A Look to the Future - 2010 Budget Message

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An important feature of our annual Budget Message is “A Look to the Future,” a section where I include information for future years and provide my thinking and conjecture of the status of emerging trends, our long term fiscal condition and the challenges we face.

As previously acknowledged in this document, these are very difficult times in our local, national and world economy. Consumers have curtailed their spending. Major private companies and banking institutions have faltered. Unemployment has risen above 10%. Home prices have fallen and foreclosures have increased. State and local governments throughout our nation are experiencing extreme revenue stresses and are therefore considering possibly major changes to their operations, budgets and short-term and long-term plans.

Through all of this, we must continue to provide our basic services, but with open ears to listen to what is affordable to our citizens. With so many people incurring financial stresses, lost income and reduced asset values, we must do our part to keep the costs of government – and our taxes and fees – in check. Considerable value must be delivered for the taxes and fees we assess or raise. We must provide our citizens with the answers to why we have new costs and revenue needs each year, and what they get for their tax dollars as well as what they will not get in the future if service delivery levels are reduced. Our challenge is to balance the shared goal of tax containment with the realities of providing excellent programs and services, which have long been viewed as essential to the quality of life in Lower Merion. We agree with those who disdain “government waste” and have developed an organizational culture over many years that constantly seeks ways to excel while spending minimally. All public entities face a common critique based on the presumption of excess; Lower Merion welcomes the scrutiny, confident in the value provided by its efficient spending practices and plan.

Local governments are different than companies in the private sector, which can and do expand during times of high income and retrench when faced with a financial downturn. Local government must not add services just because revenues are strong, nor do citizens generally expect their government to provide fewer basic services when revenues are slowed. Local government finds a regular “rhythm” in providing consistent, necessary services to the public throughout economic prosperity and retrenchment. When faced with the question, “Who will do without?” there are few who would be quick to raise their hands. In difficult times, Township Managers and elected Commissioners alike could wish for the mythical Lower Merion “15th Ward” that could bear the burden for all, while negatively impacting no one. In the absence of such a perfect world, the key word again becomes balance – avoiding knee-jerk reactions to problems and instead choosing an approach that respects the very practices that have produced a local government that is nationally recognized as an example of excellence.

We must continue to take a hard look at our costs and take regular steps to contain and strategically reduce spending. Our staff’s analytical “firepower” is limited by our administrative staffing levels and the many demands upon our managers to oversee their departments and produce mistake-free leadership. This means we must be somewhat selective in our cost-saving study topics so as to focus upon those viable options where savings opportunities are greatest, ongoing, and most likely to be acceptable to our community.

Though we have enhanced or added some new programs and services over the past twenty years in response to changing times and conditions, our full-time workforce is smaller today by twenty-eight full-time positions compared to our 1991 staffing level. This is due to skillfully analyzing our workforce needs, consolidating duties, using technology to gain efficiencies, and asking the worker of today to take on additional responsibilities and workload to meet the growing needs and expectations of our society.

Our contractual labor costs for employee compensation are fully fixed for 2010 due to the recently-approved three-year contract negotiated with our Fraternal Order of Police (FOP) Lodge #28 (2010-2012), and the expiring four-year contract with the Workers Association (WA). Both of these labor agreements contain long-term cost containment measures for employee, retiree and new-hire healthcare. Our labor management relationship with the WA and FOP leadership is very important to us, and we work daily to demonstrate our respect for the hard work and integrity of our caring and mature workforce. Mutual respect for resolving personnel issues has served us and our workers well. We must continue to join hand-in-hand with our fine workforce to accomplish the work of the day; to listen to them and implement their ideas for operating needs and cost-saving efficiencies, and to help them understand that more will be asked of them since staffing reductions and unfilled vacancies will probably continue in these challenging times.

Well funded at our last actuarial valuation on January 1, 2007, our two pension plans (Police and Non-Uniformed) both experienced significant equity losses at the end of 2008, leading up to the soon-to-be-released January 1, 2009 actuarial valuation. Nationwide, it was reported that private and public defined benefit pension funds lost an average of 25% of their value during 2008. The Township’s two pension funds performed similarly for 2008, but have both come back strongly in the first ten months of 2009 at over a +20% investment earnings rate. Our two pension funds have maximized their annual State Act 205 pension grant eligibility, without triggering Township funding requirements. Higher non-uniformed (+0.7%) and police officer (+1.2%) employee pension contributions are required beginning in 2010, which has the impact of reducing the take-home pay of our employees. Even higher employee pension contribution rates will most likely be needed for 2011 and beyond. By utilizing “asset smoothing” valuation procedures, the substantial equity funding losses last year can be somewhat mitigated actuarially, but additional funding pressures for 2011 and beyond will undoubtedly occur, especially beginning in 2013-14, with possibly larger cost increases beginning in 2015. With the help of our outstanding volunteer pension fund trustees, our solid pension funding management must continue unabated. It will also be important for State government to play an increasing leadership role to address the growing pension funding crisis throughout the Commonwealth. This topic must be front-and-center in the years ahead, including support for the creation of a state-wide pension plan, to address what is arguably the single greatest financial threat to the next generation.

An actuarial study was undertaken in 2006 for the ultimate implementation of the Governmental Accounting Standards Board (GASB) Pronouncement 45 relating to the accounting and financial reporting by employers for Other Post Employment (non-pension) Benefits (OPEB). The Township implemented this reporting standard in 2009 for the 2008 fiscal year. The actuarial study showed a long-term actuarial accrued liability for current and future retiree healthcare benefits of approximately $21 million. While the Township is only required to pay for this liability on a “pay-as-you-go” basis, many governmental units have evaluated possibly beginning to “pre-fund” a portion of these liabilities. This is accomplished by setting aside additional dedicated funding to address this growing obligation and relieve future generations from the full burden of paying the medical costs of this generation’s retirees. Fortunately, Lower Merion’s OPEB liabilities are much lower than many other municipalities around the country because we conclude our retiree and spousal healthcare benefits no later than age 65 while many others provide more costly lifetime benefits. We have commenced discussions of the OPEB liabilities with the Board of Commissioners and this topic will need to be carefully studied and more broadly discussed in the years ahead to create a viable plan and strategy to pay for retiree obligations. An update of our 2006 study is currently underway.

Our unique Equipment Fund, reported earlier in this Budget Message, has been under careful review this past year and will continue to be studied in the immediate future. It represents a major asset of the Township, utilized to finance the future replacement of our rolling stock and radio communications equipment. With the recommendation contained in this Proposed 2010 Budget not to contribute the normal annual amount needed for future replacements – and the high likelihood that this approach will therefore continue hereafter – the EF will eventually be spent and leave us at a “pay-as-you-go” funding system. With a strong EF fund balance, the Township has prepared itself to deal with uncertainties in the economy and provide flexibility for partial use of the fund for future asset replacements not heretofore expected to be funded from this source, such as new 800 MHz radios for police, fire and public works, the possibility for more costly automated refuse packer trucks and/or residential containers, or high-cost fire apparatus. As a result of this financial flexibility, the Township may instead wish to evaluate the partial use or reassignment of a portion of this reserve for one-time capital expenses or to start an OPEB fund as noted above. These decisions are important and cannot be made lightly.

In 2008, a comprehensive fire services study was completed by an outside consulting team. The Board of Directors of the volunteer fire service met throughout 2008 and early 2009 to review, address and prioritize nearly 140 recommendations from the study. This process was invaluable to examine current opportunities for improvements as well as to plan for the future of the volunteer fire service to ensure that our caring volunteers are recruited, retained, well-equipped and trained to meet the modern day public safety standards for the Township. The well-serving 20-year Fire Apparatus Replacement Policy utilized by the Township and the volunteer fire companies expires at the end of 2010. Analysis and discussions are well underway to create a viable and cost-efficient renewal of this important policy. This is particularly important when one considers that unbudgeted costs in the range of $1 million per year may be needed to fund future replacements of the fire fleet.

We must also continue our new focus toward environmental stewardship and energy-savings through the thoughtful leadership of the Township’s Environmental Advisory Council (EAC). We have added “green” expectations to our every walk of life. Sound planning and prioritizing will be essential in the months and years ahead to balance the needs of our environmental stewardship with our ever-growing fiscal demands and service priorities. A federal Energy Efficiency and Conservation block grant of $588,000 has been provided to the Township this year, to be spent during 2009/2010. An energy audit of virtually all Township buildings and facilities has now commenced; recommendations from the study will be implemented from the remaining grant funds, and the cost differential for hybrid vehicles will also be covered, allowing the Township to purchase more dual-fuel vehicles. In 2011, the Township anticipates a +20% increase in the price for electricity as a result of the deregulation of electric utilities in Pennsylvania.

After fourteen consecutive years without a rate increase, it was necessary to implement increases to the Township’s annual Sanitary Sewer Rent fee in both 2008 and 2009. Another rate increase in the range of +10% is expected to be necessary for 2010, which will be determined in May based upon projections at that time. The primary reason for the rate increases is wastewater treatment rate increases from the City of Philadelphia Water Department’s Southwest Treatment Plant. It is likely that annual fee rate increases will continue to be necessary.

The major changes recently approved for volume-based solid waste fees and collection procedures will relieve the GF of the weight of its annual operating subsidy for residential refuse and recycling services. The refuse packer fleet has reached the end of its ten-year useful life and must be replaced next year. Before the replacement truck type is selected, the Township will discuss again the pros and cons of a conversion to automated collection for those curbside subscribers. Automated trucks are more costly, and operate most efficiently with standard refuse containers, so there is much to consider. Bids to be opened on November 12th will lead the Board to a decision regarding composition of residential recycling for the future. Agreements to dispose of the Township’s refuse at the trash-to-steam facility in Plymouth expire after 2014, so planning is currently underway for long-term disposal options. It very well may turn out that the Plymouth facility will be the most economical and viable solution in 2015.

The Township’s risk management position continues to be strong and stable as we are now in our seventh year participating in the region’s top two municipal insurance trusts – the Delaware Valley Insurance Trust (DVIT) for general liability, and the Delaware Valley Workers’ Compensation Trust (DVWCT) for workers’ compensation. Our participation in these well-managed municipal risk-sharing pools has provided stable insurance costs and excellent claims management, as well as a wide range of loss-control training programs for our municipal employees. We received a dividend of $131,000 in 2009 due to both the Township’s and the DVIT pool’s recent good performance, which complemented our sizeable annual dividends during 2006-2008. The Township anticipates receiving similar dividends again in 2010. While our risk management programs are well positioned, we are not immune to unexpected bad luck or liability exposure, so we must continue strong risk control and safety practices throughout our community.

As we have noted, our Township’s six-year Capital Improvement Program has undergone extensive evaluation and discussion over the past two years to contain our costs while continuing and commencing necessary projects. Millions of dollars of projects have been delayed, but many long-planned projects will be undertaken to enhance our services to our residents and provide improvements and repairs to the Township’s aging infrastructure.

Maintenance deferral can create long-term consequences that threaten the health, safety and welfare of the community, so due diligence will be essential. This is particularly evident in the current major plans for improvements to the six libraries. Although increasingly popular and heavily used by Township residents, these buildings have fallen into disrepair and obsolescence. Remaking these facilities for the future will complete the cycle of significant investment in all Township facilities over the past two decades: the Township’s administration and public safety buildings, the public works complex, fire stations, sanitary sewer pumping stations, storm water management facilities, open space acquisitions, comfort stations, swimming pools, playground equipment and park improvements. However, there is still much to be done, including economic development, traffic improvements and addressing some of the older, historically significant township buildings.

Moody’s Investors Service and Standard and Poor’s both reconfirmed Lower Merion Township’s Triple A bond credit rating, which is the highest rating attainable. This was the Township’s 43rd consecutive year to achieve Triple A distinction from Standard and Poor’s, who again included the assessment of the Township’s financial management practices, which resulted in an overall “strong” rating – the highest rating available. We estimate that this top credit rating saves our taxpayers millions of dollars in lower interest costs. The credit rating was assigned for our $26.8 million bond sale ($7 million in new money, $19.8 million in refinanced prior bonds) in April, when we priced well below the interest rates expected that day for natural Triple A paper. Refunding savings of nearly $1.1 million were applied to lower the Township’s debt service in 2009 and 2010. The bond market continued to show that there are natural Triple A’s… and then there is Lower Merion.

Our CIP has been very forward-thinking in recent years and we must be mindful of the impact it will have on our operating budgets in future years. A bond issue of approximately $15 million is anticipated for 2010, of which nearly half will be needed for payments for the Ludington Library renovation project. Especially since we have recently delayed over $8 million in capital projects to 2011 and beyond, annual $10 million bond issues are anticipated for the foreseeable future to provide a source of ongoing funding for our CIP projects. This debt issuance plan will add approximately $0.7 million to $1.0 million each year to our future GF expenditure budgets in new debt payments. It will continue to be one of the highest cost drivers of our GF budget.

The Township will need to continue to monitor and prepare for the likelihood of more unfunded mandates from the County, State and Federal governments. Fewer grants for road improvements and bridge replacements, lower state funding for libraries, and new federal mandates to replace all of the Township’s directional and street name signage due to size and reflectivity standards will all add increased pressures upon local governments.

As reported, with Montgomery County now more than 12 years past its last county-wide reassessment of property, inequities and successful assessment appeals are growing at an alarming rate. The next county-wide reassessment needs to be discussed and planned.

One possible development to watch is a bill now going through the State legislature that, if adopted, would add a 1% optional county/municipal sales tax. Preliminary estimates indicate that Lower Merion’s participation in such a new tax could add about +$3.2 million of annual GF revenue. Since Pennsylvania is one of the few states in the nation that does not provide sales tax revenue to its counties and municipalities (other than Philadelphia and Pittsburgh), such a new revenue source would help diversify county and municipal revenue and help buffer economic change.

Summary:

As our following five year financial forecast demonstrates, balancing our budgets in the years to come will continue to provide great challenges. The 2008-2009 recession has darkened the horizon, but we have many well-considered “assets” working for us here in Lower Merion: involved citizenry, an attentive Board of Commissioners, a responsive and respected workforce who’ve made the Township their career and passion, relatively low tax rates, award-winning budgets and financial reports, solid cash and pension management, a Triple A credit rating, visionary infrastructure investment, a strong fleet and physical plant, a first rate public safety system, a mature and revered urban forest, extensive leisure and library opportunities, smart automation, aggressive gathering of grants from outside sources, and a focus upon economic development, managed growth, sustainability, environmental stewardship and historical preservation. We have a world-wide reputation for excellence and much to be proud of. We must continue to protect and cautiously build upon these strengths, while aggressively seeking new opportunities to be cost efficient and responsive to the needs of our community.

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