availability of funds and a complex formula that takes into accountvariations among local pension funds for participant benefits andcontributions. The 2007 budget estimates state pension aid to be$2,385,355, approximately 6% of expected General Fund revenue.

From 1994 through 2005, the annual change in pension aid has variedgreatly. Figure 1 shows the annual percentage change in state pension

aid.

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FIGURE 1: CHANGES IN PENNSYLVANIA STATE PENSION AID 1994-2005

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10 11

Series1

As Figure 1 makes evident, there is no trend or pattern to state pensionaid. In five of the last 11 years, state pension aid decreased from theprevious year. In six of the last 11 years, there was an increase inpension assistance.

City staff has projected an annual 2% increase in state pension aid. Giventhe irregular funding experience, any projection would be a guess. The2% annual increase factor proposed by City staff does not appear to be a

heroic assumption. Table 11 below projects state pension aid based onthe 2% assumption.

TABLE 11:PROJECTED STATE PENSION AID

2007 2008 2009 2010 2011 2012Projected State

Pension Aid

$2,385,355 $2,433,062 $2,481,723 $2,531,357 $2,581,984 $2,633,624

$ Change fromPrevious Year

$133,453 $47,707 $48,661 $49,634 $50,627 $51,640

Other Taxes

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Miscellaneous taxes and utility tax refunds are estimated to generate$217,701 in revenue in 2007. The sources account for 1% of expected2007 General Fund revenue.

Changes in revenue from the Residency and Per Capita taxes are afunction of increasing population age 18 and over. City staff projectsrevenue from the sources to grow 2% annually. Although the growth rateassumption is modest and does not account for a significant dollaramount, we feel a more prudent assumption is that there will be nogrowth in the age group that forms the basis for the taxes.

Miscellaneous taxes and utility tax refunds have been virtually flat since2001, averaging approximately 1% increase per year.

Table 12 below projects revenue from other taxes and utility tax refunds.Residency and Per Capita taxes are projected to show no growth over thenext five years, and miscellaneous taxes and utility tax refunds areprojected to increase 1% a year.

TABLE 12:PROJECTED OTHER TAXES

2007 2008 2009 2010 2011 2012Residency/Per CapitaTaxes

$195,000 $195,000 $195,000 $195,000 $195,000 $195,000

Other Taxes/UtilityTax Refunds

$217,701 $219,878 $222,076 $224,297 $226,540 $228,805

Total $412,701 $414,878 $417,076 $419,297 $421,540 $423,805

Payment in Lieu of Taxes (PILT)Some owners of tax-exempt real property make voluntary payments tothe City in lieu of paying real estate tax. Such property owners are underno obligation to make any payment. Actual 2006 PILT revenue was$866,278. From 1994 through 2006, the average annual PILT revenuewas $373,652. The adopted budget includes $395,000 for PILT in 2007.PILT accounts for less than 1% of General Fund revenue in most years.

Given the completely voluntary nature of PILT, the safest protocol wouldbe to use the dollar amount of the average annual PILT revenue, in thiscase $373,652, as a flat projection for each future year. The annualaverage can be updated each year with the new calculated averageapplied to the projection.

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2007. The adopted budget anticipates a revenue stream of $875,000 in2007, which would include sale of tax claims from prior years.

Revenue from the source will depend on the amount of unpaid tax claimsthat meet the purchase criteria specified by the selected vendor, since notall unpaid claims would be subject to purchase.

City staff projects receiving $300,000 annually from the source. Given thenew policy initiative and consequent lack of historical experience with thisrevenue source, the City staff estimate represents a reasonable approachto approximating revenue from sale of tax liens.

Housing and Regulatory Licenses

The revenue category is comprised of a number of individual revenueitems associated with construction of improvements to real property, aswell as mechanical amusement, mercantile and beverage licenses. Theestimated 2007 revenue from the sources is $1,590,000 in housinglicenses and $448,000 in regulatory licenses. The sum of the twocategories, $2,038,000, constitutes approximately 5% of expected 2007

General Fund revenue.

The fee schedule for housing licenses is controlled by City Council, whilethe fee schedule for regulatory licenses is subject to state statute.

From 1994 through 2006, the average annual increase for regulatorylicenses was approximately 3.5%. The historical factor for revenueincrease is appropriate to apply to this source for projection purposes.

Housing license revenue has been very volatile, mirroring activity in thehousing marketplace. Annual revenue changes have ranged from a highof 59% increase over the previous year to a low of 22% decrease fromthe previous year. The average annual rate of change is an approximate12% increase.

Since the fee schedule for the revenue items is subject to City Councilapproval, it would be appropriate to use the same factor being used to

project overall cost increases (for wages, benefits, services and supplies)expected by the City. The assumption is based on the objective thatlicensing fees are set for full cost recovery. Due to the annual increase inthe Citys cost of doing business, the fee schedule for housing licensesshould increase at the same rate. Future costs are projected to increasean average of 4 5% so that factor is applied to housing license revenue

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yFinancial Analysis and Operations Review

TABLE 13:PROJECTED LICENSE REVENUE

Miscellaneous/Other Revenue

Revenue items in the category include interest earnings, certain federal

reimbursements for indirect costs of grant administration, reimbursementof state gasoline taxes, and other miscellaneous items. Estimated 2007revenue included in the adopted budget is $2,556,719, comprising 6% oftotal expected General Fund revenue.

Of the total revenue included in the category, interest earnings accountfor $925,000, federal indirect expense reimbursement accounts for$526,500 and state gasoline tax reimbursement comprises $350,000.

The balance, $755,219, consists of miscellaneous revenue items.

Changes in interest earnings will occur as amounts available forinvestment change. One factor that will have an impact on investmentearnings is the amount of available fund balance. In 2007, the Cityenjoyed a beginning fund balance in excess of $15 million. The fundbalance will be drawn down significantly in the near term, so it is likelythat funds available for investment will also decrease significantly. Fundbalance is not the only amount available for investment, as current

income is also invested and earns interest. In any event, it is probablythat interest revenue will decrease.

For purposes of the forecast, we have assumed that 67% of interestearnings are attributable to investing current revenue. (Proceeds frominvesting bond funds are subject to arbitrage restrictions limiting theinterest earnings on tax-exempt issues. Consequently, bond fund interestearnings are not typically included as General Fund revenue, but are

attributed instead to capital improvement projects.)

Projected revenue on invested funds should be factored primarily on thechange in fund balance. If the General Fund balance is expected todecrease by 33% in a given year, the estimate for interest earningsshould be decreased by the same ratio. For the forecast, we have

d h h l f i i b i i i 2009 ill

2007 2008 2009 2010 2011 2012

RegulatoryLicense Revenue $448,000 $463,680 $479,908 $496,705 $514,090 $532,083

Housing LicenseRevenue

$1,590,000 $1,661,550 $1,736,319 $1,814,454 $1,896,104 $1,981,429

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Financial Analysis and Operations Review

the same factor used to project salaries and benefits cost; in which case,the factor is 4.5%.

The state gasoline tax reimbursement and the miscellaneous revenueitems in the category show no discernible pattern or trend. City staff haveused a factor of 1% as an average annual increase for the items. Thefactor is certainly prudent and can be used to estimate future growth.

Table 14 projects income for items in this revenue category.

TABLE 14:PROJECTED MISCELLANEOUS AND OTHER REVENUE

2007 2008 2009 2010 2011 2012

Interest Income $925,000 $619,750 $619,750 $619,750 $619,750 $619,750

FederalReimbursement

$526,500 $550,192 $574,951 $600,824 $627,861 $656,114

Gasoline Tax/

Miscellaneous$1,105,219 $1,116,271 $1,127,433 $1,138,708 $1,150,095 $1,161,596

Total $2,556,719 $2,286,213 $2,322,134 $2,359,282 $2,397,706 $2,437,460

Expense Analysis

2007 Adopted Budget Overview

The expenditure side of the financial forecast is built using the proposed2007 Budget as the baseline. Adjustments to the baseline for future years

are based on a combination of known cost increases for laboragreements and assumptions on other certain cost elements, asexplained here.

The adopted 2007 expenditure budget totals $43,257,385. The budgetbreakdown by category of expense is shown in Table 15.

TABLE 15: 2007ADOPTED BUDGET BY CATEGORY OF EXPENSE

Expense Category 2007 Budget $ Amount Percent of Total Budget

Salaries $21,795,816 50%

Benefits $13,345,250 31%

Operating Expense $5,814,673 13%

Debt Service $2 947 973 6%

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Salaries and Benefits

Salaries and benefits make up 81% of the 2007 budget. Table 16provides a more detailed breakdown of the salary and benefitcomponents of the 2007 Budget.

TABLE 16: 2007ADOPTED BUDGET SALARY AND BENEFIT COMPONENTS

Component2007 Adopted

Budget $ Amount% of 2007

Adopted Budget

Police Salary $10,304,164 24%Police Retirement $1,775,214 4%

Police Health Insurance $3,957,500 9%

Total Police $16,036,878 37%

Fire Salary $5,128,447 12%

Fire Retirement $1,090,009 3%

Fire Health Insurance $2,215,000 5%

Total Fire $8,433,456 20%

Non-uniform Salary $6,363,205 14%

Non-uniform Retirement $259,034 1%

Non-uniform Health Insurance $1,944,000 4%

Social Security $734,000 2%

Total Non-uniform $9,300,239 21%

Life Insurance $73,993 0.0%

Workers compensation $1,210,000 3%

Unemployment Compensation $50,000 0.0%

Parking Lot Rental $36,500 0.0%

Total All $35,141,066 81%

Salary

Salaries levels are decided through the collective bargaining process asgoverned by Pennsylvania law. The City and its employees attempt toarrive at a mutually agreed upon rate for wages through negotiations. If

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produce mutual agreement. As a result the arbitrator establishes wagerates which must be paid by the jurisdiction.

The current labor contract with police employees expires on December31, 2007. The contract with fire employees expires on December 31,2008, and non-uniformed employees on the same date in 2009. The basecase financial forecast assumes no salary increase beyond the currentcontracts. It is not likely that the City will be able to forego future wageincreases given the binding arbitration provisions of Pennsylvania laborlaw.

To provide an idea of the impact of future wage adjustments on cost, wehave developed a scenario based on a 3% annual wage adjustment forall employees each year through 2012. The 3% rate is selected based onthe fact that the firefighter contract provides for a 3% adjustment in 2008,and AFSCME receives a 3% adjustment in 2008 and 2009. Table 17shows the impact of an annual 3% wage adjustment as current contractsexpire and are replaced by new contracts.

TABLE 17: COST OF 3%WAGE ADJUSTMENT

2008 2009 2010 2011 2012Cost of 3% WageAdjustment

$309,125 $786,165 $1,480,038 $2,194,727 $2,930,857

A 3% wage adjustment implemented as current labor contracts expirewould add costs of approximately $7,700,000 over the next five years.

Health Insurance

Health insurance costs for 2007 is projected to be in excess of $8 million,and includes medical, dental and vision coverage for all active and retiredemployees, their spouses and dependents. The City is self-insured forhealth-care costs and has negotiated some cost sharing with employees.Since 2000, the average annual increase in medical, dental and visioninsurance cost has been 18%. For forecasting purposes, the historical

experience since 2000 will be used to estimate the future cost of healthinsurance.

Table 18 shows the estimated cost of health insurance from 2007 through2012.



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Retirement Cost

The City of Lancaster has its own retirement system for employees. TheCitys annual contribution to the retirement fund is established throughindependent actuarial calculation based on an assumption of an 8.5%return on investment of fund assets. The City contracts with independentinvestment advisors to manage fund assets. In 2006, the advisors for thepolice and fire pension fund achieved a 7% return, considerably lowerthan the assumed return. The fund portfolio is distributed 65% equities,30% bonds and 5% cash.

The Citys contribution for 2007 for retirement fund cost is $3,124,257. Asnoted in the revenue section of the report, the state also providesfinancial assistance for retirement cost. The 2007 state aid is estimated tobe $2,385,355, bringing total retirement expenses to $5,509,612. Theactuarial assumption for future City obligations to the retirement fund isthat the state will continue to provide pension aid.

Table 19 displays the actuarial projection of the Citys contribution for the

retirement fund through 2012.

TABLE 19: ESTIMATED CITY RETIREMENT CONTRIBUTIONS

2007 2008 2009 2010 2011 2012Police RetirementContribution

$1,775,214 $1,775,214 $1,775,214 $1,775,214 $1,775,214 $1,775,214

Fire RetirementContribution

$1,090,009 $1,090,009 $1,090,009 $1,090,009 $1,090,009 $1,090,009

Non-uniformRetirementContribution

$259,034 $259,034 $285,257 $285,257 $285,257 $285,257

Total $3,124,257 $3,124,257 $3,148,480 $3,148,480 $3,148,480 $3,148,480

Workers compensation

Lancaster is self-insured for of workers compensation funding. From1994 through 2006 the average annual increase in workerscompensation funding was 13%, growing from $245,656 in 1994 to$1,195,000 in 2006.

Applying the historical growth experience to the 2007 adopted budget the



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Operating Cost

The category of expense includes supplies, professional services andother non-personnel costs necessary for providing City services. Thecosts will generally track the inflation rate. The estimate for forecastingpurposes is 3.5%. The factor is derived from the Bureau of LaborStatistics data showing that the Consumer Price Index for Pennsylvaniahas increased at that rate from 2001 through 2005.

The adopted 2007 Budget includes $5,814,673 for operating cost. Table21 displays the estimate based on a 3.5% annual increase factor.

TABLE 21: PROJECTED OPERATING COST

2007 2008 2009 2010 2011 2012OperatingCost

$5,814,673 $6,018,186 $6,228,823 $6,446,831 $6,672,471 $6,906,007

Debt Service

Debt service is the amount paid by the City as interest and principal dueon bonds issued for various purposes. The amount due in the future is thetotal of any outstanding bond issues, plus any new bonds that are issued.The total debt service shown assumes a $10 million bond issue in 2007.Table 22 shows the debt service obligations of the City through 2012,payments remain constant despite the new bond issue because otherbonds will be retired.

TABLE 22: DEBT SERVICE OBLIGATIONS

2007 2008 2009 2010 2011 2012DebtService

$2,947,973 $2,950,117 $2,950,117 $2,950,117 $2,950,117 $2,950,117

Countermeasures

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TABLE 23: REAL ESTATE TAX RATE REQUIRED FOR FISCAL STABILITY

2008 2009 2010 2011 2012APPRAISED VALUE $1,896,601,224 $1,928,843,445 $1,961,633,784 $1,994,981,558 $2,028,896,244Tax Rate $9.82 $11.82 $12.82 $13.82 $14.82Real Estate TaxProceeds $18,624,624.02 $22,798,929.52 $25,148,145.11 $27,570,645.13 $30,068,242.34

Base Case R.E. TaxProceeds $16,728,022 $17,012,399 $17,301,609 $17,595,737 $17,894,864

Increase in R.E.Tax Proceeds $1,896,602 $5,786,531 $7,846,536 $9,974,908 $12,173,378

Beginning Balance $11,755,104 $7,881,444 $6,110,285 $4,825,066 $3,724,364Revenue $41,517,900 $46,269,146 $49,217,110 $52,261,080 $55,403,831Expense $45,391,560 $48,040,305 $50,502,329 $53,361,782 $56,689,900S/D ($3,873,660) ($1,771,159) ($1,285,219) ($1,100,702) ($1,286,069)

Ending Balance $7,881,444 $6,110,285 $4,825,066 $3,724,364 $2,438,295Ending Balance as% of Expense

17.36% 12.72% 9.55% 6.98% 4.30%

The analysis indicates that Real Estate Tax rate would have to increaseapproximately 68% between now and 2012 to maintain a stable fiscalposition. The General Fund reserve would be drawn down gradually from17% of expenses to 4%. Management Partners is not suggesting that theCity solve its financial crisis by increasing property taxes alone. It islikely necessary; however, that increases in the property tax rate will haveto be seen as part of the solution.

The base case scenario does not include an estimate for wageadjustments for new labor agreements. The additional property taxrequirement to fund new wage adjustments is shown in Table 24.

TABLE 24: REAL ESTATE TAX RATE REQUIRED TO FUND 3%WAGE ADJUSTMENTS

2008 2009 2010 2011 2012

Cost of 3% WageAdjustment $309,125 $786,165 $1,480,038 $2,194,727 $2,930,857

Property Tax RateRequired to Fund

$0.16 $0.41 $0.75 $1.10 $1.44

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y p

of the recommendations over the five-year period of the financial forecastwould be to change the projected $69 million cumulative deficit intoalmost an $8 million surplus.

Table 25 summarizes the impact of the management auditrecommendations on the base case financial forecast.

TABLE 25:IMPACT OF MANAGEMENT AUDIT RECOMMENDATIONS ON FINANCIALFORECAST

2008 2009 2010 2011 2012RevenueEnhancements $7,298,800 $7,298,800 $7,298.800 $7,298,800 $7,298,800CostSavings $3,147,614 $3,147,614

$3,147,614 $3,147,614 $3,147,614

Cost Increases $1,383,000 $1,383,000 $1,383,000 $1,383,000 $1,383,000One-time Cost $1,422,500 0 0 0 0Base CaseBeginning Balance $11,755,104 $5,984,842 ($1,572,848) ($10,704,603) ($21,780,213)Base CaseRevenue Forecast $39,621,298 $40,482,615 $41,370,574 $42,286,172 $43,230,453

Base CaseCost Forecast $45,391,560 $48,040,305 $50,502,329 $53,361,782 $56,689,900Base CaseSurplus/Deficit ($3,466,371) ($5,770,262) ($7,557,690) ($9,131,755) ($11,075,610)Base CaseCumulative Deficit NA ($1,572,848) ($12,277,451) ($34,057,664) ($69,297,324)BeginningBalance $11,755,104 $13,486,762

$14,853,492 $14,646,157 $12,494,967

Adjusted

Revenue Forecast $46,920,098 $47,781,415 $48,669,374 $49,584,972 $50,529,253AdjustedCost Forecast $45,188,440 $46,414,685

$48,876,709 $51,736,162 $55,064,280

AdjustedSurplus/Deficit $1,731,658 $1,366,730

($207,335) ($2,151,190) ($4,535,027)

AdjustedEnding Balance $13,486,762 $14,853,492

$14,646,157 $12,494,967 $7,959,940

The Table shows the amount of the annual revenue enhancement thatwould be realized by implementing the revenue enhancementrecommendations. The Cost Savings row indicates the potentialsavings from implementing the management audit recommendations foroperations modifications. The Cost Increases and One-Time Costrows of the table account for the management audit recommendations

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The table summarizes the base case forecast that projects a $69 millioncumulative deficit. The impact of recommended revenue enhancementsis shown on the Adjusted Revenue Forecast line. The net impact of

recommended cost savings, cost increases and one-time costs is shownon the Adjusted Cost Forecast line. The Adjusted Surplus/Deficittabulation is the annual financial result of implementing the managementaudit recommendations. The Adjusted Ending Balance depicts thestatus of general fund reserves from year to year.

Table 25 illustrates that implementing all of the recommendations of themanagement audit set forth in this report would change a forecast $69million cumulative deficit over the next five years into a stable financialsituation. Even if all the recommendations with a financial impact wereimplemented, the adjusted forecast indicates that there would be anoperating deficit in 2010, 2011 and 2012. However, even in those years itwould not be necessary to increase tax rates because the adjustedending balance would still be well within prudent parameters for reservesdecreasing from 30% of forecast expense in 2010 to 14% in 2012. .However, it would likely be necessary to increase tax rates after 2012 inorder to slow the rate of reserve draw down.

Appraisal Policy

Another factor to pursue on the real estate tax is the policy regardingappraisals. Lancaster County is responsible for real property appraisal.The current County policy is to appraise real property every seven years.And, it also appears that even when appraisals occur, the value falls shortof the true market value.

Table 26 shows the historic County appraised value compared to the truemarket value of real property in the City as calculated by the State TaxEqualization Board for equalizing state aid to school districts.

TABLE 26: COMPARISON OF REAL PROPERTY APPRAISED VALUE TO MARKET VALUE*

AppraisedValue

% Change fromPrevious Year Market Value

% Change fromPrevious Year

% of AVto MV

1997 $1,595,387,100 NA $1,634,617,930 NA 97.6%

1998 $1,583,345,500 -1% $1,656,219,142 2% 95.6%

1999 $1,569,946,300 -1% $1,682,686,280 1% 93.3%

2000 $1,557,897,400 -1% $1,697,055,991 1% 91.8%



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Table 26 illustrates that since 1997 the disparity between appraised valueand market value has been getting greater every year until 2005. If theappraisal policy was to use true market value as the basis for real estate

taxes, the City would realize an additional $2.7 million in 2008 at thesame tax rate.

A policy of using true market value as the basis for real property appraisalis certainly more transparent than the current County policy.

Recommendation 1: Meet with Lancaster Countyofficials to develop a policy for appraising realproperty at true market value.

Payment in Lieu of Taxes (PILT)

The value of tax-exempt real property in the City is $556 million, or about23% of the total appraised value of real property in the City. Someowners of tax-exempt real property have been making voluntarypayments in lieu of taxes. The average annual revenue from PILT since

1994 has been approximately $373,000. In 2006, Lancaster GeneralHospital (LGH) agreed to a new PILT of $1.2M per year the equivalentof 98% of all revenue received by the City for PILT. If tax exemptproperty owners (including Lancaster County, Lancaster City Schools andFranklin & Marshal College) paid the current levy amount of $8.83 perthousand, the annual revenue would be approximately $4.9 million. If theCity could negotiate 33% rate for PILT payments revenue would be $1.6million. City staff could meet with the largest tax-exempt property ownersin Lancaster and negotiate a formula for PILT so that revenue from thissource is more reliable, predictable and appropriately accounts for theservice burden of these institutions.

Recommendation 2: Develop a formal policy forpayments in lieu of taxes with large tax-exempt realproperty owners.

Charges for Service and Fees

The City anticipates collecting $7,255,000 in 2007 from charges for policeservice, public safety and public works fees, and regulatory and housinglicenses. The number represents approximately 18% of expected GeneralFund income



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Recommendation 3: Establish a full cost recoverypolicy for fees and charges for police, public safety,public works, regulatory and housing services.

Recommendation 4: Develop full cost recoveryformulas for fees and charges for police, public safety,public works, regulatory and housing services.

Recommendation 5: Adjust fees and charges forservice rates annually during budget preparation.

Utility Revenue Transfers

The City receives substantial annual revenue by transferring fundbalances from the water and sewer funds. As owner of the utilities, it isappropriate for the City to receive a return on its investment in operations.In 2007, the budget projects transferring $2,007,128 from water andsewer fund balances to the General Fund.

The City also, appropriately assesses the utility funds a service charge foradministrative services such as human resources, legal and financialsupport. The amount transferred for administrative purposes is based onthe indirect cost formula used by the Federal Government for valuingadministrative services for grants accounting. In 2007, the amounttransferred for administrative support cost from general fund agencies is$1,014,949.

The current structure of utility ownership may not be giving the City itsbest return on investment. The City should acquire expert assistance todetermine whether a different form of ownership or even outright sale ofthe utilities would produce a better return than currently experienced.

Recommendation 6: Analyze utility ownership optionsto determine how to maximize return on investment.

Expenditure Controls

Management Partners conducted an audit of City operations to determinewhat opportunities may exist for realizing cost savings. Any suchopportunities that are identified and implemented can be incorporated intothe financial model being delivered as another element of the project



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and represent 26% of total General Fund expense between 2007 and2012. The increase mirrors national experiences on health insurance andthe cost of employee health care.

The City has initiated some actions designed to defray and/or reducehealth insurance cost. The current labor agreements with AFSCME andthe International Association of Fire Fighters (IAFF) include cost sharingprovisions between the City and its employee groups. For instance, as ofJanuary 1, 2007, all new AFSCME employees pay 1% of their salarytoward health insurance cost. Firefighters are paying approximately $195a year for health insurance. The steps are in the right direction, but are fartoo modest to make an impact on health-care cost. Contributions shouldbe based on a percentage of premium basis rather than a set dollaramount.

It is usual for parties to rely on the Consumer Price Index (CPI) innegotiations regarding wage rates. The CPI includes a factor forincreased cost of health care/insurance. If employees receive a cost ofliving wage adjustment (COLA) comparable to the CPI, it would beequitable to also adjust the cost sharing for health insurance cost

increases based on the CPI factor for health care cost. For example, if theCPI is 3% and employees receive a 3% COLA, and the CPI factor forhealth insurance represents 15% of the CPI adjustment, the employeeshare of health insurance could equitably be increased by 0.45% of theirsalary (15% of 3% is 0.45%).

Recommendation 7: Develop a new basis for sharingthe increasing cost of health insurance withemployees.

City officials should initiate discussions with other municipalities and stateassociations to explore opportunities for creating risk-sharing pools thatcould dampen the growth rate in health insurance expenses. Similarpools have proven to be valuable techniques for cost control.

Recommendation 8: Initiate discussions with othermunicipalities and state associations to create risk-

sharing pools to control health insurance costincreases.

Salary Adjustments



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Capital Budget

In March 2007 the City issued $125,000,000 of bonds to implement its

newly adopted (and first ever) Capital Improvement Program. To developthe CIP, each Department was directed to identify capital needs projectedover a five-year period. The single largest project ($90 million) included inthe CIP is the building of two new membrane filtration water plants that willreplace 1930s and 1950s era plants that currently provide drinking waterto the City and several surrounding suburban municipalities. The CIP alsoincluded several million dollars of additional water system projects, $13million in sewer system projects and $17 million for General Fund projects.

While the implementation of the CIP is a good start, there must be anongoing effort to identify, plan and provide funding for the Citys capitalneeds. A thorough inventory of capital assets, the remaining useful life ofthose assets, and replacement costs estimates are important elements ofa capital plan. Lancaster should continue to further refine its multi-yearcapital planning and incorporate a multi-year capital improvement plan intoits budget process and update it each year within the annual budgetprocess.

Conclusion

The City currently enjoys a balanced General Fund Budget, due primarilyto a $15 million reserve; however, close to $3.5 million of the reserve isbeing used to balance the 2007 budget. The structural deficit in theGeneral Fund grows each year, since General Fund revenue is growing

at a 2% annual rate while expenses are growing between 5% and 6%.

The City levies the maximum amount allowed by law for all taxes exceptthe real estate tax. Tax revenue accounts for 58% of General Fundrevenue. The City is well within the maximum property tax rate at $8.82,compared to the $25 cap; however, the low appraised value to truemarket value ratio, currently 82%, means that each additional dollar ofreal estate tax rate levied produces only $1.8 million in revenue instead ofthe $2.2 million it would produce at 100% of market value. Real estate

taxes would have to increase by 68% over the next five years to stabilizethe Citys financial picture, which is clearly not a realistic option. Theproperty tax is not the only answer to stabilizing the Citys financialsituation but should be seen as part of a complex solution that includesimplementing recommendations made in the management audit.



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significant one-time revenue source that could be used to postpone theday of reckoning for years into the future. Having experts study the utilityownership options is an important undertaking for the City.

The most important study area on the expense side of the ledger is healthinsurance. The historic 18% growth rate of a multi-million dollar expensewill have a crippling effect on finances if not brought under control.

The Citys opportunities for economic development strategies forchanging the stagnant revenue pattern will be driven by the fact thatLancaster is essentially built out. As a result, acquisition and clearance ofdevelopment sites will be crucial activities.

Strategically replacing high density, low value housing with high density,high value housing must be the centerpiece of the development strategy.It would boost revenue from real estate tax and the earned income tax(which is received by the jurisdiction of residence), the two largestsources of general fund revenue.

In short, controlling health insurance cost, raising real estate tax rates,

changing the County policy on real property appraisal, utility ownershipstructure analysis, and acquisition, clearance and construction of highdensity-high value housing are the keys to achieving financial stability.



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CITY OF LANCASTER ECONOMIC DEVELOPMENTSTRATEGY AND PLAN

The development of a stable, growing employment base is the key to the

Citys financial picture. Long-term financial stability within the City ofLancaster is dependent in part upon its economic viability, includingattracting more middle- and upper-income residents while providing theideal urban experience for visitors. An approach for creating a unique,inviting urban destination is presented in the City of Lancaster StrategicPlan.

The Citys Strategic Plan clearly articulates a vision and focus area

objectives that are based on leveraging the historic assets of the City.Integral to the plan are redevelopment and revitalization initiativesthroughout the City. It is an aggressive strategy that includes 55outcomes -- labeled success indicators -- that will drive the Citysredevelopment and revitalization efforts.

Envisioned to span only three years, the Plan will create a City thatmaximizes its historic charm and large number of historically designatedproperties. The Plan also promotes new development opportunities in arts

and entertainment, a customer-centered culture, housing, mobility,neighborhoods, public amenities and ambience, and the retail sector.

Department of Economic Development and Neighborhood Revitalizationstaff will be responsible for the outcomes associated with many of theindicators. In other cases, it is likely that Economic Development will havea supporting role in implementation.

The success indicators clearly specify work plan goals and projectpriorities for the Economic Development and NeighborhoodRevitalization. The table below includes the Strategic Plan indicators andprojects that directly relate to investment and development in the City ofLancaster.



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TABLE 27: STRATEGIC PLAN INDICATORS FOR ECONOMIC DEVELOPMENT

Focus Area Success Indicator

Arts and Entertainment

Incentives to fast track the development of liveentertainment venues are identified, created &implemented50,000 additional square feet of space is availablefor artists studios

Housing

300 new market-rate, owner-occupied housing unitsare available for occupancy by 2011Financial incentives are in place to attract high-

density housing developers and contractorsProvide convenient parking for high-density parkingSecure property to provide developmentopportunities for downtown housingImplement programs to encourage the conversionof single-family rental properties to owner-occupiedunitsReduce the preparation and transfer time forproperties in the Vacant Property Program

Neighborhoods

Increased parking in neighborhoodsSystematic exterior and interior inspection of rentalunits once every four yearsDeclining property code maintenance violations

Public Amenities &Ambiance

Downtown faade improvements, enhancementsand restorations

Retail Sector

Retailers are opening in targeted locationsGaps are closed between retail clusters and criticalmass is createdBasic retail is in place to support the opening of theConvention Center

Each of the strategic directions and success indicators offers a direct orindirect link to current or planned initiatives which should be part of alarger City-wide economic development strategy. While the City hasdeveloped strategies for achieving the ideal urban experience, acomprehensive plan for redevelopment and revitalization for the City isneeded.

The City of Lancaster currently has no written economic developmentplan but several efforts underway which will result in an overall plan toguide near and long-term economic developments initiatives to supportthe Citys vision for its residents and visitors. When completed, thestudies should provide a clear vision for new development and/or



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In 2005, a Mayors sub-committee reviewed existing economicdevelopment and revitalization initiatives and opportunities underway in

the City. The sub-committee advanced 15 recommendations forstrengthening development and redevelopment efforts in the City, andprovides a starting point for realizing the Lancaster Strategic Plan. Thestatus of these recommendations is detailed in Management Partnersorganizational review of the Department of Economic Development andNeighborhood Revitalization.

Economic Development Tools and IncentivesThe Strategic Plan, market and feasibility plans should provide targeteddevelopment strategies for economic growth by creating new market rateand high-end housing which support major development initiativesdowntown, as well as in designated incentive and historic areas. Whilethe City is essentially built out, there are numerous opportunities forcontinued redevelopment as evidenced by the number of projects thatrecently were completed or are on the drawing board.

The recently completed Clipper Magazine Stadium, the new Arts Hoteland other key projects that are in progress or outlined on the Citys mapof major Economic Development Projects are evidence of thedevelopment potential that exists within the City.

Attachment D includes a map of Major Economic Development Projectsfor Lancaster. The map locates 51 projects: 13 are completed, 23 are in

various stages of progress, and 15 that are planned. Most of theseprojects are within or adjacent to several designated redevelopmentincentive areas in Lancaster:

The Keystone Innovation Zone, in the Citys northwest quadrant The Downtown Investment District, running along King and Queen

Streets in the heart of the City The Elm Street North and South corridors

Keystone Opportunity Zone, in the southern portion of the City

The development areas provide a focus for current, proposed and futureprojects.

Current and proposed development projects are generally dispersed



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Lancaster General Hospital, the Lancaster General College of Nursingand Health Sciences, and the Pennsylvania College of Art and Design.

Pennsylvanias Keystone Innovation Zones offer tax credits for emergingbusinesses to promote technology transfer activities, entrepreneurship,economic and community development, and talent retention. Thebusinesses often are located in proximity to institutions of higher learning,and hope to build a stronger creative class.

The Elm Street North neighborhood and the Elm Street Historic southeastneighborhood are part of the state of Pennsylvanias Elm Street Program.Created in 2004, and modeled after the Main Street Program, Elm Street

area incentives are used to strengthen historic neighborhoods throughprograms to improve property values and neighborhood image, whileaddressing safety concerns.

The Elm Street Program has a five-point approach to neighborhoodredevelopment that promotes initiative to address: clean, safe and green;neighbors and economy; design, image and identify; and sustainableorganization. The Elm Street North neighborhood program is

administered by the James Street Improvement District, a non-profitcommunity economic development consortium established in 2003. TheElm Street North Historic Southeast neighborhood program isadministered by the Inner-City Improvement Group.

The Lancaster Downtown Investment District (DID) is a specialassessment area which encompasses the Citys central business district.The DID began operation in 1992 and provides a funding source forprograms to support business owners and residents. The Lancaster DID,

includes some 400 businesses and 540 properties and is funded primarilythrough property tax assessments, as well as funds secured from grants,cash, marketing and in-kind donations. The fiscal year 2007 assessmentrate of 2.15 mils will be increased every two years for a six-year term thatextends from 2007 to 2012. The assessment base is set annually.Estimated funding for the DID, based on proposed assessment rates, isshown in Table 27 below.

TABLE 28: DIDTOTAL ASSESSMENTS*

Documents

Lancaster, Pennsylvania