Patrick Hopkins is a homeowner in Lancaster's College Park neighborhood. As Business Administrator for the city, Patrick knows a thing or two about Lancaster's finances. He graciously accepted our invitation to share what he knows in a guest blog post.
Here's what we know: The City of Lancaster is among the most fiscally healthy cities in Pennsylvania. How do we know this? The best, and most objective, source for comparing the relative financial health of a city is to look at its bond rating. Lancaster City has the highest bond rating among the state's most populous cities including Allentown, Altoona, Bethlehem, Easton, Erie, Harrisburg, Lebanon, Philadelphia, Pittsburgh, Reading, Scranton, York...well, you get the point.
In 2010, Moody's Investor Service upgraded Lancaster's bond rating from A3 to A1 and describes A1 rated bonds as "upper-medium grade and low credit risk." Moody's provides research for municipal bond investors by reviewing and reporting on a city's finances and financial management practices. The A1 bond rating from Moody's is a reflection of the City's financial health and of Mayor Rick Gray's strong fiscal track record through the most challenging economic times since the Great Depression.
A city's bond rating is like your own credit score – the higher the score the lower the interest rate you get when you borrow money. Cities borrow money by issuing municipal bonds to fund improvements that enhance the safety and quality of life of their residents and improve the ability of businesses to thrive and provide good jobs to those residents. These improvements – I'll get to some specifics later – typically last for decades so it only makes sense that those who get the benefit of the improvements should pay for them over time.
Some recent attention has been paid to Lancaster City's overall level of debt compared to say, York City, as though all cities are the same. Comparisons between Lancaster and York provide a perfect example of why simply looking at total debt while ignoring other factors can lead one to a misleading conclusion. Fifty-five percent of Lancaster's debt is related to the City-owned water system which serves a population of nearly 140,000, or almost two and a half times the City's population alone. A private company owns York's water system and as a result, York has less debt than Lancaster does. However, York has a bond rating five grades below Lancaster's and its bonds are considered "non-investment grade". Which city would you say is in better financial shape? (Hint: It's not the one with the least debt.)
Lancaster City's debt is best compared to your mortgage. You borrow money from a bank to purchase your home, a large investment you make knowing that the money you borrowed will need to be paid back over time. But while you may have significant debt in the form of your mortgage, you also have a major asset in the value of your house. Not to mention the fact that you also get all of the benefits of living in your home – getting lots of value from your investment – while you pay back your mortgage.
It doesn't take a financial mastermind to know that a very basic measure of fiscal health is whether or not you have more assets than debt. Lancaster City's assets total more than $280 million or about $60 million more than its outstanding debt. Unlike in some other cities, the Gray Administration hasn't used bond funds to cover regular operating expenses like salaries or building maintenance. Mayor Gray has also strongly opposed risky financial deals like the interest rate "bond swaps" used during the previous administration in 2004. One of these swaps ended up costing City taxpayers nearly $4 million after the economy imploded in 2008. The moral of that story is that if you can't easily explain how a bond swap works (and trust me, they can't be easily explained), don't do one.
Instead, the Gray Administration has issued bonds to invest in infrastructure improvements including renovations to parks throughout the City - Musser, Brandon, Sixth Ward, Rodney, Crystal and Buchanan - and to the venerable Central Market. Bond funds have also been used for less obvious, but still very necessary upgrades to sewer system facilities and for much needed public safety equipment like a new ladder truck for the Fire Bureau. And that water system I mentioned earlier? You guessed it. In 2010, the City opened two state-of-the-art membrane filtration water plants that will provide safe and affordable drinking water to City residents and our neighbors in the surrounding suburbs for decades to come. These plants were built with funds from City bonds issued in 2007.
So the City has all of these assets, but it still has to pay that debt back, right? Yes indeed, when you borrow money you have to pay it back! However, it's important to note that more than seventy-five percent of the City's total debt is related to the water and sewer systems and is paid for by customers of these systems. As I noted earlier, a large number of these customers are suburban residents whose water and, in some cases, sewer services are provided by the City. The City's water and sewer customers, by the way, include tax-exempt organizations that don't pay taxes, but do pay for water and sewer services. So it's not just City taxpayers who pay back the money borrowed to make all of these investments. In fact, most of the City's debt is NOT paid back through the taxes you and I pay as City residents.
As a percentage of total expenses, City taxpayer supported debt payments have actually fallen during the Gray Administration. From 1998 through 2005, the City's General Fund debt payments were, on average, 9.1% of total expenses. From 2006 through 2013, debt payments have averaged only 6.5% of total expenses. In addition to its relatively low annual debt payments, Lancaster has the added advantage of a healthy budget reserve. During extraordinary economic times, the Gray Administration produced back-to-back budget surpluses in 2011 and 2012, building reserves up to nearly one and a half times the minimum level recommended by the Government Finance Officers Association.
Admittedly, this municipal finance stuff isn't exactly captivating subject matter. In fact, congratulations are due if you've read this far. But the fact is that a fiscally healthy Lancaster City is good for all of us; homeowners, taxpayers, businesses and visitors. Lancaster City living is better because a financially sound City can look forward to continued investments that improve the quality of life for City residents and maintain the level of services that residents expect and deserve.