STRUCTURING HEALTHY COMMUNITIES

TAX REVENUE GENERATION AND

FISCAL HEALTH

Presentation to the Governmental Research AssociationAugust, 2007

LeeAnne ClaybergerKerry Moyer

STUDY OBJECTIVESSTUDY OBJECTIVES

• Detail the relative fiscal health of Pennsylvania’s municipalities

• Identify formidable threats to revenue generation (for instance, existing state legislation)

• Determine public attitudes toward local government and fiscal health

THE STUDYTHE STUDY

• Includes 2,551 municipalities

• Compares fiscal health with tax effort and tax capacity

• Looks at changes from 1970 to 2003

• Uses maps to tell the story

Fiscal Health MeasuresFiscal Health Measures

• EFFORT (two components)

Total Non-Real Estate Resident Tax Revenue

Aggregate Household Income

Total Real Estate Revenue STEB Market Value (Market Based Millage)

Fiscal Health MeasuresFiscal Health Measures

• CAPACITY

5% of STEB Market Value + Aggregate Household Income

Number of Households

SUMMARY OF STUDY SUMMARY OF STUDY FINDINGSFINDINGS

                            

                                                                   

                                     

Five Stages of Five Stages of Municipal Fiscal HealthMunicipal Fiscal Health

• Prosperity with low taxes• Increasing demand for services and gradually

rising tax rates and service fees• Taxes increase; reductions in non-core services• Tax revenues decrease; reductions in core

services• Loss of tax base, population, and increasing

fiscal distress

Current set of tools is Current set of tools is insufficient to reverse insufficient to reverse the current momentumthe current momentum

• Act 511 of 1965-menu of taxes, rates, caps

• Act 111 of 1968-strikes and binding arbitration

• Act 195 of 1970-right to organize/negotiate

• Act 205 of 1984-funding employee retirement obligations

• Act 47 of 1987-declaration of fiscal distress

Keep local municipal Keep local municipal identity but administer identity but administer regionallyregionally

• Fundamental mismatch between fluid economy and structured municipal boundaries

• Pennsylvanians like their local governments to remain local

• Research does not show a public outcry for consolidations and mergers of municipalities

MUNICIPAL FISCAL MUNICIPAL FISCAL HEALTH STATEWIDEHEALTH STATEWIDE

Five Stages of Fiscal Five Stages of Fiscal Health in 2003Health in 2003

Progression

Cities Boroughs 1st Class Township

s

2nd Class Township

s

Stage 1 0 0 27 399

Stage 2 15 99 26 259

Stage 3 1 213 1 512

Stage 4 1 366 29 256

Stage 5 39 228 8 29

Extremes on the Healthy/ Extremes on the Healthy/ Distressed Spectrum; Distressed Spectrum; Comparison with State Comparison with State AverageAverage

CharacteristicTop 10% Distresse

d

Top 10% Healthy

Above average income 4 of 254 245 of 254

Above average BA degrees

26 of 254 207 of 254

Above average poverty 202 of 254

9 of 254

Above average 65 year olds

192 of 254

75 of 254

Above average pop density

225 of 254

96 of 254

CORRIDORSCORRIDORS

Example of a Example of a CorridorCorridor

Corridor Example, Corridor Example, ContinuedContinued

Geographic CorridorsGeographic Corridors

Pennsylvania’s CitiesPennsylvania’s Cities

• Fiscally, PA’s most-distressed municipalities

• All 56 fall below, and most fall significantly below, the state average for tax effort/capacity

Pennsylvania’s Pennsylvania’s BoroughsBoroughs

• Most severe negative change seen for boroughs in Adams, Allegheny, Beaver, Berks, Cambria, Chester, Dauphin, Delaware, Erie, Lawrence, Lehigh, Perry, Somerset and Westmoreland Counties

Pennsylvania’s First Pennsylvania’s First Class TownshipsClass Townships

• 70 of 91 lost ground since 1970

• One township moved from below to above average

• 25 moved from above to below average

Pennsylvania’s Second Pennsylvania’s Second Class TownshipsClass Townships

• Group shows relative fiscal health with 948 (about 65%) above the state average

• Since 1970 more townships became healthier (57%) than less healthy (43%)

Municipal/County Municipal/County Clusters and Clusters and SubclustersSubclusters

The Nature of Clusters The Nature of Clusters and Subclustersand Subclusters

• Boroughs cluster within fiscally distressed regions, but not within fiscally healthy regions

• Many counties have subclusters with varied fiscal health

• Clusters may present better ways to functionally consolidate services than groupings of adjacent communities

REALITY VS. TAX REALITY VS. TAX POLICYPOLICY

Since 1970:• Significant population shifts (sprawl or

suburbanization)• Growth in households, not population• Continued reliance on property taxes

Demographic Changes Demographic Changes from 1970 to 2003from 1970 to 2003*Inflation Adjusted Dollars*Inflation Adjusted DollarsAverages per householdAverages per household

Index 1970* 2003 Difference

%

Population 11,800,766

12,365,455

564,689 5%

Households

3,692,191 4,761,900 1,067,739 29%

Income $46,632 $52,706 $6,074 13%

MarketValue

$61,263 $100,343 $39,080 64%

Real Est Tax

$458 $325 ($133) (29%)

NonRealEstTax

$450 $487 $37 8%

Compounding Factors, Compounding Factors, 20032003*Not including Philadelphia*Not including PhiladelphiaAverage per householdAverage per household

Cities* Boroughs

1st Class 2nd Class

Income $38,130

$46,298 $67,669 $60,112

STEB $54,334

$74,132 $132,398

$133,242

Rl Est Tax $535 $283 $421 $156

NonRlEstTx

$266 $209 $230 $250

Totals $801 $492 $651 $406

Problems identifiedProblems identified

• Overall, municipalities are increasingly fiscally distressed

• There is a growing use of earned income taxes and fees, but many communities still rely heavily on property taxes

• Revenue caps remain largely unchanged from the 1950s

• There is a general lack of flexibility in current legislation

• Communities need sufficient discretion in deciding how to tax themselves

PUBLIC PUBLIC UNDERSTANDING OF UNDERSTANDING OF FISCAL HEALTH AND FISCAL HEALTH AND LOCAL GOVERNMENTSLOCAL GOVERNMENTS

Representation and Representation and ResponsivenessResponsiveness

• Citizens equate local government to the local officials who run them

• Support of local government often stems from a fear of losing representation and local funds for local projects

• Local officials are “people like us”

Limited Knowledge of Limited Knowledge of Local GovernmentLocal Government

• Despite strong sentiment, citizens do not know a great deal about local governments, nor do they spend much time thinking about them

• Most citizens are not concerned about fiscal distress as this “happens in larger cities”

• Citizens in larger cities tended to underestimate their fiscal distress

Bigger is Not Bigger is Not Necessarily BetterNecessarily Better

• Local governments represent community norms in a manner that the state cannot

• Even if wasteful and expensive, those issues are on a smaller scale for local government

• Most citizens see local government as the primary form of government; state exists to serve local governments

State Government is State Government is Distant and Distant and UnresponsiveUnresponsive

“…these people (local government officials) are all visible to us and I think that there’s probably a sense that the farther government gets away from the people, the less responsive they are going to be.”

Some Support for Some Support for Functional Functional ConsolidationConsolidation

There was general support for functional consolidation when:Local governments get their fair shareServices are improvedMoney is savedDirected toward health care and pension

sharing, joint administration efforts, and regional police forces

RECOMMENDATION #1RECOMMENDATION #1

Allow communities to decide how and how much to tax locally minimum restrictionsmaximum constituent

input

RECOMMENDATION #2 RECOMMENDATION #2 Modernize and enhance Modernize and enhance existing tax revenue existing tax revenue optionsoptionsfor municipalitiesfor municipalities

• Occurs on the state level• Avoids “one-time fixes”• Evaluate outdated legislation and

change or replace as necessary• Remove restrictions in lieu of local

options

RECOMMENDATION #3 RECOMMENDATION #3 Place wide menu of Place wide menu of revenue generating revenue generating tools in communities tools in communities to avoid future fiscal to avoid future fiscal distressdistress

• Again, a subtle difference – “communities”, not municipalities

• Includes sources of revenue in addition to taxes (fees, licensing, debt management)

• Include counties, school districts, and local authorities

RECOMMENDATION #4 RECOMMENDATION #4 Promote shared Promote shared expertise for complex expertise for complex issues/servicesissues/services

• Volunteers especially need assistance• Provide incentives, if needed• Many municipalities cannot, on their

own, afford professional or technical assistance

RECOMMENDATION #5RECOMMENDATION #5Conduct further studyConduct further study

Define and standardize measures of fiscal health

Forecast future municipal fiscal healthAnalyze the expenditure and services side

of the fiscal equationCreate a baseline databasePay particular attention to the costs of

retirement systems, health care and tax collection (Part 2 will begin early fall)