City of Gary Report of the Fiscal Monitor December 11, 2009 Public Financial Management Two Logan Square 18th & Arch Streets, Suite 1600 Philadelphia, PA 19103 215 567 6100 www.pfm.com Dean Kaplan Managing Director Table of Contents 1. Overview Introduction Revenue 2. Workforce 3. Elected Officials Section Overview Mayor’s Office Common Council City Clerk City Court 4. Professional Services Finance Department Human Resources Law Department Health Department Human Relations Commission Commission for Women 5. Public Safety Fire Department (including Emergency Medical Service) Fire Commission Police Department (including Supportive Services) Police Commission 6. Public Works & General Services Section Overview Department of Public Works Building Department Planning Department Traffic Control Division General Services Department Recycling Department Department of Motor Vehicle Maintenance 7. Recreation Department of Public Parks Genesis Convention Center Youth Service Bureau 8. Development Economic Development Community Development Redevelopment Department Environmental Affairs 9. Appendices Baseline Projection List of Initiatives Implementation Scenario 1. Overview 1 Introduction The City of Gary has a proud history, tremendous physical assets and human resources. Today, however, the City’s future is at risk. As a result of the decline of its traditional industrial base, and resulting loss in population and property value, the City has faced financial challenges for many years. It has engaged in a variety of economic development efforts, including building the Genesis Convention Center and using casino revenue to support a U.S. Steel Yard, a minor league baseball stadium. More recently, in 2008 the State of Indiana enacted Public Law 146, establishing “circuit breaker tax credits” that cap local property taxes at a percentage of assessed value. Property taxes are the source of approximately 80 percent of the City’s General Fund operating revenue, and also a major source of support for numerous other local government agencies with overlapping jurisdiction. Based on analysis prepared by Policy Analytics, LLC in December 2009, the full implementation of the caps were projected to reduce Gary’s property tax revenues by approximately one-half. Projected Changes in City Property Tax Revenue ($Ms) Because of the large gap between recent historical revenues and the amounts permitted by the cap, the City and several of its related units – the Gary Sanitary District, the Gary Storm Water Management District, the Gary Public Transportation Corporation, and the Gary/Chicago International Airport Authority – petitioned the State of Indiana for relief from the caps in 2009. The state body assigned to review such petitions, the Distressed Unit Appeals Board (DUAB), granted partial relief for all but the Sanitary District and directed the City and its related agencies to retain a fiscal monitor to “assist the petitioning units in rehabilitating their financial affairs in the near-term with the ultimate objective of alleviating the petitioning units of their distressed status.” Public Financial Management (PFM) was selected in a competitive process to serve as the fiscal monitor. This report is the result of PFM’s review of the City’s financial situation and recommendations for changes to its financial and service delivery operations to comply with the property tax limits in Public Law 146. Given the gap between recent revenues and the revenue allowed under the tax caps, the recommendations are necessarily far reaching. Therefore, the report also identifies a variety of other issues that the City, State, County and other governmental bodies may wish to consider in restoring Gary and its related units to financial health while providing basic services to its residents, visitors and the community at large. Financial Assessment & Action Plan Plan Overview City of Gary, Indiana 2 It is important to note that Gary’s financial crisis did not arise quickly and will not be solved in short order. The City faces many of the same challenges in front of other older Midwestern cities with an industrial past. At the same time, action is critical. With the recent downturn in the economy and the concomitant imposition of the property tax caps, the City must change its traditional practices quickly. This will be a challenge, especially since the City has already taken steps to deal with severely reduced revenues, including laying off workers, downsizing or eliminating certain departments, transferring employees to grant-supported positions, contracting out and implementing fees for residential solid waste collection. Issues related to Gary and Northwestern Indiana The City’s ability to live within the new property tax caps is complicated by a number of factors, some unique to Gary and some faced by many municipalities in Indiana and elsewhere. These include: • Heavy reliance on a single revenue source – the property tax. Nationally most local governments use some combination of property tax, sales tax, and income tax for revenue. Indiana does not directly share the sales tax with local governments, and Lake County has not held a referendum to consider a local option income tax. While the property tax in many jurisdictions is a stable, albeit slow-growing, revenue source, Gary has seen its assessed value suffer as industry and business have left the City. Even before the state property tax caps were enacted, Lake County governments were subject to a local property tax rate cap related to Lake County’s not enacting a local option income tax. • Additional revenues provided to help Gary address this situation have faced separate challenges. For example, much of Gary’s recent local share of gaming revenue had not been paid by the Majestic Star casino due to a dispute with the casino owner. As a result, the City is delinquent in payments to the Regional Development Authority that were to be supported from this source. Now, the casino’s recent entrance into bankruptcy puts these important revenues further at risk. • Critical grant revenue sources for the City, such as highways and streets funds, have a declining statewide base in the short term as a result of the current economy. In the long term, the formula inputs for these revenues are not well-correlated with Gary’s trends (population, number of lane miles, vehicle registrations, etc.). • Non-local grant funds often are temporary, such as federal stimulus funding recently received to cover the cost of eleven new police officers for three years. Others only support optional programs like recycling education. In addition to these general revenue conditions, a number of regional and local issues challenge the City and other northwestern Indiana municipalities: • The City faces assessment appeals across multiple categories of real estate, reducing the total possible tax revenue even as expenditures increase with new labor agreements, pension costs, the rising of cost of employee health care, and other inflation in the cost of services, supplies and equipment. The most significant appeal generated a repayment obligation to US Steel for $8.1 million in prior year real property taxes; • In the past several years, Lake County has been unable to certify assessments in a timely manner, generating late property tax bills, loss of some prior year revenues, and cash flow borrowings by the City and related units to bridge the gap until property tax revenues were available. Although the fiscal monitor could not obtain detailed information, the City’s current tax collection rate is also believed to be low. Financial Assessment & Action Plan Plan Overview City of Gary, Indiana 3 A Changed Environment for Local Government Many local governments around the country are confronting similar revenue challenges, although Gary does have unusual external factors that accentuate its baseline problem. However, the deep recession has forced local and state governments to rethink their role, the services they provide, and how they provide them. News reports of government layoffs, service reductions, restructuring and downsizing have filled the news for over a year. Even before the current economic downturn, the federal Government Accountability Office (GAO) suggested that local government spending trends were unsustainable.1 This is not a temporary change, but a long-term readjustment of local government services across the United States. During its work on this report, PFM encountered many who felt that the current structure is untenable, and that Gary cannot live within its means. However, the fiscal monitor was given exactly this task – to develop a workable financial structure for Gary. Gary’s revenue structure must change because the rules have changed. State policy in Indiana is directing local government to reduce reliance on the property tax and increase the amounts of funding generated from user fees and other revenue sources. Even with some additional non-property tax revenues, Gary will have to reduce its budget and become a smaller, leaner, more effective government. Cherished services will have to be reduced or eliminated, and what Gary offers its citizens will have to be extremely focused. However, the impact of the changes can be greatly mitigated by making the City much more efficient than it has been in recent years. What Gary Must do to Cope with the Changed Environment How will Gary’s government become smaller, leaner and more efficient? This majority of this fiscal monitor report is comprised of detailed recommendations