Report of the

Task Force on Financial Options for the City of Wilmington

 

 

To the Governor and General Assembly of Delaware

and the Mayor and City Council of Wilmington

 

 

Pursuant to Executive Order No. 42 of 2003

 

May 30, 2003

 

 

 

Task Force on Financial Options for the City of Wilmington

 

 

 

Scott A. Green, Esq. – Co-Chair

Senior Executive Vice President

MBNA America

 

Fred C. Sears, II – Co-Chair

President and CEO

Delaware Community Foundation

 

Mark T. Brainard

Chief of Staff, Governor’s Office

State of Delaware

 

The Honorable John C. Carney, Jr.

Lt. Governor

State of Delaware

 

The Honorable Jennifer Davis

Budget Director

State of Delaware

 

Sherry L. Freebery

Chief Administrative Officer

New Castle County

 

The Honorable Robert F. Gilligan

Minority Leader

Delaware State House of Representatives

 

Robert S. Greco

Budget Director

City of Wilmington

 

The Honorable Michael J. Hare

Council Member at Large

Wilmington City Council

 

Gary E. Hindes

Managing Director

Deltec Asset Management Corp.

 

Deborah W. Hopkins

Director, DuPont Hospitality

DuPont Company

 

James A. Horty, Sr.

Horty and Horty, P.A.

 

Bradley A. Hublein

Senior Vice President

Wilmington Trust Company

 

John W. Land

Vice President

Conectiv

 

The Honorable Jack A. Markell

Delaware State Treasurer

 

The Honorable Harris B. McDowell, III

Majority Leader

Delaware State Senate

 

William S. Montgomery

Administrative Assistant to the Mayor

City of Wilmington

 

Ronald P. Pinkett

Director of Finance

City of Wilmington

 

Peter M. Ross

Delaware Economic and Financial Advisory Council

 

Thomas Shopa, CPA

Wilmington Economic and Financial Advisory Council

 

The Honorable David W. Singleton

Secretary of Finance

State of Delaware

 

The Honorable Wayne A. Smith

Majority Leader

Delaware State House of Representatives

 

The Honorable Liane M. Sorenson

Minority Whip

Delaware State Senate

 

The Honorable Henry W. Supinski

City Treasurer

City of Wilmington

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                      Page

 

I.       Overview of Findings and Recommendations....... 1

 

II.      General Background ............................................. 8

 

III.    Options for Near-Term Action........................... 11

 

IV.    Conclusion.......................................................... 19

 

Appendix A: Executive Order No. 42.......................... 20

 

 

I. Overview of Findings and Recommendations

 

 

On March 31, 2003, by Executive Order No. 42[1], Governor Ruth Ann Minner established the Task Force on Financial Options for the City of Wilmington.  The Task Force – structured to feature broad input from public and private sector leaders at the State, County, and City levels – was charged with reporting on “specific recommendations for broadening and diversifying the sources of the City of Wilmington’s annual revenues” by May 30, 2003.

 

The Governor’s Task Force included the following representation:

 

·         Four (4) bipartisan representatives of the 142nd Delaware General Assembly, two appointed by the Speaker of the House and two appointed by the President Pro Tempore of the Senate;

·         Five (5) representatives of the State Government appointed by the Governor;

·         Four (4) representatives of City Government appointed by the Mayor;

·         One (1) representative of the Wilmington City Council appointed by the President of City Council;

·         One (1) representative of the New Castle County Government appointed by the County Executive;

·         One (1) representative of the Delaware Economic and Financial Advisory Council (DEFAC);

·         Two (2) representatives of the Wilmington Economic and Financial Advisory Council (WEFAC); and,

·         Five (5) representatives of the private sector appointed by the Governor.

 

The appointment of this Task Force followed an independent review of the City’s finances completed earlier in the year at the request of Mayor James M. Baker by the members of WEFAC and the national consulting firm of Public Financial Management, Inc. (PFM).[2]   This WEFAC/PFM report found that:

 

"...strong local action has both contained the City’s costs and increased its locally generated revenues. Nonetheless, Wilmington’s future holds budgetary crisis if joint State and City solutions are not found in the months ahead.”

 

Through four half-day sessions, multiple subcommittee meetings, and extensive supporting research and analysis, the Governor’s Task Force has confirmed the fundamental themes of the WEFAC/PFM review and has formulated its own consensus findings and policy guidelines.  These findings are detailed below, with additional background information provided in Section II of this report.

 

In addition, the Task Force has identified a series of specific options for near-term action that are recommended for strong consideration by the State and City elected leadership.  Further outlined in Section III of this report, these options can provide the basis for developing a comprehensive approach to broaden and diversify Wilmington’s revenues. 

 

Consensus Task Force Findings

 

The Task Force has adopted the following consensus guidelines to provide a framework for analyzing the City’s financial options:

 

1)       The City of Wilmington is vital to the region and the State of Delaware.  Wilmington is an engine for economic growth, home to many of Delaware’s leading corporations and largest Court of Chancery.  It is a cultural hub, with vibrant arts and educational institutions and important venues for sports and entertainment.  At the same time, the City provides a “livable” alternative to development sprawl, with existing infrastructure capacity to serve its broader region.

 

2)       Like any government, Wilmington’s ability to fulfill its role is dependent on a stable and reliable revenue base.  Historically, growth in the City’s revenues has been limited by a high percentage of tax-exempt property (over 40% of total assessed value as of FY2003), constraints on the City’s ability to annex, and a disproportionate concentration of the region’s low-income residents.  In addition, the City’s single largest revenue source, the wage tax, is subject to unreliable “boom – bust” volatility.

 

3)       Limited and unpredictable revenue sources combine with ever-growing demands for service to produce a structural deficit in the City’s budget process.  Despite significant and successful local initiatives to reduce and control its expenditures, the City of Wilmington still faces the potential for fiscal crisis due to the pressures of its existing and growing structural deficit.  Without corrective action, the “mid-range” estimate of the projected annual operating gap within five years is $9.3 million – roughly 10% of the total City budget.

 

4)       This structural deficit should not be addressed merely by raising taxes or fees.  As one key component of the plan to improve the City’s fiscal stability, the Task Force endorses the City’s ongoing efforts to further streamline government and to contain and cut municipal spending.  The City should continue to work with the State government to pursue potential health insurance savings and other economies of scale.  The City should complete the recently announced service delivery study to uncover possible additional sources of savings.  The City should also study new mechanisms to insure that temporary spikes in revenue during boom cycles are managed to avoid placing unreasonable long-term demands on the City’s budget.  The existing Budget Reserve Account and Permanent Investment Account are excellent examples of such controls.  They should be maintained, strengthened and supplemented as necessary.

 

5)       The current structural deficit creates a shortfall in both the operating and capital budgets.  Revenue enhancements will be necessary to allow the City to meet its future operating needs, as well as to make the necessary investments in its infrastructure to provide the services critical to public safety and quality-of-life.

 

6)       Continued investment in maintaining the City’s existing infrastructure is more cost-effective for regional users than costly new development in Delaware’s suburban and rural communities.  For example, the cost of building new water storage capacity for regional drought management as an alternative to the City’s Hoopes Reservoir has been estimated at $30 million or more.  Investing in Wilmington and making full use of its current resources – as the State has supported over the years through bond issues for City infrastructure and development – also provides a positive alternative to sprawl, preserving the quality-of-life and open space around the state.  Money invested in maintaining existing infrastructure in the City of Wilmington allows all Delaware taxpayers to avoid the costs commonly associated with sprawl, such as new schools and roadway expansion.

 

 

7)       In exploring additional revenue sources, the Task Force has established two overriding principles:

·         The City should not pursue any revenue sources that would make Wilmington, New Castle County, or the State a less competitive or desirable location for residents and businesses.  Taxes or fees that discourage people from living or working in the City and its region must be avoided.  Indeed, the State, County, and City should engage in a long-term analysis of existing taxes and fees with a goal of eliminating disincentives for business and residential location.

·         Because State government is also facing budgetary challenges, the City’s structural deficit should not be addressed simply by shifting existing revenues from the State to the City.

 

8)       Gaming options are not included among the Task Force’s consensus recommendations.  However, if the State should further expand gaming, opportunities to benefit the City should be strongly considered.

 

9)       Many City “resources” – some of which traditionally have been viewed by their host communities as burdens – should be recognized for their value to the region, and Wilmington should seek to maximize the return on such unique assets.  Where non-residents enjoy the benefits of using City facilities such as water and wastewater systems and landfills, full compensation for the direct and indirect costs to the City should be assured.  Similarly, taxpayers from outside the City make extensive use of the City’s tax-exempt nonprofit institutions.  While the Task Force did not support the notion of PILOTS, it also endorsed the principle that some compensation for services is clearly warranted.

 

10)   Immediate action is needed to put financially meaningful and diversified revenue sources into place for near-term fiscal stability.  At the same time, comprehensive, structural fiscal and governance reforms should also continue to be explored for potential longer-term benefit.  The work undertaken by this task force should be continued in some form.

 

Summary of Recommended Near-Term Revenue Options

 

 

 

To capitalize on Wilmington’s unique regional role and assets:

 

 

·         Increased water/wastewater system return on investment: To compensate the City for the cost-effective role its system provides in regional drought management and environmental protection. [3]

 

• Water rates could be increased to bring Wilmington’s charges more in line with private providers and to reflect conservation pricing goals.

 

• A water availability charge of $1.00 per month per direct and indirect regional customer would generate over $1.3 million annually.

 

 

·         New landfill host community compensation:  To compensate the City for the unique burden and negative impacts associated with hosting the only regional landfill within City limits, one or more of these options could be enacted.

 

§         A $1.00 per month surcharge per customer would generate $3 to $5 million annually.

 

§         Compensation at 7.5% of total gross operating revenues would generate more than $1.9 million.

 

§         Compensating the City for biosolids now provided as landfill cover to the Delaware Solid Waste Authority at no charge would generate $1.5 million to $2.5 million annually.

 

§         Waiving City solid waste disposal charges would reduce net costs by over $2.0 million per year. 

 

Summary of Recommended Near-Term Revenue Options (continued)

 

 

 

To collect new revenues locally from sources consistent and competitive with other urban hubs:

 

 

·         Local lodging tax surcharge: With only an 8.0% State lodging tax now in place, a new Wilmington surcharge could be created while remaining competitive with cities such as Baltimore (combined 12.5%), Boston (12.45%), Philadelphia (14%), and Washington, DC (12.0%).

 

§         A 2.0% Wilmington hotel surcharge would bring the combined rate within the City to just 10.0%, while generating annual revenues of $450,000.

 

 

·       Extension of existing electricity franchise tax to natural gas: To compensate for the use of rights-of-way and establish a consistent approach to taxing major energy services within the City.

§          Extending the current 2.0% electricity franchise rate would generate $425,000 per year.

 

 

·       Ticket surcharge for sports and entertainment events: To recapture a portion of the public safety and infrastructure costs incurred when hosting events through a charge on discretionary spending.

§         Several alternatives for sliding scale charges would generate $400,000- $500,000 annually.

 

Summary of Recommended Near-Term Revenue Options (continued)

 

 

 

To update local City revenue sources in response to inflationary pressures:

 

 

·         Updated Wilmington Parking Authority (WPA) payment.  In recognition of a $430,000 property tax exemption and City debt guarantee, the WPA provides an annual transfer to the City  – but without regular adjustments for inflation.

 

§         Adjusting the current $200,000 payment by inflation since last raised would generate $50,000.

 

§         Adjusting the original $150,000 payment by inflation since inception would generate $185,000.

 

 

Summary of Recommended Near-Term Revenue Options (continued)

 

 

 

To close the remaining revenue gap:

 

 

Even if options within all six of the Task Force recommendations were implemented, the total new revenues generated could still fall as much as $5 million short of closing Wilmington’s currently projected deficit.  While the Task Force has not reached clear consensus on specific, additional recommendations, the following strategies are among the ideas discussed and that merit further exploration by State and City leaders to help bridge this remaining gap:

 

·         Further investigation of the role that City government services play in facilitating the State's incorporation activity, and consideration of providing the City with a revenue stream appropriately reflecting this role.

 

·         Enhanced economic development efforts by the City and State to attract jobs – and resulting incremental tax revenues – to Wilmington.

 

·         Continued State and County support for capital projects in Wilmington, which can both reduce the City's debt service burden and also stimulate economic development.

 

·         Reasonable, periodic increases in the city's existing revenue sources.

 

 

II. General Background

 

Like many state and local governments around the country, Wilmington is now experiencing fiscal strain with the national economic downturn.  Because of the City’s narrow base of economically sensitive revenues and limited structural opportunities for growth, Wilmington does not now possess adequate local tools for addressing these adverse trends. 

 

Instead, the City’s fortunes now sway with its highly volatile wage tax – Wilmington’s single largest revenue source, which represents nearly half of total FY2004 budgeted revenues (45.5%).  While capable of strong growth in boom years with healthy corporate bonuses, City wage tax receipts have seen actual year-over-year declines in three of the last five fiscal years – including a projected decrease of 16.5% from FY2002 to FY2003.  Financial controls, such as the Budget Reserve Account and Permanent Investment Account should be maintained and strengthened to manage fluctuating revenues from existing sources.  However, this alone will not be enough.

 

Given the importance of the City of Wilmington to the overall Delaware economy and quality of life, this Task Force has sought to identify a set of new revenue generating resources that should be made available to the City.  Such tools are critical to Wilmington’s long-term financial stability and flexibility.

 

By addressing this structural imbalance on a multi-year basis in advance of the onset of severe deficits, the State and City are embracing a key best practice in municipal financial management.  As one major Wall Street credit rating agency has written:

 

“A multiyear plan enables executives and legislators to anticipate potential budget stress that may result from projected revenue and expenditure imbalances, allowing them to take corrective action long before budgetary gaps develop into crises.”[4]

 

Although Wilmington today remains in a financially sound position, rated A2 by Moody’s and A+ by Standard & Poor’s with moderate reserves, the City’s fiscal future is clouded by pressures that threaten to erode this hard-won stability.  As Moody’s wrote about Wilmington in a May 2002 evaluation:

 

“While Moody’s believes the city has addressed these financial pressures in the short-term, their ability to avoid dramatic reductions in financial flexibility and promote consistency of financial operations in all funds remains key to future credit quality analysis.”

 

To continue Wilmington’s forward progress without disruption, anticipatory action is critical.

 

 

Projected Fiscal Gap

 

In reaching its consensus findings, the Task Force focused considerable attention on the size of the projected City budget gap and the potential for reducing this deficit through expenditure reductions rather than by new and increased revenues. 

 

The March 2003 WEFAC/PFM report projected that, absent corrective action, the City would face an annual operating budget gap beginning in FY2004, rising to as high as $12.1 million by FY2007.

 

Subsequent to the completion of this WEFAC/PFM review, Mayor Baker submitted his proposed FY2004 Budget, which offset the projected first-year deficit through deferred capital borrowing, the absence of any cost-of-living increases for the City workforce, and other cost containment measures – achieving only temporary relief.  Incorporating these latest City efforts, the current PFM “mid-range” estimate of the projected annual operating gap by FY2007 is $9.3 million – roughly 10% of the total budget – with a potential variance of several million dollars in either direction if one uses either more optimistic or more pessimistic assumptions.[5]

 

In developing these forecasts, it should be noted that continued City spending restraint has been assumed:

 

·         With regard to staffing and services, no increases are assumed above FY2004 budgeted levels.

 

·         Special purposes funding for such institutions as the Delaware S.P.C.A, Wilmington Institute Free Library and the Wilmington Arts Commission is projected to be frozen across the multi-year planning period, despite recent cutbacks in such expenditures and anticipated inflationary pressures on these service providers.

 

·         Most other non-personnel operating expenditures are projected to grow in the aggregate at no more than an inflationary rate of 2.5% per year.

 

Nonetheless, even taking into account the continued cost containment outlined above, the City faces severe budgetary pressure from skyrocketing costs for employee health and retirement benefits.

 

·         Like almost all employers nationally, the City’s health benefit costs have grown dramatically in recent years.  In just the past three fiscal years of FY2000-FY2002, total actual expenditures in the City’s self-insured program for active employees rose by over 50%.  Nationally, most health benefits experts project continued annual cost growth of approximately 15%.

 

·         Likewise, investment losses in the City’s retirement systems, while not as severe as have been seen by some other communities, will require a significant increase in employer contributions.  Wilmington’s annual funding requirement has now returned to the pre-2000 level of approximately $5.0 million per year (or twice the contribution required by the City in 2001 and 2002).

 

Further, because local government is inherently labor-intensive – requiring people to patrol the streets, fight fires, and deliver neighborhood services – such growth in benefit costs tends to disproportionately impact municipalities relative to state government and many sectors within private industry.  In Wilmington, employee wages and benefits constituted 68.5% of actual expenditures in FY2002.

 

Concurrent with negative trends in benefit costs, broader forces in the national and regional economy have slowed City revenue growth.  Again, the City’s primary revenue source, a local wage tax, is highly economically sensitive, and multiple other key Wilmington revenue sources – from building permit fees to the head tax to business licenses – hinge on economic growth.

 

Facing these fiscal challenges, the City is not alone.  Nationwide, state and local governments are struggling with severe budget deficits, driven by many of these same factors.  From New York City to Boston, for example, cities all along the East Coast are imposing layoffs and slashing public services. 

 

By taking action now to address these adverse trends – before the City’s reserves have been depleted and the choices available become more stark – Wilmington is positioned to avoid such full-blown crisis and disruption.  When faced with such “pay me now or pay me later” options, taking timely action while challenges remain more easily managed is always the preferable policy alternative.

 

City Expenditure Reduction

 

In addressing Wilmington’s projected budget gap, a key concern for the Task Force is that the City continue to pursue every viable opportunity to reduce municipal spending, rather than relying solely on increased taxes and fees to address its fiscal challenges.  Toward this end, the Task Force convened a Subcommittee to evaluate potential health care cost containment and endorses the City’s recently announced study of service delivery to seek additional sources of savings.

 

At the same time, the Task Force recognizes that the City has already taken significant steps to cut spending prior to beginning this process of exploring new revenue sources and that such efforts have had a strong and positive impact on Wilmington’s bottom line.  Examples include the following:

 

·         Since FY1992, the City has eliminated 306 positions – reducing overall headcount from 1,370 to 1,067.  Fully 299 of these positions were outside of the City’s public safety functions – a cut of over 35% in these areas.

 

 

 

·         Total non-public safety expenditures were held to an average growth rate of 1.9% per year across this same period, well below the level of inflation, despite significant cost pressures in certain areas such as health benefits.

 

·         In just the two-and-one-half years since Mayor Baker took office, significant streamlining and cost reduction have been achieved:

 

ü       The Department of Youth & Families was eliminated, saving $500,000.

ü       Grants to agencies were reduced nearly 80%, for savings of almost one half-million dollars.

ü       Spending for temporary employees has been cut 40%, or $1 million.

ü       Police overtime has been brought under strict control for annual savings of $400,000.

ü       Strengthened internal measures to resolve pending litigation against the City have cut outside legal fees by over 40% or $300,000.

ü       While making infrastructure renewal a top priority, the City has cut approximately $40 million in discretionary projects from the FY2000 Capital Budget, saving $3 million in annual debt service.

ü       By ordinance, the City has reconstituted and strengthened its Expenditure Review Board, including senior City fiscal officers, City Council representatives, and the Administrative Assistant to the Mayor, to monitor and control departmental spending.

 

·         In addition to spending cuts, City taxpayers have also contributed significantly to sustaining budgetary balance.  Since FY1992, the City has raised its property tax five times for a total increase of 57.2%.

 

Going forward, the Task Force recommends consideration of the following spending controls to further enhance these efforts:

 

·         Negotiation of restructured municipal employee health benefits, parallel to plan design changes implemented for State of Delaware workers, to help control growing costs in this area;

·         Completion of the City’s ongoing workers’ compensation cost reduction study and the recently announced multi-departmental expenditure review; and,

·         Expansion of the role of WEFAC and the City Expenditure Review Board to include evaluation and certification of five-year forecasts for revenues and spending respectively, thereby institutionalizing a longer-term fiscal planning horizon.

III. Options for Near-Term Action

 

To broaden the City’s revenue base, the Task Force recommends that the Governor, General Assembly, Mayor, and City Council develop a mix of diverse approaches.  To serve as the basis for an appropriate package, six (6) distinct options have received sufficient support from a majority of Task Force members to be put forward for consideration:

 

Consistent with the Task Force policy goal of maximizing the return on Wilmington’s regional assets, two (2) of these options would improve the recovery of direct and indirect costs associated with the City’s infrastructure:

 

·         Increased water/wastewater system return on investment;

·         New landfill host community charges.

 

In addition, the Task Force recommends consideration of three (3) new local revenue sources found among other urban hubs that would not impair Wilmington’s overall economic competitiveness:

 

·         Local lodging tax surcharge of 2.0%;

·         Extension of existing 2.0% electricity franchise tax to natural gas;

·         Ticket surcharge for sports and entertainment events.

 

Further, the Task Force recommends local action to address inflationary pressures

 

·         Updated Wilmington Parking Authority payment.

 

Finally, recognizing that these six options will not likely generate sufficient revenues to close the City’s projected budget gap, the Task Force also calls on State and City leaders to further explore additional alternatives for creating new revenue sources and investing in Wilmington’s future growth and stability.

 

REVENUE SOURCE	PROJECTED ANNUAL REVENUES	IMPLEMENTATION REQUIREMENTS
Water/Wastewater Return on Investment	$1.3 million	Surcharge approach may require State enabling legislation.  Certain issues may be addressed by City Council and/or within local ratemaking process in conjunction with anticipated Water Supply and Self-Sufficiency Act conservation rate adjustments
Landfill Host Community Compensation	$2 million - $5 million	State Legislation likely required
Lodging Tax (2% Local Surcharge)	$450,000	State enabling legislation desirable
Natural Gas Franchise Tax	$425,000	State Legislation likely required.  May also require Public Services Commission approval
Events Surcharge	$400,000 - $500,000	State enabling legislation desirable
Wilmington Parking Authority payment	$50,000 - $185,000	Local implementation via City and WPA Board approval

 

A. Water/Wastewater Return On Investment

 

Rationale

 

The City of Wilmington provides direct water and wastewater services to City residents and both direct and indirect services to suburban New Castle County residents beyond the City’s borders.  In fulfilling this critical regional role, the City should “think more like a business” and ensure a reasonable return on investment for its system assets, as well as full cost recovery for service delivery.

 

Within Wilmington’s service region, water supply is now delivered at highly competitive rates – relying on City assets.  The cost to build alternative water storage capacity similar to that available from the City’s Hoopes Reservoir, for example, is estimated at approximately $30 million.  Instead of incurring this major expense, however, suburban users of the City system are able to rely on Hoopes – and the City’s pledge of 500 million gallons in the event of another drought – as a key component of regional water supply planning.  It is patently reasonable for the City and its residents to be compensated for this direct benefit by those non-residents who are served by it.

 

Currently, the City sells water to United Water Delaware and the Artesian Water Company, both of which resell to customers in suburban New Castle County.  These private utilities, regulated by the Delaware Public Service Commission, are allowed to earn returns well in excess of the Wilmington utility’s transfer to the City General Fund.  Currently, Artesian is permitted a 10.5% return-on-equity[6], while United Water is allowed 10.75%[7]. 

 

Looking ahead, compliance with anticipated new legislation, the Water Supply Self-Sufficiency Act (HB 118), cosponsored by Representative Smith and Senator Henry, will lead the City and other regional providers to establish new conservation rates.  In addition, the City enterprise must continue to plan for combined sewer overflow (CSO) system improvements to meet increasing Federal environmental mandates.  Within the utility’s overall ratemaking context, potentially in conjunction with State legislative change, the City should seek to improve its return on investment in its vital, regional system assets.

 

Over the past several years, total City Water/Sewer Fund revenues and expenditures have been in the range of $35-40 million per year:

 

City of Wilmington Water/Sewer Fund

 FY2001-2004

 

 

From this overall budget, the City General Fund now receives a transfer of $2.5 million and an indirect cost reimbursement of $2.8 million.  While Wall Street credit rating agencies and other outside analysts have raised concerns in past years regarding historically inconsistent City transfers to the General Fund from the Water/Sewer enterprise, these transfers have stabilized under the Baker Administration.  Likewise, the indirect cost reimbursement to the General Fund has not been adjusted since FY1999.

 

While it is important for any such transfers and reimbursements to be set at reasonable levels based on sound and consistent rationales, it is also appropriate to reevaluate the methodologies in place periodically to ensure that the City is receiving a fair return on its investment with reasonable ongoing adjustments for inflation.  For example, the City and New Castle County recently renegotiated the agreement pursuant to which the County directly reimburses the City enterprise for wastewater services.  Under the terms of the new agreement, the County will pay the City $14.6 million in FY2004, with automatic inflationary adjustments of 2.75% per year going forward.  The City Water/Sewer Fund also receives a separate payment from the County of $401,123 annually for the debt service associated with an aeration tank built to treat County wastewater flows.

 

Competitiveness Impacts

 

According to analysis provided by the Task Force Infrastructure Subcommittee, Wilmington’s water rates are now among the lowest in the region[8].  A residential County customer with a 5/8” meter using 10,000 gallons per quarter would pay $73.23 if served by the Artesian Water Co., $57.37 if served by United Water, $40.82 if served by the City of Newark, and only $33.37 if served by the City of Wilmington.  Consequently, even with some adjustments to rates, Wilmington’s prices will likely remain highly competitive within the region.

 

Revenue Impact

 

The revenue impact of any changes will be a function of multiple considerations, much of which would be included within a new ratemaking process.  Through the work of the Task Force, several issues have been identified for particular consideration:

 

·         The Infrastructure Subcommittee has recommended a water availability charge per customer.  Currently, approximately 112,000 regional customers receive some type of water service from the City: 12,000 directly, and approximately 40,000 through United Water Delaware and 60,000 from the Artesian Water Company.  The City provides Artesian with treated drinking water at a cost of 70% of the current in-City industrial rate ($20.84 per thousand gallons).  Artesian is obligated to take 200 million gallons per year, but the supply is not now guaranteed in case of drought.  United benefits from a release of untreated water into Red Clay Creek, from which it can draw and treat its supply.  United pays an yearly reservation charge of $1,200 per million gallons for a predetermined amount up to 200 million gallons, as well as a usage charge of $400 per million gallons.  The annual revenues from these sources are well below the resale prices charged by the private utilities and obviate their need to site and build expensive impoundment and treatment facilities.

 

• At $1.00 per customer per month, applied to all 112,000 regional beneficiaries of the City system, a water availability surcharge would generate over $1.3 million annually.  This charge might potentially be structured as a State-enabled drought prevention tax passed through to the City.

 

·         The Water/Sewer Fund makes an annual payment of just under $2.8 million per year to the General Fund as a reimbursement to the City for the costs of indirect services provided (e.g., legal, financial, human resources, purchasing, information technology, and other centrally administered support).  This amount has not been increased since 1999 and has been dropping steadily as a percentage of Water/Sewer Fund expenditures.  In the recently adopted FY2004 budget, the reimbursement of these services was projected at 7.28% of expenditures.  In order to keep this payment at a level where it maintains its value, and the City does not continually support greater and greater portions of Water/Sewer Fund overhead, the payment could be indexed to inflation.  In the context of upcoming rate adjustments, the City should update its indirect cost allocation study to ensure that the appropriate base is in use for such reimbursements.

 

·         Because the County wastewater agreement referenced above has been recently renegotiated, it is not recommended that its terms be revisited at this time.  In the long-term, however, the issue of proper City compensation for hosting the region’s wastewater treatment and biosolids processing facilities merits ongoing review.

 

Legal/Implementation Requirements

 

A surcharge approach may require State legislation, while other adjustments may be addressed locally within the ratemaking process.

 

 

B. Landfill Host Community Compensation

 

Rationale

 

In many landfill agreements nationally, a host community fee is added to the base tipping fee collected by landfill operators to compensate the host community in part for the direct burdens the facility places on the host community.  The landfill in Wilmington is owned by the Delaware Solid Waste Authority (DSWA), a public entity, and is operated by a private contractor.  Currently, no host community fee is applied, and no other compensation is provided. 

 

While no tax or surcharge will truly compensate those most directly impacted by the sounds and smells of an active landfill, through some form of host community compensation, the City and its residents would receive partial compensation for landfill-related costs and community impacts, and the economic development opportunity costs associated with dedicating prime waterfront real estate to a tax-exempt regional landfill facility. 

 

Competitiveness Impacts

 

Many landfills nationally absorb the costs of host community charges and remain economically competitive.  Currently, the DSWA is in excellent financial condition – reporting excess revenues over expenses FY2002 of $12.8 million and increasing retained earnings from $18.8 million to $31.7 million during the year.  Further, within the overall DSWA balance sheet, Wilmington’s Northern Solid Waste facility currently generates the great majority of operating income – $25.6 million in gross operating revenue and $11.8 million in net income after expenses.  The current base tipping fee has not been increased since 1994.  Consequently, the initiation of reasonable compensation to the City should be feasible without significantly impairing the competitiveness of the DSWA facilities or causing sharp rate increases for regional customers.  Nonetheless, given the active competition among solid waste disposal sites, market concerns should be recognized in developing the specifics of any new host community compensation program.

 

Revenue Impact

 

The revenue impact from landfill compensation would vary pursuant to the methodology used to determine the appropriate level of payment.  Through the work of the Task Force, four approaches have been put forward.

 

·       The Infrastructure Subcommittee of the Task Force has recommended a surcharge on every customer (both residential and commercial) of haulers disposing at the Wilmington landfill.  The Subcommittee estimates, for example, that a surcharge of $1.00 per month would generate between $3 million to $5 million annually.

 

·       Alternatively compensation to the City could be established based on a percentage of total Cherry Island gross operating revenues.  At FY2002 revenue levels of $25.6% million, for example, a 7.5% surcharge would generate over $1.9 million. 

 

·       Other Task Force members have suggested that, as compensation for Wilmington hosting the Cherry Island landfill, the DSWA could provide solid waste disposal for the City at no charge.  Based on the FY2004 Budget, this would reduce net City expenditures by more than $2.0 million annually. 

 

·        In addition, the City now provides biosolids to the DSWA for use as landfill cover at no charge, saving the Authority significant expense that would otherwise be required for purchased fill.  The City should be compensated for this benefit, which could potentially generate between $1.5 million and $2.5 million.

 

It may further be noted that these four approaches are by no means the only alternatives for providing compensation to the City, nor are they necessarily mutually exclusive.

 

Legal/Implementation Requirements

 

State legislation is likely required for new surcharges.  Biosolids compensation may be negotiable between the City and DWSA without new legislation.

 

 

C. Local Lodging Tax

 

Rationale

 

Lodging taxes are commonly applied to per night room rentals at hotels, motels, and other temporary accommodations.  Such taxes are intended to recapture some of the costs associated with a community’s role (from public safety to public relations) in supporting its hospitality sector.  While there is currently no City of Wilmington lodging tax, the State of Delaware collects an 8.0% tax on rooms.  The revenues from this 8.0% State tax are divided into four portions: 5.0% of the taxable bills are allocated to the State General Fund; 1.0% for the Delaware Department of Natural Resources and Environmental Control (for beach erosion programs); 1.0% to be shared among the three county-level Convention and Visitors' Bureaus; and 1.0% for the statewide Delaware Tourism Office.

 

Competitiveness Impacts

 

While it is important to avoid creating a lodging tax structure that discourages business and recreational travelers from staying in the City, a modest local surcharge would likely have minimal adverse impact.  Most travelers are not highly sensitive to reasonable variations in local lodging tax rates, and Wilmington’s current hotel taxes are already well below those in other eastern cities:

 

·         Baltimore, MD: 12.5% (State Sales: 5.0%, Local Hotel: 7.5%)

·         Philadelphia. PA: 14% (State Sales: 6.0%, Local Hotel: 7.0%, Local Sales: 1.0%)

·         New York City, NY: 13.25% + $2 per day (State Hotel: 8.25%, Local Hotel: 5.0%)

·         Boston. MA: 12.45% (State Hotel: 5.7%, Local Hotel 4.0%, Local Convention Center: 2.75%)

·         Washington, DC: 12.0% (State Sales: 7.0%, State Hotel: 5.0%)

·         Hartford, CT:  12.0% (State Hotel: 12.0%)

·         Burlington, VT:  11.0% (Local Hotel: 2.0%, State Hotel: 9.0%)

 

Revenue Impact

 

In calendar 2002, The State of Delaware received $1,810,917[9] million from its Public Accommodation tax within the City of Wilmington.  Using this amount as a base for analysis, the table below assumes that a local lodging tax would be structured as a 2.0% surcharge above the existing state tax.  At this level, Wilmington’s overall hotel tax rate at 10.0% would still be below many East Coast cities, while generating over $450,000 in additional local revenues each year.

 

 

Legal/Implementation Requirements

 

The simplest implementation mechanism for this new local Wilmington tax would be via State enabling authorization.

 

 

D. Extension of Existing Electricity Franchise Tax to Natural Gas

 

Rationale

 

Wilmington now levies a 2% franchise tax on electricity service.  Some other communities apply similar taxes to other utility services, compensating for the use of tax-exempt rights-of-way and generating significant local revenue.  Wilmington does not now tax other energy sources such as natural gas.

 

Competitiveness Impacts

 

While any utility tax may ultimately be passed on to the consumer, and is somewhat regressive in nature, a 2.0% increase should not have a high impact on local residents or consumers.  As noted above, such a rate is already applied to all Wilmington electricity customers. 

 

In some Delaware communities, profits from municipally owned energy utilities provide significant transferred revenues to local General Funds.  Other cities nationally, such as Baltimore, tax natural gas, steam, and fuel oil for businesses.

 

Revenue Impact

 

Potential revenues have been estimated based on extrapolations from County-level natural gas usage data[10], using the number of Wilmington households as a proxy for the number of customers in New Castle County that are also Wilmington residents[11].  Business consumption was estimated at 28% of total area usage, based on industry data, with a further rough assumption that 25% of New Castle County business related gas usage occurs in Wilmington. 

 

 

Legal/Implementation Requirements

 

This new local Wilmington tax would require State authorization, and may require Public Services Commission approval.

 

 

E. Ticket Surcharge for Sports and Entertainment

 

Rationale

 

In some communities, an admissions/events tax is imposed on tickets for entry to sports, cultural, and other entertainment events.  This tax on discretionary spending can serve to import revenue from non-resident visitors, recapturing a portion of the public safety and infrastructure costs incurred by the City hosting those events. Neither the State of Delaware nor the City of Wilmington currently collects such a tax.

 

Competitiveness Impacts

 

So long as rates do not become so high as to discourage attendance, modest surcharges will likely have minimal adverse impact.  Both Baltimore (10%) and Philadelphia (5%) charge an admissions excise tax on any type of amusement (e.g., sporting events, movie tickets), and this tax was recently instituted in Nassau County, New York at $1.50 per ticket as part of that local government’s recovery plan from fiscal distress.  In addition, service and handling fees already assessed by many local venues do not appear to have a negative impact on attendance.

 

Revenue Impacts

 

Comprehensive Wilmington sports, cultural, and general event attendance figures are not readily available.  To develop a high-level projection, six major venues were contacted for their attendance figures for the most recent calendar year.

 

 

To develop fiscal impact projections, several alternative sliding scales of charges per ticket price range were evaluated (Wilmington ticket prices were found to range from $5 for General Admission at the Blue Rocks to $63 for Saturday night shows at the Playhouse Theatre).  Of course, the actual structure of such a surcharge could vary from any of these three options – and any adjustments would affect revenue generation accordingly.

 

 

Because detailed data was not available from all six venues surveyed, certain simplifying assumptions were used.  With additional variability in year-to-year programming, the following projections should be considered approximate, but generally conservative.  Further, calculations for each of the Theatre companies and the Grand Opera House have been discounted 25% to allow for the degree to which official attendance figures for certain venues may include discounted and unpaid admissions (e.g., senior citizens, students, group discounts).  Generally speaking, the Task Force members preferred alternatives that exempted altogether tickets in the lower price ranges.

 

 

Legal/Implementation Requirements

 

This new local Wilmington tax would likely require State authorization.

 

 

F. Wilmington Parking Authority Transfer

 

Rationale

 

The Wilmington Parking Authority (WPA) has provided an annual transfer to the City General Fund since 1980, except for certain years when the WPA experienced operating losses.  Such payments – unchanged at an annual level of $200,000 since FY1994 – recognize the WPA exemption from property tax payments, as well as the benefit provided to the Authority by the City guarantee for WPA debt.  If the WPA were a tax-paying entity, based on assessed values, it would pay the City $430,000 in property taxes – well in excess of the current transfer.  While some reduction from full taxation may be appropriate given the economic development role of the WPA, some inflationary adjustment is also warranted.

 

Competitiveness Impacts

 

The retail cost for downtown parking plays an important role in Wilmington’s economic competitiveness.  Consequently, in negotiating any increased payment, City officials should be careful to avoid an increase that triggers an extraordinary increase in parking rates.  In many other communities, however, local governments receive significant direct revenues from parking taxes.  Further, in other municipalities such as Philadelphia, virtually all excess revenues from Parking Authority operations are transferred to the City General Fund.

 

Revenue Impact

 

If the current $200,000 payment were to be adjusted by the cumulative increase in the regional Consumer Price Index (CPI) since June 1993 – the start of the last fiscal year when the transfer was raised – then the new rate would be approximately $250,000 ($253,021), for an incremental revenue gain of $50,000.  If the original $150,000 payment were to be adjusted by the CPI since June 1979 – the start of the fiscal year when the transfer was first established – then the adjusted payment would be approximately $385,000 ($385,943), for a gain of $185,000.  The Task Force recommends that the City work with the WPA to determine a new payment that balances these increased inflationary pressures against the policy goal of providing affordable downtown parking rates.  It is further recommended that any new transfer agreement include an automatic inflation factor for future years.

 

Legal/Implementation Requirements

 

Once negotiated with the City, this transfer may be increased upon approval of the WPA Board.  No State action is required.

IV. Conclusion

 

In recent years, strong local action has both reduced the City’s costs and increased its locally generated revenues.  Nonetheless, Wilmington’s revenue base remains structurally vulnerable to economic cycles and volatility, with limited flexibility to adapt to changing conditions.

 

By broadening and diversifying the City’s revenue base through the actions outlined for consideration in this report,

 

·         Increased water/wastewater system return on investment;

·         New landfill host community charges;

·         Local lodging tax surcharge of 2.0%;

·         Extension of the franchise tax on electric service to natural gas;

·         Ticket surcharge for sports and entertainment events; and,

·         Updated Parking Authority payment.

 

this Task Force believes that Wilmington will be able to maintain its fiscal health in the near-term, while improving its position to address even greater challenges of growth and competitiveness for the long-term.

 

To further provide for sustained financial stability, the Task Force also calls on State and City leaders to explore additional strategies for enhancing Wilmington’s bottom line.  Ideas that merit consideration range from the creation of new revenue streams appropriate to the City’s role in facilitating Delaware incorporations, to enhanced economic development initiatives, to continued State and County support for City capital improvements, to periodic, reasonable increases in existing local revenues.  In addition, although the Task Force recognizes that time is short in the current State legislative session, timely action should be strongly considered where opportunities may exist to advance such strategies now.

 

Along with supporting the creation of new revenue sources, the Task Force also endorses the significant and sometimes difficult spending reductions already undertaken by Mayor Baker and the City – and planned going forward.  At the same time, the Task Force recognizes that ongoing investment is needed to maintain basic services, infrastructure, public safety, and quality-of-life. 

 

Finally, the Task Force recommends that analysis continue beyond the time limitations inherent to this immediate call to action to explore longer-term, structural options for improving the City’s financial and economic position.

 

The Task Force appreciates this opportunity to have contributed to the evaluation and development of fiscal changes important not only for the City of Wilmington, but also for the region and State of Delaware.  Timely action in the days just ahead will help to build a stronger fiscal foundation for many years to come.