Ability to Pay Presentation for the

IAFF Local 104Wilkes-Barre, PA

March 27, 2017

H. David Robison, PhD

1

Basis for Presentation

• As will be demonstrated below, City of Wilkes-Barre can afford to improve pay and benefits for its Firefighters. This opinion is based on:

1. The state of the US and regional economies,

2. Forecasts and trends for the US and regional economies,

3. The City’s own statements about the state of the City,

4. Statements from Standard & Poor’s about the City,

5. The City’s on-going economic development efforts,

6. The City’s financial position, and

7. The City’s compensation of other City employees.

2

The Ability to Pay

• Evaluating a municipality’s “ability to pay” for a multi-year award requires a multiyear forecast.

• However, the City budgets on a year-by-year basis.

• Thus, this panel will be dependent on information about trends and forecasts that are not specific to the City of Wilkes-Barre as it considers making a multiyear award.

• The City had PFM generate a five-year forecast, but as will be demonstrated, the PFM forecast is unreliable.

3

Outline

1. Context: Trends in National Economy (# 5)

2. Context: The State, Regional, and County Economies (# 22)

3. What the City Says about the City (# 35)

4. What Standard & Poor’s Says about City Finances (# 45)

5. Economic Development in the City (# 50)

6. The City’s Finances (# 63)

7. The City’s Proposals and Firefighter Standard of Living(# 79)

8. PFM’s Preliminary Report (# 88)

9. Final Summary (# 106)

4

Part 1: The National Economic Context

• As economists understand, the economy in a city depends on the economies of the nation, region, county, and city.

• Thus, any forecast for the City of Wilkes-Barre needs to be placed in the context of forecasts for the nation, state, and region which the City failed to do in its budget and PFM fails to do in its report.

• This section presents evidence on the state of the national economy and forecasts for the national economy going forward.

5

National Trends

• Before examining some forecasts, a quick look back seems appropriate to establish the base for the forecasts.

• The next slide and several future slides present tables comparing conditions in June 2010 and current conditions.

• These comparison tables and the other historical trends presented below clearly demonstrate that conditions have dramatically improved since 2010.

• 2010 is used as the comparison point because June of 2010 provided the last data available before the prior arbitration.

6

Changing Macro Conditions

Topic 2010 2016

US Unemployment Rate 9.4% (June 2010) 4.7% (Feb 2017)

Total Growth in Real GDP in prior 5 Years

4.0% (2005 Q2 to 2010 Q2)

10.6% (2011 Q4to 2016 Q4)

S&P 500 Index 1,083.36 (June 1, 2010) 2,267.83 (Jan 1, 2017)

Dow Jones Index 9,931.97 (June, 2010) 17,885.73 (Jan 1, 2017)

Consumer Confidence Index Value

52.9 (June 2010) 114.8 (Feb 2017)

7

National Employment Trend

• According to the Bureau of Labor Statistics, the US economy added 235,000 jobs (net increase) in February 2017 and has added an average above 204,000 jobs per month over the last 24 months.

• The national unemployment rate was 4.7% in February 2017.

• Average hourly earnings rose by 2.8% over the year ending February 2017.

Source: R-3

8

Monthly Net Job Gains: Jan. 2015 to 2017Seasonally Adjusted (R-3)

9

Cumulative Net Job Creation Jan 2012 to Feb 2017

Source: Bureau of Labor Statistics

10

Inflation-Adjusted Wages

• The CPI-U data has not been released for Feb 2017. But, prior year (off by 1 month) CPI-U rose by 2.0%.

• Thus, inflation-adjusted wages rose by 0.8% 2.8% (wage growth) - 2.0 (inflation) = 0.8

• Other than in recessions, average wages normally rise faster than prices.

• If average wages did not exceed price increases, the national standard of living in the US would decline.

11

12

U.S. Unemployment RateSource: US Bureau of Labor Statistics

Peak Unemployment rate was 10%

Prerecession Minimum was 4.4%

Feb 2017 rate was 4.7%

13

PA Unemployment RateSource: Bureau of Labor Statistics

Prerecession minimum was 4.3%

December 2016 rate was 5.4%

Recessionary Peak was 8.7%

Luzerne County’s Unemployment Rate

• The next graph presents Luzerne County’s unemployment rate.

• However, unlike the national and state unemployment rates, the County’s unemployment rate is not seasonally adjusted. Therefore, it has a seasonal pattern in addition to the general pattern.

• The seasonal pattern is easy to see by looking at January of every year. Almost every January has the highest unemployment rate for the year.

• If seasonally adjusted, the graph would look more like that of the state.

14

15

Luzerne County Unemployment RateNot Seasonally Adjusted

Looking Forward to 2016, 2017 and Beyond

• The oldest survey of economic forecasters in the United States is published by the Philadelphia Federal Reserve Bank and known as the Survey of Professional Forecasters (SPF).

• The Survey questions roughly 40 professional forecasters in academia, banks, brokerages, and forecasting/consulting firms.

• The Survey is widely cited in the press and academia.

• More information on the Survey is available at: https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/

16

Survey of Professional Forecasters Q1-2017

(Year over Year Growth)Variable 2017 2018 2019 2020Real GDP Growth 2.2% 2.4% 2.6% 2.1%Unemployment Rate 4.6% 4.5% 4.5% 4.6%10 Year Bond Yield 2.6% 3.0% 3.4% 3.6%

Employment Growth 1.5% 1.3%CPI Inflation 2.4% 2.3% 2.3%

Source: Survey of Professional Forecasters, Source: R-4

17

Wage Growth and Job Quality

• Mark Zandi, Chief Economist for Moody’s Analytics and a nationally recognized forecaster, states:

• “Wage growth is even stronger than indicated by the BLS wage data.” and

• “…year-over-year wage growth for individuals is just more than 4%.” (R-5)

• In a different report (R-6), Zandi highlights that the quality of jobs began rising steadily in 2012.

• Information on Northampton County job and wage growth will be offered later in this presentation.

18

Job Quality (Continued)

• Many news reports have inaccurately reported that the jobs added in the recovery from the Great Recession have been low-quality, low-wage jobs.

• A careful, detailed study comparing recessions and recoveries done at the Philadelphia Federal Reserve bank found, “… high-pay jobs were cut less sharply during the Great Recession and have been added at the same or a faster pace than low-pay jobs during the recovery.” (R-1) (A simplified explanation of the study’s method is given as the appendix to this presentation.)

19

National Income Growth

• The Census Bureau recently released its 2015 American Community Survey data, which generated a substantial amount of press because the data reveal that between 2014 and 2015:

• Median household income rose 5.2%,• The % of Americans living in poverty fell at the fastest rate

in decades, and• Hourly wages rose 2% after adjusting for inflation. (R-2)

• “The details of the bureau’s report revealed that the gains were both broad and deep. Notably, lower-income households saw the largest income gains in percentage terms.” (R-2)

20

Summary of National Conditions

• There is virtual unanimity among forecasters projecting solid national growth for 2017 and beyond.

• The forecasts suggest that employment levels continue to grow, the unemployment rate continues to fall, and wage growth rises.

• As the economy approaches what economists call “full employment,” job growth will slow and wage increases will rise.

• Inflation stays modest – but rises to just over 2%.

21

Part 2: Regional Trends and Forecasts

1. The Metropolitan Statistical Area

2. The County

22

The Metropolitan Statistical Area (MSA)

• Wilkes-Barre is part of the Scranton – Wilkes-Barre - Hazelton Metropolitan Statistical Area. (SWBH for short)

• MSA’s are designated by the US Office of Management and Budget. MSA’s typically consist of a core city with a large population and its surrounding region which may include several counties. The areas are typically marked by substantial social and economic interaction.

• The SWBH metro area consists of Lackawanna, Luzerne, and Wyoming counties.

23

Note of Clarification

• The data presented below comes from two primary sources: The Quarterly Census of Employment and Wages, and Local Area Unemployment Statistics.

• Local Area Unemployment Statistics (LAUS) looks at the employment situation of residents of each county/city – ignoring whether they work in the specified county/city or not. When citing this data, the emphasis will be the word resident.

• The Quarterly Census of Employment and Wages (QCEW) looks at jobs in the counties. It does not consider who holds the jobs – residents or non-residents. When citing this data, the emphasis will be on the word jobs.

24

Regional Conditions

Topic 2010 2016

MSA # Residents Employed

255,378 (June) 262,123 (Dec)

MSA # Residents Unemployed

27,249 (June) 15,292 (Dec)

MSA Resident Unemployment Rate

9.6% (June) 5.5%

# of Jobs Inside the MSA

246,281 (June) 252,260 (June)

Growth in # of Jobs prior Five Years inside the

MSA-3.3% (June 2005-10) 2.0% (June 2011-16)

25

Three Regional Forecasts

• PNC Financial Services, a division of PNC Bank, provides a forecast for Northeast PA.

• IHS Global Insight, a respected national forecasting firm, produced a forecast for growth in output by MSA for the Conference of Mayors.

• IHS also produced a forecast of income and wages by MSA.

26

Three Regional Forecasts

• The forecasts predict:

1. Growth in the number of jobs in the region of 0.8 to 1.0% per year (R-7, R-8),

2. Rising median household income in of 2.0% to 3.5% per year (R-8, R-9),

3. Additional industrial jobs due to the Marcellus Shale natural gas providing low-price energy. (R-8)

4. Output growth at 3.9% for both the short and longer run. (R-7)

27

The PNC Forecast States:

• “As local employers seek out top talent in their hiring efforts, average hourly wages should start to rise more consistently this year after sub-par performances in each of the past three years. A near-term equilibrium in the labor market should lay the foundation for wage gains to remain on a sustainable path over the next few years as well.”

28

Implications of the Forecasts

• These forecasts consistently suggest: • Economic growth will improve across the region,

• Additional jobs will boost income in the City,

• The growth will encourage people to move to the area, and

• Ultimately, property values will rise, which can boost revenue for the City.

• In addition, as seen below, Luzerne County is outperforming much of the region.

29

Comparison Across PA CountiesSource: Quarterly Census of Employment and Wages

% Growth in Employment

June 2010-2016

% Growth in Average Weekly

WageJune 2010-2016

Average Weekly Wage in $

For Q2 2016

Carbon 0.3% 19.2% $665.

Columbia 1.7% 13.1% $751

Lackawanna -0.1% 12.8% $759

Luzerne 5.3% 13.1% $768

Monroe -2.1% 5.5% $761

Schuylkill -0.7% 12.5% $737

Sullivan -1.9% 13.3% $638

Wyoming -2.0% 9.6% $832

State of PA 4.2% 14.4% $971

30

Luzerne County

• According to the QCEW data, Luzerne County experienced the fastest job growth (at 5.3%) over the six year period from June 2010 through June 2016 of the counties presented.

• Average weekly wage growth, while slower than some other counties and the state average, nonetheless grew faster than the CPI-U for Northeastern cities. (9.3% inflation)

• Thus, the average weekly wage in the County rose almost 0.63% per year faster than inflation over this period.

• Note that wages rose faster than prices for every county, as it is normal for average wage growth to exceed inflation.

31

Comparison of Residents EmployedSource: Local Area Unemployment Statistics

Labor Force Growth

June 2010 to June 2016

% Growth in Resident

EmploymentJune 2010 to

June 2016

Unemployment Rate Dec 2016(Preliminary)

Carbon 0.3% 5.6% 5.5%

Columbia -1.6% 2.6% 5.3%

Lackawanna 0.5% 4.0% 5.0%

Luzerne 0.1% 4.0% 5.9%

Monroe -0.2% 3.5% 5.8%

Schuylkill -3.7% 1.0% 5.7%

Sullivan 5.3% 6.7% 6.0%

Wyoming -0.2% 2.9% 5.4%

32

Resident Employment Status for Wilkes-Barre

Source: Local Area Employment Statistics

33

Date Labor Force Employment Unemployment Unemployment Rate2000 19,429 18,355 1,074 5.52001 19,314 18,156 1,158 6.02002 19,210 17,843 1,367 7.12003 19,168 17,808 1,360 7.12004 19,145 17,844 1,301 6.82005 19,198 17,999 1,199 6.22006 19,268 18,137 1,131 5.92007 19,302 18,258 1,044 5.42008 19,568 18,268 1,300 6.62009 19,503 17,646 1,857 9.52010 18,835 16,787 2,048 10.92011 18,907 16,815 2,092 11.12012 18,992 16,852 2,140 11.32013 18,896 16,886 2,010 10.62014 18,576 17,020 1,556 8.42015 18,458 17,147 1,311 7.1

Dec-16 18,394 17,157 1,237 6.7

Connecting the City and County

• For the period 2010 to 2016, the County had a compound annual growth in total wages (including increases in both the average wage and the number of employees) of 2.96% per year.

• For the same period, the City had Earned Income Tax (EIT) revenue rise at a compound annual rate of 2.97% per year.

• City residents (who pay the EIT tax) had income rise at essentially the same rate as all county workers.

34

Part 3: What the City Says about the City

35

From 2015 CAFR

“Mayor George and his Administration will also concentrate on development within the city’s neighborhoods and in the Downtown Wilkes-Barre business district. Mayor George also intends to finalize development projects inherited from the previous administration. The key to ensuring safety and encouraging economic development is the City’s collaboration with Federal, State, and Local governments as well as with local non-profits, colleges, leadership organizations, and residents’ associations. Mayor George’s ultimate objective is to provide safety and security to Wilkes-Barre, which will spur economic development within the City.” (page 14)

36

From 2015 CAFR

• “Mayor George knows that businesses within each neighborhood are essential to development. … [Applying for grants for transportation and housing] … All of these grant funds encourage and recognize the leveraging of diverse grant funds to upgrade transportation, enhance communities, improve safety, revitalize neighborhoods, and create jobs.” (page 15)

37

From the 2015 CAFR

• Development projects listed by the City include:• Coal Street Realignment Project• Sterling Lot• Public Square Renovation• Innovation Center• First National Bank Building Restoration• Downtown Hotel & Conference Center

• Each of these projects would contribute to future jobs and income in the City.

38

Mayor’s Year in Review (R-20)

• “In 2016, 31 new businesses approved by zoning in 2016 and the City and developers closed on property for a new Hotel and Convention Center at South Main & East Northampton.”

• “As promised, Mayor Tony George restored and improved city services in 2016, including the Mayor’s Help Line, City Hall for a Day, the Neighborhood Impact Team (NIT), White Goods Pickup and street sweeping.”

• “In 2016, 19 units of nuisance properties were demolished.”

39

Mayor’s Year in Review (R-20)

• “This year, the City was awarded $600,000 through the PA Multimodal Transportation program for the George Avenue Streetscape project, which will reinvigorate the Parsons Business District by replacing deteriorating sidewalks, crosswalks, pedestrian signage and improving ADA accessibility through curb cuts and ramps. Street lighting will be upgraded and new trees will be planted, as well.”

40

From the City’s Website

• “More recently, the City hosts 15,000 downtown employees, the 4th largest workforce in the Commonwealth of Pennsylvania, with major employers such as Geisinger Health Systems, Blue Cross Health, eBay and over 60 new businesses that have opened their doors in recent years. Through partnerships with both public and private organizations, the City of Wilkes-Barre has been a key player in many economic development projects that have shaped the future for Wilkes-Barre and the surrounding community.”

41

From the City’s Website

• “Downtown Wilkes-Barre is home to R/C Theatres Wilkes-Barre Movies 14 on the corner of Northampton and Main, which welcomes 10,000 people per week on average. Our Barnes & Noble serves as the bookstore for neighboring Wilkes University and King’s College, as well as a community retail store and cafe. The Downtown Streetlight and Streetscape Enhancement Project has brightened downtown Wilkes-Barre with over 300 streetlights installed. The $25 million Intermodal Transportation Center has added 752 parking spots to the downtown and centralized public transportation to South Main Street, making the businesses along Public Square more accessible to patrons.”

42

From the City’s Website

• “Wilkes-Barre has become revitalized into an 18-hour destination with a “Walk-To-Everything” lifestyle. The downtown offers a wide variety of dining and shopping options for residents and visitors. … Retail shops are easily accessible to downtown patrons including Boscov’s and Barnes & Noble along South Main Street. The vision of downtown living has become a reality as the strategic conversion of inactive bank buildings to luxury apartment units has added a lively, spectacular presence to our city. From the former Citizens Bank building being converted into the upscale apartment building known as “The Bank”; as well as renovations underway at the former Luzerne and Wyoming National Bank, attractive and marketable living units are becoming a permanent fixture downtown.”

43

From the City’s Website (3/14/2017)

• “To complement the downtown lifestyle citizens are becoming accustomed to, the city has introduced a variety of options to shop, dine, socialize and live. Investors recognize the potential for success in the City of Wilkes-Barre and private development occurring throughout the city. The city is strengthened by its quality educational programs. King’s College and Wilkes University are mainstays of academic achievement and benefactors of economic progress in the city. Over 5,000 college students are within walking distance to our downtown and the city’s administration has made great strides to connect these colleges with the greater community. King’s and Wilkes have helped create the “college town” atmosphere with state-of-the-art centers for dynamic learning and academic excellence.”

44

Part 4: What Standard & Poor’s Says About the City

• Standard & Poor’s Rating Services provides bond ratings for the City of Wilkes Barre.

• The current rating is A- / Stable for City’s general obligation (GO) bonds.

45

Standard & Poor’s Ratings

Rating S&P’s Description of the Rating

AA An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.

A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.

BBB An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

46

City Strengths in the S&P Report

• “Strong budgetary performance,”

• “Very strong budgetary flexibility, with an available fund balance in fiscal 2014 of 27% of operating expenditures.”

• “Adequate liquidity, with total government available cash at 13.5% of total government fund expenditures …”

• “Adequate management”

• “Strong institutional framework score.”

Source R-10

47

City Weaknesses in S&P Report

• “Weak economy, with projected per capita effective buying income at 69.9% and market value per capita of $27,578, that is gaining advantage from access to a broad and diverse metropolitan statistical area (MSA);”

• “Very weak debt and contingent liability position, with debt service carrying charges at 16% of expenditures, … but rapid amortization, with 74.1% of debt scheduled to be retired in 10 years”

• Source R-10 (emphasis added)

48

S&P Report also States

• “Officials report there are several economic development initiatives underway that could add value to the tax base and expand employment opportunities.”

• “The stable outlook reflects Standard & Poor's view of the city's strong budgetary performance supporting the very strong flexibility. As such, we do not expect to change the rating within the next two years.”

• Source R-10

49

Part 5: Economic Development In the City and Region

50

Economic Development In Wilkes-Barre

• File R-11 WB Development lists 29 articles on economic development projects in Wilkes-Barre.

• Some of the projects were in the list from the 2015 CAFR, while many were not on that list.

• Some of the articles cite specific amounts for construction spending, or jobs created, or number of housing units added. Unfortunately, the other articles lack such details.

51

Social Trends affect Economics

• The financial health of of cities depends on both social trends and economic activity.

• For example, the 1950’s social trend of moving to the suburbs started with rising incomes and affordable automobiles.

• One of the current social trends is that “millennials” are choosing to live in cities at a much higher rate than prior generations.

• Cities which can provide both jobs and housing are benefitting from this trend. And, both housing and job development are economic development issues.

52

PNC Bank Building

• $4.5 million dollar renovation

• PNC bank on first two floors with office space on floor three

• Floors 4 through 11 will each have 5 high-end apartments (residents pay the City EIT)

• The developer for this project has 40 units on the other side of the City in the Hampton Park East and West developments, so they know the market.

Source R-12

53

More on Millennials

• Asked about the PNC building project, Wico van Genderen (president of the Chamber of Commerce) said, “The developers are keen to the fact that millennials are attracted to Wilkes-Barre as a result of its transformation into a secure, walkable, vibrant city.” Source R-12

• “Between 2011 and 2016, a total of 92 new households of the 25-to-40 year old age group demographic have moved into downtown residences, according to [Larry] Newman, whose Diamond City Partnership tracks such data.” Source R-12

• According to Nicholas Dye, the developer for the Hampton Park developments, “Our tenants, the average household income is near $100,000 per year.” Source R-12

54

McCarthy Tire Service

• McCarthy Tire Service is putting a tire re-treading service in a renovated warehouse in Wilkes-Barre.

• Expected to create between 40 and 50 jobs at the site.

• The renovation plus equipment requires a $3.2 million investment. (R-11)

55

Guard Insurance

• Guard Insurance (a Berkshire Hathaway company) has been increasing its employment in Wilkes-Barre.

• In 2012, the company employed a total of 310 employees worldwide. Now it has 396 in Wilkes-Barre alone. (R-18)

• There have been several news reports of the firm seeking to buy a property in Wilkes-Barre to create a corporate headquarters. Mayor George predicted that Guard expanding could add 400 to 500 new jobs to Wilkes-Barre. (R-19)

• GUARD CEO Foguel stated, "We have been growing by over 25% a year with estimated 2016 premiums of $1 billion.” (R-18)

56

Hotel and Convention Center

• Sphere International LLC is building a 100-room hotel and convention center in the City. Hotels generate a mix of low-wage (housekeeping), mid-wage (maintenance), and higher-wage (management) jobs.

• The building will also include retail space, four floors of rental units, and two floors of condominiums. (R-11)

• The rental units and condos will add to the City’s updated housing stock.

57

Healthcare Jobs

• Wilkes-Barre hospital is in the process of a major addition. Naturally, the new space will require additional jobs.

• Geisinger Health system announced the intent to hire 2,000 clinical and other staff for its healthcare system. Some (unspecified number) will be in Wilkes-Barre.

• Commonwealth Health (owner of General Hospital) separately announced a plan to hire 160 nurses and support stall for its locations in the area (not all in the City).

58

Tech In Wilkes-Barre

• “Innovation Squared” is an effort to add to the technology base of Wilkes-Barre in First National Bank building, that received a $2 million state grant.

• The first “innovation center” led to startup Pepperjam, which announced its intention to keep its headquarters in the innovation center until at least 2021, plus the intention to hire another 125 employees in the City.

• Given Pepperjam’s use of the first space, the City and its partners are embarking on a second innovation center, called Innovation Squared. (R-11)

59

More Tech: LSEO.com

• LSEO, a Wilkes-Barre digital marketing firm, announced that it was merging with UM Technologies in November 2016.

• Despite the merger, LSEO announced it would remain headquartered in Wilkes-Barre.

• While there was no announcement of additional jobs in the City, UM Technologies’ CEO stated, “This is an area where tech jobs can be built. We expect more major announcements within the next 45-90 days. We are excited to prove the model that Northeast PA can be a tech hub for world class services.” (R-13)

60

Economic Development in the County

• The labor market in Wilkes-Barre strongly interacts with that of Luzerne County, so development in the County can provide additional job opportunities for City residents.

• Three recent county projects are:• NorthPoint Development has projects that will bring 1,500 to

2,000 jobs to Hanover Township. The first firm to lease space, Chewy.com, is expected to hire 600 employees.

• American Paper Bag Co is building a corporate headquarters and a manufacturing plant in Luzerne County.

• Look Trailers opened a manufacturing plant in Wright Township.

61

Development Impacts

• While some projects in the City are modest businesses, like a new restaurant, all businesses contribute to the City’s development.

• The new housing units are critical for attracting the millennial generation, many of whom prefer to live and work in the same neighborhood. And, residents pay the EIT.

• The projects in the City and the County all will contribute to the local labor market, creating upward pressure on wages, further raising EIT.

• Finally, the City also benefits because development tends to attract development, raising property values and adding still more jobs.

62

Part 6: Financial Information for the City

1. Net Assets / Net Position• Rose every year for last several years• Dropped by a lot in 2015 due to the GASB requirement to

include pension obligations

2. 2015 Results

63

Net Assets / Net PositionSources: CAFRs

64

Net Assets / Net Position

* 2015 Value excludes effects of GASB 68.

Net Assets / Net Position

• The primary difference between Net Assets and Net Position has to do with the financial statement treatment of financial derivatives.

• No derivative instruments were reported in the 2015 financial statements, thus it is reasonable to treat the two ideas as a single series.

• For 2015, the City implemented GASB 68 which brought the unrecognized pension liabilities into the financial statements. Because the City did not make the adjustments to prior years, that adjustment was removed for the year 2015 to provide a consistent series.

65

General Fund Balance

66

General Fund Balance

General Fund Balance

• Despite the drop in 2015, the General Fund balance grew at a 3.5% compound annual rate between 2010 and 2015.

• At the end of 2015, the Fund Balance was 24.6% of General Fund expenditures.

67

Key 2015 General Fund Revenue Results

• Tax revenues were $1.1 million (3.9%) higher than budgeted.

• Departmental earnings were $383,000 (6.1%) higher than budgeted.

• Total revenues were 4.1% above budget.

68

Key 2015 General Fund Expenditure Results

• Despite Public Safety expenditures coming in below budget, total expenditures were 7.4% above budget for the reasons presented below:

• There was an unbudgeted capital expenditure of $2.1 million.

• General governmental expenditures were $376,000 (7.2%) above budget.

• Highways, Streets, and Sanitation expenditures were $366,000 (7.4%) above budget.

• Health and Welfare expenditures were $98,000 (10%) above budget.

69

Departmental Expenditures over Time

• Below are two tables examining how departmental expenditures changed over time.

• It is important to note that the City includes (as it should) healthcare and pension expenditures in each departmental budget.

• Thus, the analysis below should be a full-cost apples to apples comparison of departments.

70

Changes in Departmental Expenses

71

Department 2010 Expend 2016 Expend % Change

General Govt. 6,105,100.72 6,595,467.63 8.03%

Police 9,644,350.20 11,996,450.85 24.39%

Fire 9,457,782.58 10,716,384.43 13.31%

Building Inspect 740,178.74 1,129,382.89 52.58%

Highway & Streets 4,558,300.17 6,007,982.65 31.80%

Health & Welfare 855,279.60 990,299.55 15.79%

Parks & Rec 1,118,671.10 865,618.26 -22.62%

Urban Redevelop 454,471.21 564,299.45 24.17%

Whole City Total 42,017,185.56 52,289,455.81 24.45%

Source: GF financial files provided by the City

Change in Dept. Expenses per Budgeted Employee

72

Department 2010 # of Employees Budgeted

2016 # ofEmployees Budgeted

% Change in Expenditure per

Employee

General Govt. 41 34 30.27%

Police 101 92 36.56%

Fire 79 79 13.31%

Building Inspect 11 9 86.49%

Highway & Streets 36 41 15.73%

Health & Welfare 13 11 15.73%

Parks & Rec 7 5 36.84%

Urban Redevelop 7 6 8.33%

Whole City Total 295 277 32.53%

Departmental Expenses

• The prior two slides demonstrate that the Fire Department has not been a primary driver of increased spending in the City of Wilkes-Barre.

• On a departmental total spending basis, Fire Department expenditures rose at a little more than half the rate of expenditures for the City as a whole.

• On a per employee basis, Fire Department expenditures rose only 40.9% as much as expenditures for the City as a whole.

73

Change in The Fire Department’s Net Cost

• As seen earlier, the increase in Fire Department expenditures between 2010 and 2016 was $1.25 million.

• However, there were increases in revenue to the City as well, including:• A SAFER grant worth roughly $900,000 in 2016• Increased EMS fees of $25,000 in 2016• Increased healthcare contribution of more than $95,000, if all

firefighters took the less expensive HMO rate.

• Thus, the NET increase in costs to the City for the Fire Department was approximately $230,000 (2.4%) across a six year period.

74

2017 Budgeted Pay Raises

Department Position(s) 2016 Budget 2017 Budget % Increase

City Clerk Directors/Supv 72,420.00 $74,593.00 3.00%

City Clerk General 55,407.00 $57,069.00 3.00%

City Administrator Directors/Supv 187,418.00 $193,041.00 3.00%

Human Resources Directors/Supv 134,930.00 $138,978.00 3.00%

Human Resources General 44,972.00 $46,321.00 3.00%

Info Technology Directors/Supv 84,559.00 $87,096.00 3.00%

Police Public Safety 3,609,018.50 $3,707,876.00 2.74%

Police General 121,054.00 $124,685.00 3.00%

Traffic & Parking General 85,782.00 $88,355.00 3.00%

Fire Public Safety 2,307,833.33 $2,316,586.50 0.38%

Planning & Zoning Directors/Supv 90,125.00 $92,829.00 3.00%

Planning & Zoning Prof Staff 69,132.00 $71,206.00 3.00%

75

2017 Budgeted Pay Raises

Department Position(s) 2016 Budget 2017 Budget % Increase

Planning & Zoning General 38,041.00 $39,182.00 3.00%

Health Prof Staff 68,959.00 $71,028.00 3.00%

Econ Development Directors/Supv 90,125.00 $92,829.00 3.00%

Econ Development General 51,523.00 $53,069.00 3.00%

DPW Admin Directors/Supv 38,616.80 $39,775.20 3.00%

DPW Admin General 31,989.75 $32,949.15 3.00%

Motors Garage Directors/Supv 67,561.00 $69,588.00 3.00%

Motors Garage General 138,481.20 $155,625.60 12.38%

Munic. Buildings Directors/Supv 69,010.00 $71,080.00 3.00%

Munic. Buildings Municipal 286,769.60 $295,422.40 3.02%

Solid Waste Directors/Supv 19,308.40 $19,887.60 3.00%

Solid Waste Municipal 132,870.40 $136,864.00 3.01%

76

2017 Budgeted Pay Raises

Department Position(s) 2016 Budget 2017 Budget % Increase

Engineering Prof Staff 145,699.00 170,670.00 17.14%

Engineering General 47,530.00 $48,956.00 3.00%

Wastewater General 38,041.00 $39,182.00 3.00%

Collection Systems Directors/Supv 72,204.00 $74,370.00 3.00%

Collection Systems Municipal 279,739.20 $288,121.60 3.00%

Highways Directors/Supv 72,257.00 $74,425.00 3.00%

Highways Municipal 719,222.40 $718,151.20 -0.15%

77

2017 Budgeted Pay Raises

• The City appears to believe that it has enough money to provide 3% raises to the majority of its employees, but not the Fire Department.

• In addition, the City voluntarily agreed to a 3% raise in 2018 for the police union. (R-21)

78

Part 7: Impact of City Proposals on Firefighter Standard of Living

• This section briefly examines the impact on the standard of living for the families of the Firefighters in this unit if the City’s proposals are accepted in their entirety.

• Standard of living refers to inflation-adjusted take-home compensation. Put another way, it is the ability of a firefighter to take care of their families by purchasing goods and services.

• Remember from the earlier forecasts that the rate of inflation is projected to be 2.4% in 2017, and 2.3% thereafter.

79

The City’s Proposals

• Pay raises of 0%, 1%, 2%, and 2% across 2017 through 2020,

• An increase in healthcare contribution from 8% to 20% of premium,

• Eliminating Act 120 pay,

• Reducing pension for current firefighters to the Third Class City Code, and

• Reducing life insurance benefits.

80

Standard of Living 2017

• This analysis will focus on a 15-year Firefighter A with a family (and family insurance) whose base pay was $61,089 in 2016.

• The City is asking this panel to lower this firefighter’s standard of living by 10.2% in 2017 if on the PPO and 8.8% if on the HMO, as is demonstrated in the next two slides.

• In addition, the firefighter would face a substantial reduction in the expected pension payment for a 30 year career.

• Finally, the firefighter would have less than half of the city-provided life insurance versus 2016.

81

Standard of Living Calculations: HMO

Category 2016 Value2017 with

2.4% Inflation2017 City’s Proposal

City’s – With Inflation

Base Wage 61,089 62,555 61,089 (1,466)

Longevity 1,833 1,877 1,833 (44)

Act 120 Pay 1,500 1,536 0 (1,536)

Health Contrib ($1,482) (1,518) (4,044) (2,526)

Clothing 575 589 575 (14)

Total 63,515 65,039 59,453 (5,586)

82

The loss divided by the starting point: (5,586) / 63,515 = -8.8%

Standard of Living Calculations: PPO

Category 2016 Value2017 with

2.4% Inflation2017 City’s Proposal

City’s – With Inflation

Base Wage 61,089 62,555 61,089 (1,466)

Longevity 1,833 1,877 1,833 (44)

Act 120 Pay 1,500 1,536 0 (1,536)

Health Contrib ($1,988) (2,036) (5,423) (3,387)

Clothing 575 589 575 (14)

Total 63,009 64,521 58,074 (6,447)

83

The loss divided by the starting point: (6,447) / 63,009 = -10.2%

Standard of Living in 2018, 2019, and 2020

• For 2018, the City’s offer of a 1% raise is 1.3% below expected inflation.

• For 2019 and 2020, the City’s offer of 2% raises falls 0.3% below inflation each year.

• Under the City’s proposals, the firefighter’s expected standard of living would be 10.7% to 12.1% lower in 2020 than it was in 2016.

• In essence, the City is asking this panel to take away roughly 10.7 to 12.1% of firefighters’ ability to take care of their families in a four-year contract.

84

By Comparison

• The City’s negotiated settlement with the FOP that provides for:• A 3% pay raise in 2017,• A 3% pay raise in 2018,• A continuation of the 0.0% contribution to pay for healthcare

if on the HMO,• A continuation of their pension which allows more than the

Third Class Code pension. (R-21)

• So, while the City may claim to believe that it cannot financially afford to pay the firefighters more, the voluntary agreement with the FOP suggests otherwise.

85

Remember the City’s Other Proposals

• Firefighters who worked for and planned on a particular pension benefit would lose access to that expected benefit.

• And, the City’s life insurance policy would pay the firefighter’s family $35,000 rather than ½ of the base salary plus longevity.

86

A Note on Health Care Contributions

• For 2016, the IAFF was budgeted for 67 of the 277 positions in the City’s budget.

• If each IAFF member was on the less expensive HMO (family) plan, total contributions in 2016 would have been $103,461.

• According to R-17, the City received a total of $197,880 in healthcare contributions from employees in 2016.

• While the IAFF represents less than ¼ of the City’s employees, it already makes something close to half of all healthcare contributions.

• Yet, the City is seeking an increase from 8% to 20% contribution, while allowing the Police officers on the HMO to make no contribution.

87

Part 8: PFM Draft Report

• The City had Public Financial Management (PFM) produce an Early Intervention Report.

• The PowerPoint slides from a December 6 draft were provided by the union.

• This draft, like every PFM report that I have ever reviewed, is devoid of forecasting techniques – instead picking growth rates without any reasonable / acceptable techniques being used, which is known as judgmental forecasting.

• As demonstrated below, PFM’s forecast growth rates are inconsistent with what is happening in the City, region, and country.

88

Forecasting By Assumption

• The Government Finance Officers Association (GFOA) is an organization of state and municipal finance officers.

• The organization has a set of best practices and publishes content on a variety of topics associated with municipal finance.

• In particular, the GFOA says, “Revenue projections should generally strive for accuracy by coming as close as possible to the actual outcome.” Source: R-14

• Accurate forecasts are developed by understanding what is happening in the community and using appropriate forecasting techniques (methods).

89

The GFOA on “Judgmental Forecasting”

• “Forecasting science generally recommends against pure judgmental forecasting for two main reasons.

• First, the process used to construct the forecast exists primarily in the forecaster’s head, which means the forecast is neither transparent nor easily replicated. Hence, the forecast is difficult to fully explain to others, and there would be variations among forecasters, leading to inconsistencies.

• Second, a wide body of literature suggests that judgmental forecasts are likely to be of dubious accuracy.”

Source: R-15

90

Earned Income Tax (EIT) Forecast

• PFM’s forecast for EIT is a classic example of failing to do actual forecasting and of “cherry-picking” information.

• PFM cites growth rates for EIT between 2010 and 2012 plus between 2013 and 2015.

• The report dismisses the 2013 growth as due to the change in how the EIT was collected, stating, “Like many other places, Wilkes-Barre’s receipts jumped when the new law was fully implemented in 2013.”

91

However,

• In both Bethlehem and Pittsburgh arbitration hearings, PFM claimed that Act 32 lowered revenue for cities.

• In Bethlehem, Vijay Kapoor testified, “Finally, Act 32, which now requires EIT to be collected at the county level has impacted the collection rate —generally negatively for cities.” Slide 13 of R-21

• PFM really should decide whether it believes that Act 32 generally raised or generally lowered revenues for cities, Better yet, PFM should analyze the data to determine if and how Act 32 affected each City.

• Implementation of PA Act 32 was January 1 of 2012 so, even with a one quarter delay in the money flow, three quarters of the revenue change should have occurred in 2012, not 2013 as PFM’s report claims.

92

Other EIT Issues

1. PFM provides no examination of what is happening in the City in terms of economic development which will raise population, wages, and income.

2. PFM fails to provide sources for the figures it cites.

3. PFM starts with the 2017 Budget for EIT. However, the 2017 budget predicted less EIT revenue for 2017 than the City received in 2016, which makes no sense in light of the on-going development. (see R-17)

4. PFM presents no forecasting method.

93

What if PFM was Correct about 2013?

• Assume for a moment that PFM was correct in the claim that 2013 was when the extra Act 32 revenue was received.

• PFM used 2013 as the basis for the 2013-2015 growth rate.

• Under this particular circumstance, it is inappropriate to use 2013 as the basis for computing subsequent growth, because it has an arbitrarily high value. The high values for 2013 lowers subsequent growth rates.

• So, even if PFM is correct about 2013 (and I do not think that they are), they are unambiguously wrong about the growth rate.

94

One more EIT Issue

• Consider the evidence presented above:

1. Inflation is projected to be above 2% per year,

2. Average wages have been rising faster than inflation,

3. Total wage increases for Wilkes-Barre residents have fared as well as other county residents,

4. The number of City residents employed has been rising,

5. The City has economic development projects that are adding upscale housing units and providing new job opportunities, and

6. Job growth in the County is providing additional job options for City residents,

95

One more EIT Issue

• EIT revenue can be found by the following formula:EIT = #Residents employed x Average Wages x Tax Rate

• PFM’s forecast for EIT revenue is 0.5% per year growth.

• However, wages are rising by more than 2.8% per year, the number of residents is rising, and the tax rate is constant.

• The absolute minimum forecast under these conditions has to be 3% growth, and 3.5% is more realistic going forward.

• 3.0% growth adds more than $6.1 million to revenue across the forecast.

96

Real Estate Tax

• For Real Estate Tax revenue, PFM acknowledges that revenue grew at a compound annual growth rate of 0.4%, but assumes that all growth will end in order to forecast 0.0% growth.

• The on-going economic development raises property values, which should ultimately raise additional real estate tax revenue.

• In addition, the City has been selling property for development, which returns the property to the tax rolls. And, the improvements by developers raise the value.

• PFM also fails to mention the collection rate and techniques for improving real estate tax collection.

97

Other Taxes

• PFM dismisses all other taxes, essentially without mention.

• The Mercantile tax should rise as retail space and activity increase in the City, and should rise with incomes - which rise faster than the rate of inflation.

• The Local Services Tax should reflect the increase in the number of jobs in the City as development occurs. If City residents take the jobs, the City gets both the LST and EIT.

• The Real Estate Transfer Tax rose at a 10.5% rate between 2010 and 2015, but is unmentioned in the PFM report.

98

Other Taxes

• Because PFM accepted the City’s budget forecast for 2017, it does not have to explain the forecast for a 10.1% drop in Other Tax Revenue compared to the estimated actual for 2016 found in R-17.

• PFM’s forecast does not have Other Tax Revenue rise to the level of 2016’s estimated actual value in the entire forecast, yet Other Tax Revenue has generally been on an upward trend since 2010. (only 1 yearly decrease)

99

All Other Revenues

• Other revenues (Licenses & Permits, Intergovernmental, Charges for Services, Fines, Investment Earnings, and Other) accounted for 30% of City revenues (properly defined) in 2015.

• In the PFM report, only three items (EMS, Sewer, and Refuse) that account for 9% of General Fund revenue are presented. Thus, another 21% of revenue is not even considered in the presentation.

• For EMS revenue, PFM cites the most recent 5-year average growth at 6.1%, but projects 4.0%. No explanation is provided for selecting the lower growth rate.

• Again, no actual forecasting methods were used.

100

PFM “Forecast” for Healthcare Costs

• Note that PFM’s forecasting effort on the revenue side appears to have been to look at some historical revenue growth and then pick a growth rate based on some historical information.

• When it comes to costs, PFM does not follow that process.

• For healthcare expenditures, PFM cites the compound annual growth rate of 1.9% from 2010 to 2015.

• Then, with no historical information to support its choice, PFM selects 8.5% per year growth.

101

PFM “Forecast” for Healthcare Costs

• All forecasters should always be considering how their forecasts fit with other forecasts for similar items.

• R-16 provides a national forecast for health insurance costs broken out several ways completed by the Centers for Medicare and Medicaid Services (www.cms.gov).

• The forecast is for private health insurance costs to rise 5.1 to 5.6% per year through 2019, and a little above 5% per year starting in 2020.

• Other forecasts have similar results as the CMS forecast. See healthandeconomy.org for example.

102

Other Costs

• PFM predicts that expenditures on “Materials and Supplies” will rise by 20.7% for 2017 and another 16.4% for 2018. That is a two year increase totaling nearly $1.2 million.

• In budgets from 2010 through 2017, the increase in the “supplies” line has been about 2.4% per year, nowhere near the 20.7% and 16.4% PFM predicts.

• No explanation for the increases is given. Again, no forecasting method was presented.

103

Costs vs. Revenues

• PFM’s “forecasts” for cost factors like Workers’ Compensation, Contractual Services, and Materials & Supplies demonstrate that PFM understands that inflation will affect costs.

• However, PFM did not demonstrate the same understanding on the revenue side, when several revenue sources will move with inflation – or move faster than inflation.

104

Summary Analysis of PFM’s “Forecast”

• By assuming little revenue growth and substantial cost growth, PFM assumed its conclusion – that budget deficits would occur.

• Assuming your conclusion is not forecasting.

• PFM’s revenue forecast assumes substantial job losses, falling wages, or both, which makes no sense in the context of the economic development of the City and County.

• In my opinion (as someone who worked as a professional forecaster and wrote a dissertation on forecasting methods), PFM’s complete lack of study of the city and failure to use reasonable forecasting methods render their report meaningless.

105

Part 8: Final Summary

• The national, county, and City economies have improved substantially since the last IAFF arbitration case.

• The City’s finances (Net Position and Net Assets) have been on upward trends.

• As seen on the City’s web site and in Part 5 on Economic Development, the City’s development efforts are paying off with new firms, new housing, and new residents. These efforts should produce increased tax and fee revenues to the City over the next several years as development spurs additional development.

106

Final Summary

• The City budgeted for 3% raises for most employees in 2017, other than the Fire Department, but proposes a 0% raise for firefighters.

• If the City’s proposal is accepted in full, Firefighters will suffer 8.8% to 10.2% reduction in the standard of living for firefighters in 2017 and a 10.7% to 12.1% reduction across the contract.

• The PFM report, which the City will likely emphasize, is not worth this panel’s time as it is not consistent with large amounts of readily-available evidence. And, it contains no real forecasts based on any generally-accepted forecasting methods.

107

Therefore:

It is my opinion that:

The City of Wilkes-Barre has the ability to meet the IAFF’s reasonable wage and benefit requests.

108

THANK YOU FOR YOUR ATTENTION

109

Appendix: High-Wage vs. Low-Wage Industries

• The FED study compares jobs lost and gained in recessions and recoveries based on national wage data by industry.

• The study also recognizes that some industries shift from high to low wages, and vice-versa, over time. So, the authors treat each recession and recovery separately using what were high and low wage industries at the time of each recession.

• The high-wage versus low-wage distinction is based on the average hourly earnings for each industry nationwide.

• In 2013, the average annual hourly earnings ranged from a low of $11.76 per hour in the Leisure and Hospitality industry (low-wage) to a high of $27.61 in Information Services (high-wage).

110

Appendix Continued

• Having defined what were high-wage and low-wage jobs for each recession, the essence of the study is comparing what types of jobs were lost in each recession and what types of jobs were gained coming out of the recessions.

• For example, assume that: • In recession #1 two high-wage jobs are lost for every low-

wage job, while

• In recession #2, one high-wage job is lost for every low-wage job lost.

• Recession 2 suffered relatively fewer high-wage job losses.

111