Budget Cuts: Machete or Scalpel?

From the AP at forbes.com

Pa. schools, governments feel the economic misery
By MARK SCOLFORO Associated Press 10.15.08, 5:19 PM ET

HARRISBURG, Pa. -
Less money is coming in, investments are being hammered and loans - when available - are likely to become more expensive.

While that describes the household finances of many Pennsylvania families these days, the same set of daunting challenges faces local governments across the state.

"We're feeling it," said Aurel Arndt, general manager of the Lehigh County Authority, which provides water and sewer services. "Our new revenues have essentially flattened, and that's a reflection of the fact that there are very few customer additions to the system."

The authority appears likely to increase sewer bills next year to close its budget gap, Arndt said. Other local governmental entities - school districts, townships, boroughs, cities and counties - are looking at service cuts, employee reductions or tax increases.

Officials are in the early stages of budget planning for 2009, and many assume the slowdown will reduce local income tax collections, increase delinquencies and fuel demand for police and social services.

The state may not be able to do much to help out. Its tax collections for 2008-09 were hundreds of millions dollars shy of projections just in the first quarter of the budget year.

Gov. Ed Rendell on Sept. 16 ordered state agencies to look for ways to cut 4.25 percent from their discretionary appropriations - although public safety, health and education were given smaller amounts to cut. The administration is still working out the details, but counties are worried about how that austerity will affect their own budgets.

"It's a killer," said Doug Hill, executive director of the County Commissioners Association of Pennsylvania. "The bottom line is, obviously it comes from somewhere, so we anticipate at best further pressure."

The Pennsylvania Department of Transportation estimates that the motor license fund's payments to municipalities will be down $7 million to $10 million next year. That may be a small drop-off for a $332 million fund, but officials said the most recent comparable situation was the energy crisis of the mid-1970s.

Pension funds, which are closely tied to the stock market, loom as another major problem. At the end of June - before Wall Street turned from bad to worse - the state's $63 billion public school retirement system said investments had lost nearly 3 percent in the prior year.

That is bad news for local school districts that have to pump tax money into the fund when investments fall short. Last year's losses increased the much-dreaded 2012-13 pension contribution spike up from 11.2 percent of payroll to an estimated 16.3 percent, and the stock market's decline since June 30 can only have made that worse.

Municipal pensions also are feeling the pinch. In Cambria County, chief clerk Mike Gelles said Wednesday the county's pension fund lost about $42 million since the start of the year, or 24 percent. Layoffs, service cuts and millions in additional contributions from county taxpayers are considered likely.

"The markets turn around, it may have less of an impact, but at this point in time, with the numbers we're looking at, we have to plan for the worst," Gelles said.

The worldwide credit crunch is expected to soon increase the economic misery for Harrisburg property owners, who could end up paying much higher trash collection bills because their city authority has had difficulty refinancing debt tied to an ill-starred incinerator project.

Market conditions were a factor in a decision by the state's Commonwealth Financing Agency to delay - at least temporarily - the issuance of $800 million in bonds that were approved by the Legislature this summer.

That money is designed to help water and sewer plants comply with the Chesapeake Bay cleanup program, but it has tight deadlines. About 60 larger plants along the Susquehanna River watershed must finish construction in 2012.

"We are hearing some of our folks are postponing projects because the bond market is so bad," said John W. Brosious, deputy director of the Pennsylvania Municipal Authorities Association. "Unfortunately, those with Chesapeake Bay permits will not have that much flexibility to wait too long to start."

If there is a silver lining, it's that the heavy season for school district borrowing comes during the summer, leaving time for the credit markets to recover.

"Any districts who are trying to issue new bonds are probably finding extreme difficulty in the short term," said Dave Davare, director of research services for the Pennsylvania School Boards Association.

State revenues are considered a generally reliable indicator of what is happening to less-closely-tracked local taxes, and the Revenue Department says that, from July to September, they were 4.7 percent below what was anticipated.