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City refinancing of land purchase could free up ARPA for next year’s budget

(Photo: Tim Stuhldreher)

Lancaster will have the capacity to extend “revenue replacement” using federal pandemic dollars past 2024, City Council learned at its committee meeting Monday.

That’s because the city must refinance its purchase of 30 acres of land adjoining its Oyster Point reservoir in West Hempfield Township, for which it paid $5.9 million in American Rescue Plan Act funds.

In 2021, when the transaction took place, the U.S. Treasury had not finalized its ARPA guidance, and it appeared the purchase might be eligible, Director of Administrative Services Tina Campbell said. Under Treasury’s final guidance, however, it is disallowed.

Accordingly, the city plans to either issue bonds or secure a bank loan to cover the purchase.

Excluding the Oyster Point purchase, the city has allocated $36.1 million of its $39.5 million ARPA award, which implies that around $3.4 million will become available for reallocation once the refinancing takes place.

“Revenue replacement” refers to using ARPA to cover the city’s routine ongoing expenses. The 2024 budget uses $6 million from ARPA, or 8%, to bring revenues up to the level of projected expenses.

This year was expected to be the fourth and final year for revenue replacement, because all available ARPA funds had been committed. As a result, the city was looking at an estimated $10 million budget deficit for 2025, according to consulting firm PFM: $6 million from the end of ARPA being available, $4 million from other factors, primarily projected healthcare and salary costs.

Council President Amanda Bakay said she’s open to hearing other ideas but is “strongly in favor” of using the funds freed up from the Oyster Point refinancing to help close the budget gap.

“We are rapidly approaching deadlines to designate all of our ARPA funds, and revenue replacement is a way that we can directly benefit residents,” she said. “… Given our financial position, I think this would be a prudent decision.”

ARPA funds must be “obligated” — that is, assigned to a specific purpose or use — by the end of this year. Municipalities have up to two years after that to spend them; the deadline is the end of 2026.

To date, Lancaster has spent $20.6 million of its ARPA allocation on revenue replacement, which has helped it to balance its annual budgets with just one property tax increase in the past five years. ARPA is a one-time cash infusion, however; so once it’s gone, it’s gone, while the recurring expenses it is covering remain.

Next year’s “fiscal cliff” is a major reason for the push to enact home rule. Officials say shifting some of the city’s tax burden to the earned income tax, which home rule would allow, is the most equitable available option to increase revenues and avoid catastrophic service cuts.

The availability of the Oyster Point funds, while welcome, does not change the fundamentals of Lancaster’s structural deficit or the importance of moving forward with home rule on schedule, Mayor Danene Sorace said: “Urgency remains.”

Bank loan or bond issue

The Oyster Point land purchase is one of two transactions that the city is planning to refinance. The other is a 2013 lease to build and operate a pump station on property owned by the High Cos. The refinancing will include the transfer of the pump station site to city ownership, Campbell said.

More than half the city’s water customers live outside city limits. Their rates are set through the state Public Utility Commission, or PUC. City Council sets the rates for city water customers as part of the annual budget process.

The city made the Oyster Point purchase proactively, recognizing that growth trends in its western suburbs will eventually lead to the need to expand its reservoir capacity, and that adding to an existing site will be less expensive than building a new reservoir from scratch elsewhere. That said, “nothing is imminent,” Public Works Director Stephen Campbell told One United Lancaster. For now, the property is being held as-is.

Including interest, the total amount being financed is $8.9 million, said Darryl Peck of Concord Public Finance: $6.5 million for Oyster Point and $2.4 million for the pump station.

The choice between a bank loan or bond issue will be made in the next few weeks based on interest rates and their effect on overall financing costs. City Council has been presented two draft ordinances, one for each option; it will be asked to pass the appropriate one once the decision is made.

Debt service will be paid out of water revenues. Currently, about $268,000 a year is going toward debt service on the pump station lease; that’s expected to drop to about $260,000, Peck said. The term will continue another 12 years.

As for Oyster Point, debt service will commence in 2026 and run about $530,000 a year. The term will run 20 years, through 2044.

Later this year, the city plans to apply to the PUC for a rate increase for its suburban customers. The Oyster Point land purchase and pump station refinancing are part of a much larger set of infrastructure projects for which the increase is being sought, Administrative Services Director Tina Campbell said.

It’s too early to say what the new rates might be, she said. The PUC may oblige the city to raise its in-city rates as a condition of increasing its suburban race, but in-city rates are currently higher, so the city doesn’t expect that to happen, she said.

(Editor’s Note: This article has been updated to correct the amount of the Oyster Point ARPA funds that would be available for reallocation.)