General Fund Revenue Proposed - 2010 Budget Message

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Real Estate Tax (RET):

The Township’s RET will continue to be the General Fund’s primary source of revenue, accounting for 56% of the total 2010 GF Revenue Budget. In recent months, the Township has experienced a significant increase of successful real estate assessment appeals, which will decrease the Township’s real estate assessment base in 2010. The estimated taxable real estate assessed valuation for 2010 is $7.514 billion. This is flat as compared to the 2009 assessment base and only $14 million higher than 2008. In years prior to 2008, the real estate assessment base has increased by about +0.8% annually as a result of new construction and additions to residential and commercial proprieties, offset by real estate tax assessment reductions from appeals. However, with the real estate market decline, housing market values have decreased in the Township. This has resulted in a noticeable increase of real estate tax assessment appeals and reduced real estate assessments for 2009 and beyond. In October 2009, the Montgomery County Board of Assessments had over 800 appeals (from Lower Merion Township property owners) scheduled to be heard before year end 2009. Based on the 2008 Common Level Ratio (54.0), calculated by the Pennsylvania State Tax Equalization Board (STEB), the Township of Lower Merion has the second largest market value of any municipality in the Commonwealth of Pennsylvania (behind Philadelphia and above Pittsburgh).

Township of Lower Merion Total Market Value of Assessable Real Estate
Year
(mills)
Tax Rate
Percent
Change
(Tax Basis)
Assessed
Valuation**
Percent
Change
Current
RET
Revenue
Total
Market
Value*
2003
3.20
22.1%
7,212,601,930
1.0%
$22,310,000
10,498,692,800
2004
3.34
4.4%
7,261,476,175
0.7%
23,533,000
12,022,311,500
2005
3.47
3.9%
7,300,215,935
0.5%
24,533,000
13,670,816,400
2006
3.47
0.0%
7,371,483,853
1.0%
24,805,000
14,510,795,000
2007
3.54
2.0%
7,446,874,345
1.0%
25,572,000
14,688,115,100
2008
3.61
2.0%
7,501,357,064
0.7%
26,268,000
14,766,450,900
2009
3.68
2.0%
7,514,754,265
0.2%
26,742,000
n/a
2010
3.82
3.8%
7,514,754,265
0.0%
27,758,000
n/a
* Actual 2003-2008 and estimated 2009-2010
** Total Market Value equals the Pennsylvania State Tax Equalization Board (STEB) Assessed Value divided by the STEB Common Level Ratio

Real estate tax collection (current year) for the 2010 levy is estimated at $27.8 million. An additional $0.7 million is expected from prior year and interim taxes for a total of approximately $28.5 million. 

RE Collections

Real Estate Transfer Tax:

The real estate transfer tax, levied upon the market value of real property deed transfers, peaked in 2006 with record high collections of $4.8 million. Since then, the Township has experienced a slowdown of home sales, longer sales cycle and declining housing market values. In 2007, the Township had a noticeable decline of real estate transfer taxes with revenues deceasing $627,000 (-13%) as compared to 2006. Based on the most recent STEB common level ratio (54.0% assessed-to-market-value ratio), the Township experienced average real estate depreciation of approximately -6%, which followed a -0.2% decline in 2007, as compared to +6% appreciation in 2006. The actual 2009 real estate transfer tax collections have decreased (-$1.1 million or -41%) compared to the $2.7 million actual collections for the nine months of 2008 and are estimated to finish the year at $2.1 million, or -$1.5 million lower than the 2009 Budget. With help from the Federal government, the 30-year conventional mortgage reached a historical low of 4.8% in April 2009, after six consecutive months of decreases. The current average 30-year mortgage, still attractively low, is at a rate of about 5.2%.

With the economic rebound projected to begin in 2010, the Township is carefully monitoring the housing market conditions and projecting moderate increases for this revenue source in 2010 and beyond. Overall, the Township has not been negatively impacted by mortgage defaults and employment levels appear to be fairly stable. The Township’s long-range construction projections anticipate some new residential and commercial development; however, the timing of these projects will depend on future economic conditions and housing demand. The 2010 real estate transfer tax is budgeted slightly higher (+$82,000) compared to the estimated 2009 levels, but approximately -$1.0 million or -32% lower than the 2008 actual ($3.2 million).

RE Receipts

Business Privilege and Mercantile Tax:

The business privilege and mercantile taxes are levied on the gross receipts of anyone doing business within the Township. Business taxes are volatile since they are directly related to the prosperity of the local and national economy, lagged by one year. With the economic downturn impacting business later in 2008, the 2009 tax filings, which include a 2010 estimate, reflect a blend of good and bad business performance for the year 2008. Therefore, if 2009 business receipts decline below levels experienced in 2008, the Township could have exposure to providing tax credits in 2010, which would result in lower business tax revenue.

In recent years, the Township’s business tax collection program has resulted in increased delinquent business privilege and mercantile tax collections and license fees. In 2009, approximately 500 new businesses (not on the tax rolls) were identify, utilizing new technologies and data sources. Most of the delinquent collections are one-time revenue; however, the identification of new businesses adds recurring revenue to the Township’s business tax base. Approximately $0.5 million of business tax revenue was collected through the Finance Department’s business tax audit program in 2009, of which approximately $0.2 million is considered recurring revenue for the future. However, the Township has a significant amount of tax audit assessments pending, which will likely be resolved in 2010 and beyond. The estimated 2009 business tax revenue is projected to be $9.5 million, which is an increase of +$2.3 million or +31% compared to 2008. The increase is entirely attributed to unexpected recent business performance of a small number of businesses in the Township. However, due to the economic recession, gross receipts are projected to be flat to declining throughout 2009, resulting in decreased business tax revenue in 2010. The business privilege and mercantile taxes are budgeted at $7.3 million in 2010 or -$2.1 million (-23%) lower than the 2009 estimate.

Local Service Tax (LST):

In 2007, State Act 7 amended the Emergency Municipal Services Tax (EMST) effective for 2008 as follows: renaming the EMST to the Local Services Tax (LST); implementing a mandatory low-income exemption from the tax for taxpayers whose total earned income and nets profits from all sources within the political subdivision are less than $12,000; requiring employers to stop withholding the LST if an employee provides an upfront exemption certificate, and requiring the LST to be assessed and collected in installments based on the employer’s payroll periods. In the 2009 Budget, the Township projected a significant reduction of LST revenue for 2008 as a result of the changes from Act 7. In fact, this revenue category decreased -$0.3 million or -15% in 2008 from the 2007 actual ($1.9 million). Based on current trend information, the 2009 estimate is $1.5 million or a decrease of -$80,000 (-5%) as compared to 2008. The proposed 2010 LST revenue budget is flat at $1.5 million.

Licenses and Permits:

Overall license and permit revenue in 2008 moderately underperformed the 2008 Budget as a result of a significant decline in swimming pool memberships for the Belmont and Ardmore Pool Complexes and building permits for residential and commercial construction projects. The economic recession was partially attributed to the revenue decline; however in 2008, the Township increased its pool membership fees to recover costs at both facilities, which were renovated and reconstructed in 2006/2007. This increase coupled with the fact that the novelty of the newly renovated pools had expired, had a negative impact on pool memberships. Building permit revenue in recent years ($1.7 million in 2008) has decreased as compared to 2007 with record high revenues of $2.2 million. In recent years, the Township has experienced a noticeable decline in the number of building permit applications, but is projecting moderate growth for 2010 and beyond. The 2009 estimate of $1.4 million and the 2010 Budget of $1.6 million include annual fee rate increases, but are expected to be significantly below the receipt levels experienced in 2007 and 2008.

Cable television franchise fees are charges (5%) levied on gross receipts of the Township’s two providers, Verizon and Comcast, offering cable television services to Township residents. The franchise fee revenue has experienced above average growth in recent years (+11% in 2006, +8% in 2007 and +11% in 2008) due to increased demand for services and higher cable pricing and is estimated to increase +0.8% in 2009 and +3% in 2010. The 2010 Budget ($1.1 million) represents 2.1% of the total GF Budget.

Overall, the 2010 Budget for Licenses and Permits is -$0.3 million or -7% lower than the 2009 Budget. For 2010, the Township is updating and increasing its various fees and rates, including building and plumbing permit fees and street opening permit fees. Total license and permits revenues are projected to decrease in 2009 by -$273,000 (-6.8%) as compared to the 2008 Actual. The fees and rates charged for licenses, permits and departmental services are generally intended to recover the Township’s costs for providing the underlying services. The chart below shows that building permits have declined in recent years - a trend which is expected to reverse and stabilize in 2010.

Township of Lower Merion Building Permits 2006 – 2008
Permit Type
2006
2007
Percent
Inc/Dec
2008
Percent
Inc/Dec
Building Permits
2,195
2,219
1.1%
1,902
-14.3%
Electrical Permits
1,055
1,066
1.0%
904
-15.2%
Alarm Permits
181
133
-26.5%
104
-21.8%
HVAC Permits
532
493
-7.3%
425
-13.8%
Plumbing Permits
810
784
-3.2%
702
-10.5%
Septic Service
477
431
-9.6%
424
-1.6%
Resale Certifications
1,058
1,077
1.8%
848
-213.8%
Zoning Hearing
64
69
7.8%
63
-8.7%
Total
6,372
6,272
-1.6%
5,372
-14.3%

Fines and Forfeits:

Fines and forfeits are revenues generated by enforcement and prosecution of Township ordinance and state statutes. The majority of this revenue category is represented by fines collected for Township parking violations. In addition, the Township receives a share of motor vehicle violations from three separate district magistrate offices located in the Township’s boundaries. In 2009, the Parking Service Department implemented a rate increase (from $15) to $17 for parking violations. For 2010, the budget ($1.3 million) includes a $3 rate increase for parking violations ($20 per violation), which is estimated to result in approximately +$133,000 of additional revenue. The estimated 2009 revenue for fines and forfeits is approximately $1.0 million, or flat as compared to 2008. During the economic recession, the Township experienced a decline in the utilization of its public parking lots, which has resulted in a lower amount of parking violations and a decline in parking meter revenue. The 2010 projections are more optimistic and anticipate moderate growth in parking related revenue.

Departmental Earnings:

Departmental earnings are primarily represented by four major revenues: parking; zoning and subdivision; police services; and, recreation fees. For 2010, the budget includes moderate fee rate increases for recreation program fees and zoning and subdivision fees. However, revenue is estimated to decrease moderately for police services (-$7,000) and parking meters (-$26,000) compared to the 2009 Budget. The departmental earnings estimated 2009 revenue is approximately $2.2 million, or flat compared to 2008 actual. The 2010 Budget is projected to remain unchanged from the 2009 level.

Other Revenue:

Payment-in-lieu-of-taxes is a revenue source collected and distributed by the State as a form of real estate tax levied upon utility properties. It is distributed by the State based upon the relative tax collections of each municipality. The 2009 estimated actual is $55,300, a +10% increase as compared to the 2008 actual.

In 2007, the Township earned $1.2 million of GF investment income, which represented 2.4% of the total GF revenue, which was followed by a significant decrease ($-500,000) in 2008 due to interest rate declines. Since October 2008, the Federal Reserve has decreased the Federal Funds rate a total of 75 basis points (from 1%) to 0.25%. For 2009, investment income is estimated lower than the 2009 Budget by approximately -$0.3 million (-54%) due to low interest rates. Investment income is estimated to finish 2009 at $274,000 or approximately -$366,000 (-57%) lower than the 2008 actual. The Township anticipates short-term interest rates will remain near the current levels in 2010, which would result in 2010 total investment income of $300,000 or +$26,000 (+9.5%) higher than the 2009 estimated actual.

Fed Fund Rates

The 2010 Budget for reimbursed expense is projected to increase +$116,000 (+63%) compared the 2009 Budget. This is primarily attributed to the purchase of cable television studio equipment, which is reimbursed by funds received from Comcast designated for this specific purpose. This revenue category also includes an annual voluntary contribution (approximately $100,000) from the Foundation for Community Services.

Highway Aid, the Township’s allocation of the State gasoline tax assessed by the Commonwealth of Pennsylvania, is projected to decrease in 2010 by approximately -$46,000 (-3.8%). This decrease is due to reduced State Highway Aid to municipalities resulting from the economic recession and lower consumption in 2009.

Transfers from the Solid Waste and Sanitary Sewer Funds to the General Fund are both increasing by a total of +$50,000 (+4%) in the 2010 Budget. These transfers cover the indirect costs for administrative services provided by GF activities. The 2010 Budget is a total of $1.3 million.

Summary:

In 2009, the GF revenue is estimated to exceed budget by approximately $0.4 million (+0.7%). However, without the excellent performance in business tax revenue (+$3.1 million) helping to offset the declines (compared to the 2009 Budget) in real estate deed transfer taxes (-$1.6 million), building permit fees (-$0.5 million), investment income (-$0.3 million), real estate taxes (-$0.2 million) ordinance violations ($-0.1 million) and plumbing permit fees (-$0.1 million), the Township’s GF revenues would have significantly underperformed the 2009 Budget. With the recommended new RET increase of $1.0 million for 2010 and stable business tax collections (offset by negative impacts in real estate deed transfer taxes, investment income and building permit revenue), the total 2010 GF Revenue is projected at $50.5 million, a decrease of approximately -$0.2 million (-0.3%) compared to the 2009 Budget. Overall, the economic recession has significantly impacted Township revenues that are sensitive to the economy, establishing a new lower GF revenue base for 2010. The Township will be challenged with slowed revenues in the near term and will carefully monitor those revenue drivers (real estate tax assessment base, real estate transfer tax and building permits) to determine the impact on 2010 and beyond.

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