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Home Rule Study Commission hears deficit projections, financial case for tax changes

In this image from online video, PFM’s Gordon Mann, at podium, presents financial projections to the Lancaster Home Rule Study Commission on Thursday, May 24, 2024. (Source: City of Lancaster)

Lancaster city is looking at a $10 million budget deficit in 2025, and without home rule, it will have just two tools to bridge it, a consultant told the Home Rule Study Commission Thursday evening.

While the likely outcome would be a mix of both, at the extremes the choices would be draconian budget cuts or steep increases in property taxes, Gordon Mann told the commission.

Home rule, however, would give City Hall, a third, potentially more equitable tool, Mann said, terming it “the third side of the triangle”: The ability to raise the earned income tax rate, or EIT.

Mann is managing director of PFM, short for Public Financial Management, a financial planning and consulting firm for public entities and nonprofits. PFM has been working for City Hall for several years, analyzing government operations and making financial projections.

His presentation Thursday (PDF) detailed the core case for home rule that Mayor Danene Sorace has been making since Day 1: That the city faces a structural deficit; and that a higher EIT, authorized under home rule, is its best available option to bring revenues and expenses in line.

At present, the EIT is capped by state law at 1.1%, with 0.6% going to the city and 0.5% to the School District of Lancaster. The Home Rule Study Commission is in the process of drafting a home rule charter that would allow the cap to be lifted. If the charter goes to city voters in November and they approve it, the 2025 budget could incorporate a higher rate.

Shifting some of Lancaster’s tax burden to the EIT, proponents say, better align it with residents’ ability to pay. It would help seniors — Social Security benefits aren’t subject to it — and the need for rate increases would be less, because incomes, and hence EIT revenues, tend to grow over time.

PFM’s budget projections for Lancaster. Click to enlarge. (Source: PFM)

Business as usual

To illustrate what’s at stake, PFM provided yearly budget projections through 2029 based on “business as usual” — that is, the city makes no changes to its tax rates or spending patterns. That’s unrealistic, but it useful to see what would happen absent any corrective action, Mann said.

The leadoff $10 million shortfall that’s forecast for 2025 stems from several factors. First, the city no longer has $6 million in federal American Rescue Act Plan funds for “revenue replacement,” as it did this year. Second, it anticipates a 2% rise in labor costs, or a little over $1.2 million.

Lancaster’s 2024-29 budget projections, presented to City Council late last year. Note the 2025 deficit projection, circled in red. Click to enlarge. (Source: City of Lancaster)

That yields a little over $7.2 million, which was the 2025 deficit projection presented to City Council during budget discussions at the end of last year. PFM’s estimate is higher because it says Lancaster has been under-budgeting for its health costs. Therefore, the consultant is including an extra $2.7 million a year in expenditures for 2025 and thereafter.

In an email to One United Lancaster, Mann said the $2.7 million only reflects underbudgeting in the General Fund, not the city’s enterprise funds (water, sewer, stormwater and trash), which account for about 28% of the city’s healthcare budget. There may be shortfalls there, too, but they would be on a much smaller scale, he said.

How do you close a $10 million deficit? Doing it through a real estate tax hike would necessitate a 30% increase (from 12.64 mills to 16.50 mills), raising the median homeowner’s taxes by $692. Doing it through personnel cuts would necessitate 87 layoffs, equal to 23% of the positions supported in the General Fund budget. Again, those are unrealistic extremes, Mann said, but they’re illustrative.

Offsetting the deficits of subsequent years would be less dramatic but still significant, PMF calculated: It would require annual property tax increases of 3.9% to 4.7%; or additional annual layoffs of nine to 14 people.

Closing Lancaster’s projected deficits with property tax hikes (top) or staff cuts (bottom). Click to enlarge. (Source: PFM)

What about splitting the difference, commission member Carl Feldman asked — say, a 15% tax hike and 40-some layoffs?

If home rule isn’t enacted, that may not be a speculative question. The city is currently preparing two budgets, Mayor Danene Sorace said: One if it has the option to raise the EIT, and one it does not.

Essentially, the city would have to pick and choose among its core services, the mayor told Feldman. For some functions, its options are limited: State law mandates the provision of police and fire services and a planning department; and the city needs its accounting and treasury departments to function at all.

Hence, cuts would likely have to come in areas such as streets and parks maintenance, and in the Department of Neighborhood Engagement. It would decimate the city’s ability to secure grants, the mayor said, such as those funding the lead abatement program and the Vision Zero safe-streets initiative.

That’s not what city residents want, Sorace said: Even at current funding levels, “there are more demands of us than we can meet.”


How would a higher EIT change the equation? As with property taxes and layoffs, it’s unrealistic to say the city would rely on it entirely, Mann said, but if it did, the EIT would roughly double in 2025, from 0.6% to 1.22%.

For the average household, that would mean an additional $381, significantly less than the $692 increase it would pay if the city made up the deficit from real estate taxes. That’s because the EIT has a broader base of households to which it applies Mann said; and going forward, the need for rate increases would be minimal, less than a percentage point a year.

Making up Lancaster’s projected deficits through property taxes vs. through the earned income tax. Click to enlarge. (Source: PFM)

Commission member Darlene Byrd asked if the home rule charter could mandate caps barring future budgets from raising real estate taxes and the EIT together. It could, but it wouldn’t be advisable, Mann and Pennsylvania Economy League consultant Fred Reddig said: The whole point is to have flexibility, which a cap would limit.

Byrd and fellow commission member Tony Dastra were skeptical, both indicating they are highly uneasy about increasing the city’s capability to tax and spend. Referencing a Spanish proverb (“todos en la cama o todos en el suelo“) about the haves and the have-nots, Dastra said many Lancaster residents are have-nots and don’t believe government is working for them. If that’s how they feel, why would they favor a charter granting it more taxing authority?

Byrd has repeatedly contended the city isn’t trying hard enough to trim its costs. On Thursday, she called for it to reexamine the amount of revenue it’s foregoing because of LERTA, a program that allows property taxes on new development to be phased in gradually over a decade, rather than all at once.

Sorace said she’s fully aware of the burden that taxes and fees place on lower-income households. The EIT change is being sought not to expand programs, but to keep core services from going away, she said.

She cautioned the commission to be mindful about the individual livelihoods who are at stake in discussions of large-scale layoffs.

“We’re talking about people’s jobs,” she said. “… These are real people.”

“Our community’s real, too,” Byrd said, and it includes senior citizens on fixed incomes who struggle to pay taxes.

“There’s a balance that we’ve got to look at,” she said.