City Hall is working to cut spending by $2 million by the end of the year, Mayor Danene Sorace told City Council this week.
The cuts are part of the city’s efforts to avoid drawing on its reserves. The 2023 budget that City Council passed in December included $2 million in projected reserve spending and $6 million in federal American Rescue Plan Act “revenue replacement” funds.
Every department has been given a targeted reduction amount in order to hit the overall goal, Sorace said. The $2 million is equal to about 2.8% of the budget’s General Fund, which totals $71.87 million.
As the mayor noted, it has been fairly common for the city to initially pass a budget that calls for spending a portion of its reserves, then avoid doing so.
Budget adjustments can occur on both sides of the ledger: In revenues that come in higher than projections, or in spending that’s lower.
On the revenue side, the city now expects earned income tax revenues to be $350,000 above the $8.425 million forecast in the budget, and building permit revenues to be up by $110,000.
On the expense side, the city has a number of unfilled vacancies, which are keeping personnel costs below projections.
At least one major challenge looms, however: Higher than expected medical costs.
The city self-funds its medical insurance. For 2023, it had projected an increase of just $36,000, or 0.2%, over 2022. It looks like the actual increase will be more on the order of 7% or 8%, Mayor Sorace said, which works out to $1.1 million to $1.2 million.
Those estimates are preliminary, and the city will learn more over the next two months, Sorace told One United Lancaster afterward. Despite the challenges, the city’s goal is to finish the year without utilizing reserve funding and it is on track to do so, she said.
Looking ahead to 2024, the administration is forecasting what Sorace termed “basically a completely flat budget,” with no increases in discretionary spending.
That’s driven in part by the need to provide for mandatory line items — fixed costs over which the city has no control.
That category includes payments on existing debt; pension obligations; insurance; and retiree medical benefits. Fixed costs amount to $20.4 million, or 28% of total general fund spending.
In past years, the city has been able to reduce its debt payments through refinancing. With today’s higher interest rates, that’s no longer an option, Sorace said.
Since the pandemic, the city has been able to use ARPA to eke out its revenues. After 2024, that option will go away.
Lancaster’s structural deficit — the gap between the cost of the services it’s obligated to provide and the revenue tools it has to cover them — was the principal reason Sorace called for the formation of a Home Rule Study Commission.
Last week, the commission heard a presentation on the city’s finances from the Pennsylvania Economy League. It was a thorough summary, the mayor said, and encapsulated the concerns she has been raising for the past several years.
The 2023 budget included an 8% hike in property tax rates to 12.64 mills and increases in water, sewer, trash and stormwater fees. All told, the annual increase amounts to about $295 for the average homeowner.
Sorace’s August budget update is something of a break with precedent. In past years, public budget discussions between City Council and the administration have started much later in the year, around the time of the formal introduction of the upcoming year’s budget in November.
“I think it’s important that we begin hearing about this now and setting the stage for what’s to come,” Council President Amanda Bakay said.