BETHLEHEM CITY COUNCIL MEETING

November 3, 2004 Meeting Minutes

BETHLEHEM CITY COUNCIL MEETING
Bethlehem, Pennsylvania
Wednesday, November 3, 2004 – 7:45 PM – Town Hall

1. INVOCATION
2. PLEDGE TO THE FLAG
3. ROLL CALL

President J. Michael Schweder called the meeting to order. Reverend Lori Leib, of Bethany United Church of Christ, offered the invocation which was followed by the pledge to the flag. Present were Ismael Arcelay, Jean Belinski, Robert J. Donchez, Joseph F. Leeson, Jr., Gordon B. Mowrer, Magdalena F. Szabo, and J. Michael Schweder, 7.

4. APPROVAL OF MINUTES

The minutes of October 19, 2004 were approved.

5. COURTESY OF THE FLOOR (for public comment on ordinances and resolutions to be voted on by Council this evening)

Pension Bond Issue – Unfunded Actuarial Accrued Pension Liability

Chuck Nyul, 1966 Pinehurst Road, focusing on Bill No. 49 – 2004, Pension Bond Issue – Unfunded Actuarial Accrued Pension Liability, questioned whether the Bond Issue will get rid of the problem that he said was the increase in pension payments the City keeps giving pensioners. He asserted now it comes to the point when the City must pay for all of this. Recounting that Bethlehem Steel pensioners left the company with a certain amount of pension, Mr. Nyul informed the assembly that he has been receiving the same amount of pension from Bethlehem Steel for 19 years and it will not go up. Mr. Nyul, stressing that the City cannot give pensioners money every year and then decide it has to float a $35 million bond, remarked “get rid of the problem, please.” Communicating that the Mayor and City Council are the solution people, Mr. Nyul ask that they try to come up with a solution.

William Scheirer, 1890 Eaton Avenue, noting that he spoke with Dave Killick, Actuary, and a majority of Council Members about the issue of the Pension Bond, said it is his feeling that Council is not going to permit any jobs to be cut. Turning to the question of State Pension Aid, Mr. Scheirer advised he was told that the State Pension Aid every year will be calculated as if the Pension Bond never occurred. Mr. Scheirer continued on to exemplify that, if the bond issue resulted in proceeds that increased the pension fund by 50%, one-third of the funds will be taken out for purposes of calculation, then it will be calculated what the City would have been required to put into the pension fund that year in the absence of the pension bond, and that in turn will determine the State Pension Aid. Mr. Scheirer commented that the most optimistic borrowing plan would have a payment that is only about $1 million less than the payment that would be required this coming year in the absence of a bond which is about one mill. Mr. Scheirer observed two possible advantages to borrowing are making a good return in the stock and bond markets, and paying less interest than would be required, and slowly reducing the underfunding in the pension fund. While communicating the first is problematical, Mr. Scheirer said the second is more certain but needs to take into account to the fees involved in floating the bond issue which are in excess of $800,000 and equivalent to raising the interest rate by .22 percentage points. Mr. Scheirer stated it seems to come down to a payment of $3,000,000 next year can be avoided by borrowing at a somewhat reduced interest rate but subjecting the proceeds to the vagaries of the financial markets. Mr. Scheirer said this does not have to actually be decided today except for budget purposes, and could be done on one month’s notice at any time.

6. OLD BUSINESS

Special Bethlehem Authority Meeting – November 3, 2004

Mrs. Belinski notified the Members that she attended a special meeting of the Bethlehem Authority today, November 3, 2004, at 8:30 a.m. Mrs. Belinski informed the assembly that at the meeting approval was given for the City to borrow from the Bethlehem Authority $2 million to pay bills by the end of the year. Mrs. Belinski continued on to relate that one of the Bethlehem Authority Board members asked what happens next year if the water usage is low again such as this year due to a rainy season, revenue obtained in previous years is not received, and the debt service fund of the Bethlehem Authority gets lower and lower. Mrs. Belinski queried “what if next year the City comes to borrow again and the wells run dry. What do we do then.” Pointing out that another discussion ensued at the meeting about what other assets the Authority has, Mrs. Belinski related that James Broughal, Bethlehem Authority Solicitor, said “land sale.” Mrs. Belinski recalled a few weeks ago, David Brong, Director of Water and Sewer Resources, presented the strategic planning initiative. However, Mrs. Belinski stressed “we know what has to be done at the Filtration Plant [and]…at the Sewage Treatment Plant.” She continued on to say there are very good experts who will take care of the watershed and timbering if it happens, and added that water has not been able to be sold for six years so “we’re still hoping for that miracle.” Mrs. Belinski said she does not know what the strategic planning committee is all about, and does not know what plan they are going to devise “except that they put on the committee two people, optional maybe, for real estate purposes, real estate agents. Why do they need real estate agents. I said at our Council Meeting just recently I think you’re strategic planning committee is all window dressing because what you’re really about is selling our land up at the Watershed.” Mrs. Belinski remarked that the $50,000 given to Peter Wernsdorfer, facilitator to the strategic planning committee, could be saved since he is not needed.

7. COMMUNICATIONS

A. Assistant Fire Chief – Designation of Agent for PEMA

The Clerk read a memorandum dated October 19, 2004 from Michael Sankovsky, Assistant Fire Chief, advising that Mayor Callahan has designated Mr. Sakovsky as the agent for the City to coordinate all paperwork and to be a point of contact with the Pennsylvania Emergency Management Agency (PEMA).

President Schweder stated that authorizing Resolution 11 B is listed on the Agenda.

8 . REPORTS

A. President of Council

Committee of the Whole Meeting

President Schweder announced the Committee of the Whole meeting on November 4 at 7:00 PM in Town Hall to receive a presentation on the Five Points Traffic Study.

B. Mayor

None.

C. Finance Committee

Chairman Donchez presented an oral report of the Committee’s meeting held October 25, 2004, that was a continuation of the October 18 meeting, on the following subject: Unfunded Pension Liability. Chairman Donchez noted the Committee recommended that the proposal for the $35 million Pension Bond with financing options for a Tiered Match for 30 Years With and Without Principle Payments to Begin in 2005, and for Level Payments for 30 Years With and Without Principle Payments to Begin in 2005 be forwarded to City Council for consideration.

D. Public Safety Committee

Mr. Leeson, Chairman of the Public Safety Committee, presented an oral report of the Committee’s meeting held November 3, 2004, prior to this evening’s City Council Meeting, on the following subject: Fire Inspectors. Chairman Leeson noted that the meeting will be continued to another date.

9. ORDINANCES FOR FINAL PASSAGE

A. Bill No. 45 – 2004 – Amending General Fund Budget – Northampton County Drug Task Force – Overtime; Fire Department – Roster Duty; Mechanical Bureau – Equipment Repairs; NCDA Grant – AIDS Program; Tobacco Program

The Clerk read Bill No. 45 – 2004, Amending General Fund Budget – Northampton County Drug Task Force – Overtime; Fire Department – Roster Duty; Mechanical Bureau – Equipment Repairs; NCDA Grant – AIDS Program; Tobacco Program, on Final Reading

Voting AYE: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Leeson, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 7. Bill No. 45 – 2004, hereafter to be known as Ordinance 4283, was declared adopted.

B. Bill No. 46 – 2004 – Amending Non-Utility Capital Budget – Paint Mill Bridge Replacement Project; Illick’s Mill Grant; DCNR Grant – Parks and Playground Equipment; South Side Lighting and Elm Street Study

The Clerk read Bill No. 46 – 2004, Amending Non-Utility Capital Budget – Paint Mill Bridge Replacement Project; Illick’s Mill Grant; DCNR Grant – Parks and Playground Equipment; South Side Lighting and Elm Street Study, on Final Reading

Voting AYE: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Leeson, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 7. Bill No. 46 – 2004, hereafter to be known as Ordinance 4284, was declared adopted.

C. Bill No. 47 – 2004 – Amending Community Development Budget – HOME Program – HOOP Loans

The Clerk read Bill No. 47 – 2004, Amending Community Development Budget – HOME Program – HOOP Loans, on Final Reading

Voting AYE: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Leeson, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 7. Bill No. 47 – 2004, hereafter to be known as Ordinance 4285, was declared adopted.

D. Bill No. 48 – 2004 – Adding Article 129 – Bond Issue Item Amounts

The Clerk read Bill No. 48 – 2004, Adding Article 129 – Bond Issue Item Amounts, on
Final Reading.

Amendment to Bill No. 48 – 2004

Mr. Donchez and Mrs. Belinski sponsored the following Amendment:

That the following in Bill No. 48 – 2004, as amended, which reads as follows:

129. 01 From the date of enactment of this Ordinance until December 31, [2004], no municipal bonds shall be issued and sold by the City for the purpose of purchasing items of realty, or personalty, which items have a purchase price or cost of less than $50,000.00 [each]. This restriction shall not apply to expenditures pertaining to economic development related activities or functions, nor shall it pertain to City government expenditures for local contributions tied to non-City funding resources, including state and/or federal loans and/or grants.

129.02. On and after January 1, [2005], no municipal bonds shall be issued and sold by the City for the purpose of purchasing items of realty, or personalty, which items have a purchase price or cost of less than $75,000.00 [each]. This restriction may be temporarily suspended, only for good cause shown, by the affirmative vote of five (5) members of Council. This restriction shall not apply to expenditures pertaining to economic development related activities or functions, nor shall it pertain to City government expenditures for local contributions tied to non-City funding resources, including state and/or federal loans and/or grants.

Shall be amended to read as follows:

129.01 From the date of enactment of this Ordinance until December 31, 2005, no municipal bonds shall be issued and sold by the City for the purpose of purchasing items of realty, or personalty, which items have a purchase price or cost of less than $50,000.00. This restriction shall not apply to expenditures pertaining to economic development related activities or functions, nor shall it pertain to City government expenditures for local contributions tied to non-City funding resources, including state and/or federal loans and/or grants.

129.02. On and after January 1, 2006, no municipal bonds shall be issued and sold by the City for the purpose of purchasing items of realty, or personalty, which items have a purchase price or cost of less than $75,000.00. This restriction may be temporarily suspended, only for good cause shown, by the affirmative vote of five (5) members of Council. This restriction shall not apply to expenditures pertaining to economic development related activities or functions, nor shall it pertain to City government expenditures for local contributions tied to non-City funding resources, including state and/or federal loans and/or grants.

Voting AYE on the Amendment to Bill No. 48 - 2004: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Leeson, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 7. The Amendment passed.

Voting AYE on Bill No. 48 – 2004, as Amended: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Leeson, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 7. Bill No. 48 – 2004, hereafter to be known as Ordinance 4286, was declared adopted.

10. NEW ORDINANCES

A. Bill No. 49 – 2004 – Pension Bond Issue – Unfunded Actuarial Accrued Pension Liability

The Clerk read Bill No. 49 – 2004, Pension Bond Issue – Unfunded Actuarial Accrued Pension Liability, sponsored by Mr. Mowrer and Mr. Donchez, and titled:

AN ORDINANCE OF THE COUNCIL OF THE CITY OF BETHLEHEM, LEHIGH AND NORTHAMPTON COUNTIES, PENNSYLVANIA (THE “CITY”), AUTHORIZING AND DIRECTING ISSUANCE OF FEDERALLY TAXABLE GENERAL OBLIGATION BONDS, SERIES B OF 2004, IN THE AGGREGATE PRINCIPAL AMOUNT OF $35,000,000 (THE “BONDS”), AS PERMITTED BY AND PURSUANT TO THE LOCAL GOVERNMENT UNIT DEBT ACT, 53 Pa. C.S. § 8001 ET SEQ., AS AMENDED AND SUPPLEMENTED, FOR THE PURPOSE OF PROVIDING FUNDS TO BE APPLIED FOR AND TOWARD (A) FUNDING THE CITY’S UNFUNDED ACTUARIAL ACCRUED PENSION LIABILITY, AND (B) PAYING THE COSTS AND EXPENSES OF ISSUING THE BONDS (THE “PROJECT”); DETERMINING THAT THE BONDS SHALL BE SOLD AT PRIVATE SALE BY NEGOTIATION; DETERMINING THAT SUCH DEBT SHALL BE NONELECTORAL DEBT OF THE CITY; ACCEPTING A PROPOSAL FOR PURCHASE OF THE BONDS, AT PRIVATE SALE, AND AWARDING THE BONDS; PROVIDING FOR MATURITIES AND INTEREST RATES; APPOINTING A PAYING AGENT, REGISTRAR AND SINKING FUND DEPOSITORY; PROVIDING FOR THE TERMS OF THE BONDS INCLUDING DENOMINATIONS, DATE, INTEREST PAYMENT DATES AND RECORD DATES; PROVIDING FOR THE REGISTRATION AND TRANSFER OF THE BONDS; SETTING FORTH REDEMPTION FEATURES AND PROCEDURES; AUTHORIZING THE EXECUTION AND AUTHENTICATION OF THE BONDS; COVENANTING TO PAY DEBT SERVICE AND PLEDGING THE FULL FAITH, CREDIT AND TAXING POWER FOR THE PAYMENT OF THE BONDS AND PLEDGING, AS ADDITIONAL SECURITY FOR THE BONDS, CERTAIN STATE PENSION PLAN ASSISTANCE; CREATING SINKING FUNDS IN CONNECTION WITH THE BONDS AS REQUIRED BY SUCH ACT; APPROPRIATING PROCEEDS OF THE BONDS; DESCRIBING THE PROJECT AND SPECIFYING THE ESTIMATED USEFUL LIFE OF THE PROJECT; RATIFYING PRIOR ADVERTISEMENT AND DIRECTING FURTHER ADVERTISEMENT; AUTHORIZING AND DIRECTING THE PREPARATION, EXECUTION AND FILING OF A TRANSCRIPT OF PROCEEDINGS, INCLUDING A DEBT STATEMENT AND BORROWING BASE CERTIFICATE, WITH THE PENNSYLVANIA DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT AND THE FILING OF THIS ORDINANCE AND THE APPROVAL OF THE PENNSYLVANIA DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT WITH THE PUBLIC EMPLOYEE RETIREMENT COMMISSION; AUTHORIZING AND DIRECTING THE OFFICERS AND OFFICIALS OF THE CITY TO EXECUTE AND DELIVER DOCUMENTS AND TO TAKE ACTION AS MAY BE NECESSARY RELATING TO THE ISSUANCE OF THE BONDS; RATIFYING THE PRELIMINARY OFFICIAL STATEMENT AND THE DISTRIBUTION THEREOF AND AUTHORIZING THE APPROVAL AND DISTRIBUTION OF A FINAL OFFICIAL STATEMENT AND THE USE THEREOF IN CONNECTION WITH THE SALE OF THE BONDS; CREATING A CLEARING ACCOUNT; AUTHORIZING THE TRANSFER OF FUNDS TO THE APPLICABLE PENSION FUNDS OF THE CITY; AUTHORIZING THE PAYMENT OF EXPENSES; PROVIDING GUIDELINES FOR PERMITTED INVESTMENTS; AUTHORIZING THE PURCHASE OF A POLICY OF MUNICIPAL BOND INSURANCE; PROVIDING FOR THE AUTHORIZATION OF OFFICERS; ADOPTING THE FORM OF BOND; COVENANTING TO PROVIDE CONTINUING DISCLOSURE; PROVIDING FOR SEVERABILITY OF PROVISIONS AND REPEALING INCONSISTENT ORDINANCES.

Mayor Callahan affirmed that the Administration is recommending that City Council take positive action on the Pension Bond this evening and support the financing option of a Tiered Match for 30 Years With No Principal Payment in 2005. Mayor Callahan explained it is felt that the proposal is taking an already existing debt that is a liability which exists currently of $34.5 million on which in essence the City is currently paying 7-1/2% and refinancing that debt at 6%. Mayor Callahan observed this is much the same as any taxpayer would do on their mortgage to take the currently existing debt and refinance it at a lower amount. Mayor Callahan pointed out that the City would smooth out the pension debt payment over a 30 year period, and it would also make it much easier to budget. Mayor Callahan stressed that, equally important, the City will be providing a measure of relief to the taxpayers over the next two years and going out forward, allowing the fund to rebuild. Mayor Callahan further pointed out this will be done at a net savings of $1.5 million to the fund in the process. Mayor Callahan expressed the belief that the only way the proposal does not make sense is if City Council does not believe that the fund will return 5.9%-6% over the next 30 years. Confirming that the Administration provided the data for the investment returns for the pension funds over the last 20 years, Mayor Callahan highlighted the fact that over that 20 year period the average gain in all the funds combined has been 10.4%. There were only 5 years in the 20 year period that the fund did not return the 6% threshold at which money would be borrowed under the Pension Bond proposal. While observing it could be said it is a hypothetical risk, Mayor Callahan communicated there will be risk in the pension fund regardless because any time dollars are invested the money is at risk, but it is by putting that money at risk that there is a return on the investment. Expressing that the Administration feels the calculation of 7-1/2% is quite conservative, Mayor Callahan illustrated there is the opportunity to borrow the $35 million at 6%, to achieve some savings, to refinance the unfunded pension debt, to smooth out the payments over time, and to provide some necessary relief to the taxpayers over the next few years. Mayor Callahan informed the Members that this is a plan that is fiscally responsible and has been endorsed by the City’s actuarial consultant, the pension advisor, the financial advisors, and members of the Pension Board. Mayor Callahan explained “the $72 million debt is there no matter what we do this evening, and there will be risk we will incur regardless of the action that Council takes this evening. We are lowering our cost of debt with a predictable schedule versus inaction which is a higher cost debt with an unpredictable payment schedule. We are allowing the taxpayers in the City to breathe, and allowing the ongoing economic development…[to] come on line. All economic indicators show that the City is headed in the right direction. All indicators are positive. We have $14 million increase in our real estate assessments in just the last year…The City has turned the corner from an economic development standpoint. We have $330 million in economic development in the pipeline as we speak.” Saying “it is our opinion that we should give the City and the taxpayers an opportunity to breathe, [and] give the City time to fuel the recovery in a lot of the former Bethlehem Steel land which essentially make up 20% of the taxable land mass of the City to come on line,” Mayor Callahan expressed “we would be doing everybody a service.” Mayor Callahan stated the Administration does not feel there is any need to put unnecessary pressure at this time on the taxpayers and on the General Fund. Observing this is a problem that was really nobody’s doing and was in essence because of the losses in the stock market, Mayor Callahan explained the City is in a position where it is having to contribute $2.8 million to fund an unfunded liability into the pension fund when last year the City put zero into the pension fund. Focusing on the Tiered Match for 30 Years with No Principal Payment in 2005, Mayor Callahan pointed out that is not front loading the payments or back loading the debt. Mayor Callahan thought that the Pension Bond has been structured in a very reasonable and fiscally responsible way. Mayor Callahan further stated the Administration is recommending this proposal not only because it is the right thing to do in the smaller context of the Pension Bond itself, but the Administration thinks it makes sense given the financial state of the City in this year’s budget and the finances of the City moving outward.

Mayor Callahan, while commenting that the Administration is not wedded to any one proposal, explained the Administration purposely wanted to lay out four proposals that it felt made sense; i.e., Level Payments for 30 Years with No Principal Payment in 2005, Tiered Match for 30 Years With No Principal Payment in 2005, Level Payments for 30 Years with the Principal Payment Beginning in 2005, and Tiered Match for 30 Years With the Principal Payment Beginning in 2005.

Amendment to Bill No. 49 – 2004 - Financing Option Of A Tiered Match For 30 Years With No Principal Payment In 2005

Mr. Mowrer and Mr. Donchez moved to consider the Administration’s financing option of a Tiered Match for 30 Years With No Principal Payment in 2005.

Voting AYE: Mr. Arcelay, Mrs. Belinski, Mr. Donchez, Mr. Mowrer, Ms. Szabo, and Mr. Schweder, 6. Voting NAY: Mr. Leeson, 1. The motion passed.

Dave Killick, of Conrad Siegel Actuaries in Harrisburg, stated he is the plan actuary for the City’s Police, Fire, and Officers’ and Employee’s Pension Plans. Mr. Killick informed the Members that his primary role is to prepare biannual actuarial valuations of the pension funds to determine the funding status of the plans. Mr. Killick advised he then communicates to the City how much money needs to be contributed to the plan on an annual basis to keep it funded in accordance with Act 205 which is a State law that spells out the funding requirements for municipal pension plans. When preparing the actual valuation, Mr. Killick explained that he makes numerous assumptions regarding the value of the benefits that will ultimately be paid to the participants of the plan. Mr. Killick estimates how much an active member today is going to earn over the next few years so that when the employee ultimately retires he can calculate what the pension benefit will be. Mr. Killick estimates the likelihood that the employee will not only live to retirement but continue to work for the City and earn benefits until that time. When the employee retires, Mr. Killick makes estimates as to how long the person will live and receive a pension payment from the plan. With all of those assumptions, Mr. Killick explained that he discounts all the benefits expected to be paid to all the members over the years, such as 60 to 70 years, back to the valuation date using an interest rate assumption of 7-1/2%. Mr. Killick then determines what the liability is and compares that to the assets of the plan at that time. If the assets are in excess of the liability, then the plan is fully funded for prior years. If the assets are less than the liabilities, then there is an unfunded accrued liability that has to be made up by the City over the period of years prescribed by Act 205. At January 1, 2001 assets exceeded the accrued liabilities under the three pension plans. The effect of that was in determining the contribution requirements for the City, the City had to contribute an amount equal to the cost of the benefits that would be earned by the active members each year, but it was able to take a credit of about $300,000 to take into account the fact that the plan assets at January 1, 2001 exceeded the accrued liabilities under the plan. An actuarial valuation is done every two years. The purpose of doing the valuation every two years is to adjust the contributions upward or downward based upon how the experience of the plan during that two year period differs from the assumptions. Affirming that in January 1, 2001 there were excess assets, Mr. Killick pointed out that in 2001 and 2002 the investments did not fare too well. Mr. Killick, reiterating his assumption that the plan assets will earn 7-1/2% each year, highlighted the fact that not only did the plan not earn 7-1/2% in those two years but actually lost money in those two years that was a function of the stock market. Mr. Killick pointed out that, not only did the City of Bethlehem pension plan lose money, almost every pension plan across the country lost money during that two year period. Because the assumption of 7-1/2% each year was not met, Mr. Killick notified the Members the effect is that the shortfall must be made up by additional contributions by the City in future years. The period over which that shortfall must be made up according to Act 205 is 15 years, or the average future service of the active members if less. On January 1, 2003, instead of assets exceeding the accrued liability as was the case on January 1, 2001, there was a shortfall of about $35 million that is called the Unfunded Actuarial Accrued Liability (UAAL). Beginning in 2005, the City has to make contributions to the plan equal to the cost of the benefits that will be earned in 2005 by the active members plus an additional contribution to pay off the $35 million Unfunded Actuarial Accrued Liability over a period of years. Instead of a $300,000 credit, Mr. Killick informed the Members that resulted in an approximate $4.5 million extra contribution. Mr. Killick advised that earlier this year the State legislature passed Act 81 that amended Act 205 to allow the City to pay off or amortize the investment loss that occurred in 2001 and 2002 over 30 years instead of 15 years. The effect of that was to decrease the amortization contribution from $4.5 million to $3.2 million. In other words, it is reducing the 2005 contribution requirement by about $1.3 million. The City took advantage of that by having revised actuarial valuation reports prepared and filed with the Public Employee Retirement Commission. In 1995, the State legislature also passed a law that allowed for Pension Bonds to be issued. The idea behind the Pension Bond is that it is issued just like any other bond that the City might issue. However, the proceeds, instead of being used to purchase equipment, for example, were to be deposited into the pension plans to pay off any Unfunded Actuarial Accrued Liability that exists. Noting that the City could have floated Pension Bonds since 1995, Mr. Killick said but up to this point it really did not make financial sense to do so. However, now that the Unfunded Actuarial Accrued Liability is $35 million, it is something the City can consider. Mr. Killick continued on to say the reason the City might want to consider a Pension Bond is because, based upon the current interest rate environment, the City may be able to borrow money to deposit into the pension fund and pay off the debt of the Unfunded Actuarial Accrued Liability at an interest rate that is approximately 6% compared to the 7-1/2% used in the calculation of the amortization of the Unfunded Actuarial Accrued Liability in the pension plans that currently exist.

Darryl Peck, of Concord Public Finance, financial advisors, informed the Members that the company developed a financing plan for the Pension Bond that is a way to refinance the existing obligation. Mr. Peck, referring to the graph he had distributed titled, Projected UAAL Payments, showing the Unfunded Actuarial Accrued Liability, explained that, as Mr. Killick discussed, the payments would be made over a 30 year period. Mr. Peck, reemphasizing the 30 year period, highlighted the fact that the returns were poor for everybody in 2001 and 2002. Mr. Peck noted that the State itself had the foresight to allow municipalities to amortize those losses over a 30 year period. Mr. Peck explained that, when the graph would have been produced earlier this year, the line would have been much higher at about $4.5 million versus the present line showing beginning payments just over $3 million. Mr. Peck demonstrated that the graph shows the payment streams the City is facing over 30 years. All of the payments will equal $72 million. In the financing plan that will be presented, all the payments on the bonds, including expenses, have been factored in. All of the savings are net of all costs of issuance. Mr. Peck affirmed that Act 205 requires the City to make the stream of payments. In today’s dollars, the present value of that amount is $34.6 million. Mr. Peck said it is important to note the Pension Bond issue of $35 million is a transference of an obligation. The City currently has on its books an existing liability of $34.6 million. Mr. Peck restated it should be understood that the Pension Bond is simply a transference of the existing $34.6 million obligation. Mr. Peck emphasized it is simply not true to say that the City is going to issue additional debt of $35 million. Mr. Peck affirmed that a Pension Bond would be issued and the $35 million will be deposited into the pension fund to totally fund the liability and put the money to work for the City. With reference to a question raised at the Finance Committee meeting of how the rating agencies are going to look at the City of Bethlehem if it issues a $35 million bond, Mr. Peck advised a rather clear answer was received that there will be no effect on the City’s rating. Mr. Peck observed that is a credit to the structure that is being proposed. Mr. Peck communicated he hoped Council would agree that the Pension Bond structure is conservative, and no games are being played. The proposed repayment will very closely match the existing payments that is the blue line on the graph. Mr. Peck notified the Members that written confirmation has been received from Standard & Poors rating agency that in the City’s doing the Pension Bond it will not have a negative impact on the City’s credit rating. Mr. Peck, referring to the total $72 million amount of future payments, explained that the Pension Bond really just becomes a refinancing, and the Pension Bond debt service schedule of a Tiered Match for 30 Years with No Principal Payment in 2005 will provide aggregate cash flow savings of about $1.5 million, with the present value savings in excess of $3 million. Mr. Peck explained that the City’s current pension obligation is accruing at an assumed actuarial rate of 7.5%. The Pension Bond will have an interest rate estimated to be approximately 6%, and could be less. As a result, Mr. Peck advised therein lies the savings, and added it is just like a bond refinancing that the City would do in its normal course of business or a mortgage refinancing. Mr. Peck, focusing on the 6% borrowing costs, reemphasized that the historical returns of the pension funds serve to demonstrate that the refinancing is not detrimental. In terms of historical investment returns, Mr. Peck pointed out that over the past 10 years the pension funds have averaged investment returns in excess of 8%. Over the past 19 years, the pension funds have averaged investment returns in excess of 10%. Acknowledging that, of course, nobody can predict what the future returns will be, Mr. Peck highlighted the fact that in looking back at the historical data the pension funds have earned 8% over 10 years, and over 19 years the pension funds have earned 10%. Mr. Peck communicated that is the rationale for undertaking a Pension Bond. Mr. Peck notified the Members that a page he distributed this evening replaces page 1 in the presentation and contains the same numbers but with additional columns. Mr. Peck stated that, based on the recommendation of the Administration and Concord Public Finance, he will focus on the Tiered Match financing option. Mr. Peck explained that, in looking at the Tiered Match for 30 Years With No Principal To Be Paid in 2005, by undertaking the Pension Bond transaction with that financing option the City will save almost $1.4 million in 2005, the City will save $300,000 in 2006, and thereafter there will be a small amount of savings and dis-savings. Turning to the blue line on the graph, Mr. Peck noted that debt service payments are approximately $3 million, and fall down after 2016 to about $2 million. Mr. Peck highlighted the fact that under this debt service schedule there is no back-end or front-end loading. Mr. Peck continued on to point out that over the entire time period there will be aggregate cash flow savings of almost $1.5 million which in present value terms is in excess of $3 million. Mr. Peck advised that, under the financing option of the Tiered Match for 30 Years With A Principal Payment To Be Made In 2005, the City will save only $300,000-$400,000 over the next few years. Mr. Peck noted the question is where should that money be in 2005. Mr. Peck expressed that ”the thought process is let’s leave that money in the taxpayers pocket, or leave that money in whatever other resources would have to be reduced from the citizens.” Mr. Peck pointed out that over time those accumulated savings will be experienced for a longer period of time, and the taxpayers services would not be impaired under the Tiered Match for 30 Years With No Principal To Be Paid in 2005 proposal. Stressing that everybody knows a dollar today is worth more than a dollar tomorrow, Mr. Peck queried “when would you rather have the money. I would rather have the money today, or over the next two or three years.” Mr. Peck continued on to explain the option is to have $1.7 million of savings over the next two years, and the debt service payments would be very close to the existing obligations. Turning to the graph that shows a big spike in 2016, Mr. Peck commented he does not know that the Administration or Council would want to consider such a spike in 2016. Mr. Peck pointed out that the Administration’s preferred proposal has the ability to erase that spike and not impair any other year.

Mr. Reichard, affirming that he and Mr. Donchez, Chairman of the Finance Committee, have had discussions over the last two days, noted that he gave to City Council tonight some points he would like to make about the Pension Bond Issue. Mr. Reichard stated that one of the items Mr. Donchez had inquired about as well as other Members of Council and some individuals in City Hall is why the City cannot just borrow for next year or the year after. Mr. Reichard informed the Members that the pension law prohibits that. The pension law states that the City can borrow for the unfunded pension liability but it cannot borrow piecemeal, that is, the City cannot borrow its Minimum Municipal Obligation (MMO) for the pension funds for next year. If the City is going to borrow, it has to borrow the full amount of the unfunded actuarial accrued pension liability. Mr. Reichard confirmed that the Administration asked those questions before they ever approached any Members of City Council. Mr. Reichard informed the Members that he spoke with Attorney Peter Carlucci, Bond Counsel with Eckert Seamans, about a line of credit or a bank loan. However, Mr. Reichard explained there is not a bank that is going to fix a taxable rate for 20 years or 30 years. Instead, a bank may give the City an interest rate for 5 or 7 years, but then the bank will adjust the rate. In contrast, Mr. Reichard pointed out that with a pension bond borrowing there will be a fixed interest rate, and there will be a call feature after about 10 years so that the City can call the bonds and refinance them. Mr. Reichard notified the Members this is what the City of Easton did in 2003 and what the City of Allentown did since both cities issued Pension Bonds. Mr. Reichard, acknowledging it is the Administration’s proposal and it is City Council’s prerogative to vote on it, highlighted the fact that “it’s a liability on the City’s books. I don’t care how you look at it. I think it’s been made clear it’s $35 million. If we run the gamut for the next 30 years it’s $72 million at the 7-1/2% interest. If we do the borrowing, smooth out the budget payments, it’s $70 million, and it’s at a rate that for today this borrowing does make sense. You can sit there, and I can sit there, and you can be nervous about it in the future, and say well are you going to be able to make these kind of returns. It’s what we look at every month on the Pension Board. We look at history, but we only have history to look at. And, over the last 19-20 years…we’ve averaged 10.4% on those funds. As I said to Members of the Finance Committee, and Members of Council, we have a good pension board. We have good consultants. We have our monies in a good mix of fixed and equities. We’re interviewing [investment] managers now. With everything that you’re bringing up for the future, with that in mind, what happens if the market goes down, what kind of funds can we invest to make sure we don’t have the type of losses that some of the other funds would get. And, I think we’ve done a good job. And, long before I’ve been on the Pension Board, the Pension Board members have done a very good job over the years of funding that.”

Turning to a comment made by Mr. Nyul about the benefits, Mr. Reichard recalled that when he started with the City in 1974 the Bethlehem Steel was the cream of the crop. Their employees were making the money and City employees were not. Denoting that benefits increase, Mr. Reichard pointed out that there are negotiations, and the City tries to keep benefits within the range that can be afforded. However, there are things that are out of the City’s control such as Act 111 and arbitration. Mr. Reichard communicated that there will be benefits into the future. Mr. Reichard highlighted the fact that the City has funded the pension plans over the years according to the requirements of Act 205, and will continue to fund them according to the requirements of Act 205. Mr. Reichard, agreeing that tonight is a very important night for the Administration and the City Budget, advised “these are not scare tactics. This is just the facts. We’re either going to come out of here tonight with an agreement, hopefully, on the proposal that the Administration puts forth, or tomorrow morning the Mayor and I are going to have to make some painful decisions. Because, as we’ve talked about it, it’s $2.8 million being added to the General Fund. There’s a $1 million increase in medical [insurance]. And, there’s wage increases next year, even though the 27th pay is coming off that’s certainly helped, but there are wage increases. And that represents a 24% increase, and even greater if you look at the medical [insurance costs]. We think we have a good proposal here. I told Members of Council early on, and I’ll reiterate it, I was never a fan of the Pension Bond. I looked at this closely, and I feel strongly that this is the way that we should approach it because, as [Mr. Peck] said, it’s a debt. And, you’re going to have it either way you look at it. It’s going to have to be funded. And, it’s going to be your decision tonight to decide how it’s going to be funded.”

President Schweder, with reference to the Mayor’s comments last week that if the Pension Bond proposal did not go through there are painful decisions to be made such as a tax increase or layoffs, asked how much money is needed to cover the debt and unfunded liability in the General Fund next year.

Mayor Callahan replied that if Council does not take action on the Pension Bond proposal this evening, the City’s mandated $2.8 million contribution to the pension fund next year equates to an 18% tax increase in order to fund it.

President Schweder inquired whether the $2.8 million would be the total liability for the unfunded liability and any payments into the pension fund that the City would have to make in 2005.

Mayor Callahan explained that the City’s portion for its unfunded liability that it owes to the pension funds as mandated by the State to be paid is $2.8 million. Based on the current real estate assessment that would equate to 2.15 mills and would necessitate an 18% tax increase.

President Schweder, querying if $2.8 million covers every dollar the City would need both in payments to be made and for lost earnings, asked what is the dollar figure that the City has to put into the pension fund next year for funding everything including any liability going out and investment losses.

Mayor Callahan replied for next year it is $2.8 million.

Mr. Reichard explained that the City’s pension liability next year is $5.7 million total subtracted from which is the State pension aid that the City will receive which would bring down the total to about $3.2 million. Mr. Reichard, noting some charges go to the Water and Sewer Funds, and Golf Course Enterprise Fund, said that then leaves a net amount of $2.8 million. Mr. Reichard restated that the total unfunded pension liability next year is $3.2 million plus additional normal costs which comes to a total of $5.7 million.

President Schweder asked “how much more do we have to pay to the General Fund to cover all the liability that the City would have in the year 2005.”

Mayor Callahan responded $2.8 million.

President Schweder, observing perhaps it is just semantics, stated his understanding is that the City has to put in the unfunded liability now and the City cannot borrow piecemeal. However, President Schweder pointed out the reality is if the City does not borrow it can be done piecemeal.

Mayor Callahan said that is correct.

President Schweder, noting that at the very least the City would have to borrow $20 million which is the amount of the pension investment losses, stated the point is the City would not have to do that if it did not borrow the funds. President Schweder recounted what was said tonight is the other reason to borrow money is because this liability is a liability the City has so it does not cost any more money. President Schweder said, if he understands what he has been told, if the City pays the amount out of General Fund revenue and did not borrow the money then the liability would be $35 million that the City would have 30 years to pay back interest free.

Mayor Callahan stated the City would have to put $2.8 million into the pension fund on which a 7-1/2% rate of return is assumed over the next 30 years. Mayor Callahan advised the Administration is proposing that rather than put the money in piecemeal now the City is going to fully fund the pension fund, have that money in the pension fund and pay 6% interest on it, but the City is assuming it will get 7-1/2% interest on that money which clearly has been done over time. Mayor Callahan said the difference between the $72 million and the $70 million is the difference between 7-1/2% and 6%, and represents the savings. Mayor Callahan continued on to say that if the City puts the money in now, pays 6% but gets 7-1/2% return, it will fully fund the pension plans and will save $2.25 million.

Mr. Peck, referring to the handout dated November 3, 2004, titled, Unfunded Pension Liability Restructuring – Financing Options, turned to page 7. Mr. Peck, noting that he has already talked about the payments that are required to be made of $3 million over the next 12 years and approximately $2 million afterwards, stated that on page 7 there is an amortization schedule. Mr. Peck said “think of it as an annuity. You can either…put $35 million in the account today, or you can put something more than that in over time. The column called Aggregate Payment is the $3.2 million. That’s the data that builds the blue line on the graph. Those are comprised of components, a principal component and an interest component. Those are the two columns, the principal component being the $34.6 million, the interest component being the $37 million. Those two put together equal the $72 million that must be paid over time. Everybody knows that you can put $35 million away [and] invest it to get to $72 million, or you can put it in piecemeal over time in the form of an annuity. What the [pension] bond will do, then, is to equate the debt service to the required payments under the actuarial calculation. That is what is presented on page 3. And, the…$1.5 million in savings is the difference between 6% and the 7-1/2%.”

President Schweder pointed out that the Commonwealth of Pennsylvania under the legislation says that this has to be paid back, but it does not all have to be borrowed. President Schweder, noting there is a way, agreed it may be a difficult way and it may be painful cuts and other things. But, he stressed, there is a way to do this without borrowing money.

Mayor Callahan, acknowledging that no one has ever denied that, noted it has been made clear if the City does not do this pension bond the City is going to owe $2.8 million next year and that will equate to an 18% tax increase. Mayor Callahan continued on to say that amount, coupled with the medical costs, the debt service payment on the Hirko settlement, and a 4% pay increase, is going to equate to greater than a 24% tax increase. Mayor Callahan explained the Administration is saying that can be avoided by taking action on the Pension Bond this evening. Mayor Callahan, noting he does not think anyone has denied that it can be done a different way, asserted it will be a lot more painful and in the end more expensive.

President Schweder commented if it is done on a pay as you go basis then the City does not incur the interest expense that it would have incurred if it took out the Pension Bond. He continued on to say the City would earn it with what it put in but the City would not have the additional interest cost since it would be making payments with General Fund revenue.

Mr. Peck, turning to page 3, focused on the column titled UAAL Amortization, and noted that is the blue line on the graph. Mr. Peck stated those are the payments that are required to be made under the snapshot of the actuarial assumptions. Mr. Peck explained that stream of payments will be replaced with the column titled Annual Debt Service. The Difference column on the right shows that $1.4 million of savings will be achieved in 2005, $300,000 in 2006, and other amounts thereafter. Through matching up the payments of the debt service with the UAAL amortization the City will achieve $1.6 million of savings or cash flow relief in 2005 and 2006, so over the life of the loan the City would pay less in payments.

President Schweder inquired whether 30 to 50 jobs as a layoff figure is what Mr. Reichard assumed that $2.8 million would generate.

Mr. Reichard, commenting it would probably be more than that, and noting the salary basis is about $30,000 per employee, observed it would probably be about $900,000. Mr. Reichard highlighted the fact that, obviously, the City cannot lay off 300 people, for example. Stressing that he does not want to enter into a debate regarding the issue, Mr. Reichard said he thinks it is made clear that the City owes $72 million. Mr. Reichard remarked that if one wants to fund it out of the Budget then the City would have to put in $3.2 million next year, plus the normal costs, plus administrative costs, and for the next 5-6 years there will be about $6 million of payments annually. That would have to come out of General Fund revenues, or a combination of revenues and budget cuts. Mr. Reichard observed what President Schweder is saying is that if the City wrote a check today for $35 million “it’s done. We don’t have that 7-1/2%. We have an interest rate assumption to pay whether we invest the money or not. Whether we invest it or not, that’s our payment schedule. That $72 million UAAL amortization was done by Dave Killick not Dennis Reichard, [and] was given to the State…That’s what’s owed…and that will have to come out of the General operating revenues…”.

President Schweder observed that this may be the solution, or a partial solution, or perhaps there is some other way of doing it. However, President Schweder stressed that “we’re sitting here and being asked to do this in the dark…”. President Schweder stated that every decision that is made financially has a reaction on every other decision that is made. President Schweder pointed out that Council has no idea what is in the Proposed 2005 Budget and the Pension Bond proposal is an integral part of that Budget. President Schweder stressed that, in fairness to Council, the Members should see the proposal as part and parcel of an entire financial package. President Schweder remarked what the Administration is suggesting is that City Council vote for a $72 million financing option without knowing how it impacts anything else, and what are the revenue streams and proposals for next year. President Schweder recounted that, as Mrs. Belinski stated earlier and noting that Mr. Leeson has the same concern, the City went to the Bethlehem Authority this morning and got $2 million or else would have defaulted on a payment on November 15. President Schweder, agreeing that the Bethlehem Authority was right in doing so, noted those funds are now evaporated because there is a reserve that needs to be kept. President Schweder communicated that Council does not understand, by taking this of and by itself, the implications of the proposal without seeing the rest of the budget. President Schweder, stating it does not need to be done this evening, advised that Council should look at the proposal and the alternatives, and what are the ramifications of proceeding with a Pension Bond or not proceeding with it. More importantly, President Schweder noted is the question of whether it should be done as part of a package of several things, such as changes in the tax rate, elimination of positions, or a form of borrowing. President Schweder continued on to point out that another situation may be that Council could make the determination that a year from now the issue could be looked at again. President Schweder, communicating he has talked about it for years but has not been supported by his colleagues, recalled that he has talked for years about Council having its own fiscal and budgetary analyst. President Schweder asserted what the Administration is asking Council to do with no staff is to vote on something that is a $72 million borrowing scheme when Council has no idea how it fits into the Proposed 2005 Budget, and stated that he thinks the process is wrong.

Mayor Callahan thought that to characterize it as a borrowing scheme is inaccurate. Mayor Callahan said what President Schweder is asking is to put the cart before the horse. Affirming he is obligated to present a balanced budget, Mayor Callahan stated that, in order for him to make a determination about a potential tax increase or job cuts, he has to know whether he is going to have a $2.8 million gap in his Proposed 2005 Budget. Mayor Callahan, while acknowledging he could present the Pension Bond in the context of the 2005 Budget, remarked what he thinks he would hear from Council then is that he is forcing a pension bond down Council’s throats in order to avoid a tax increase. Mayor Callahan, expressing he is looking for some guidance, stressed that he cannot present a budget until he knows what Council wants to do with the $2.8 million liability. Mayor Callahan continued on to state that that, if Council chooses not to take action, then he will present a balanced budget as he is under obligation to do, and find a way to plug the 18% gap through a tax increase coupled with job cuts. Mayor Callahan pointed out the way it looks now is that the City would be looking at a 24% tax increase. Mayor Callahan stressed that the Administration has been trying throughout this year to make the case for how tight it is this year, and how hard it is going to be next year. Mayor Callahan communicated if that is falling on deaf ears with Council then there is not a lot he can do about that. Mayor Callahan recounted that the Administration has been talking about the increase in medical costs, the increased cost in the pension fund, the debt service cost for the Hirko case settlement, and the contractually obligated wage increases for next year. Mayor Callahan stated “we have tried to present you, while not the budget, the picture as to where all this fits together. You want to know what the impact will be on next year’s budget with the absence of a pension bond, I told you. It’s $2.8 million, or an 18% tax increase. I don’t know how much clearer I can be. Now, if you choose not to do that, then I will find a way to present a balance budget, and then Council…can determine…whether you want to do it the way I presented it, or in a different way. But, we really do need to know tonight what…Council wants to do because I’ve made a commitment to present a balanced budget to you on November 11th, and I plan to keep that commitment. But, I can’t do it until I know whether you and the rest of this Council think that a Pension Bond is the right idea. It’s just that simple. I can’t present you a budget until I know how I’m going to pay for everything…and I need some direction from Council. We’re laying out the case. It’s nobody’s fault how we got here. We’ve got a $2.8 million liability. We’ve laid out four proposals before Council. I have brought each individual Finance Committee [member] in to meet with all the professionals one on one to ask any questions they want. I made that offer to Mr. Leeson. And, we have throughout this process answered every single question that’s been posed to the Administration…We just ask you to make a decision this evening.”

Mr. Reichard, turning to the Bethlehem Authority meeting today, affirmed that the $10.3 million in the debt service reserve fund is Water Fund revenues. While pointing out the reserves in the account can keep building, Mr. Reichard remarked there could be $15-$20 million in the account that is never used. Mr. Reichard, confirming that the excess monies in the reserve fund can be used to pay down debt service, advised the debt service reserve fund is there to pay debt service if the Water Fund does not have sufficient funds to pay it. Adding that was the safeguard, Mr. Reichard advised the debt service reserve fund was set up for that purpose. Pointing out that the City’s water rates are governed by the PUC, Mr. Reichard highlighted the fact that he cannot raise rates without PUC approval.

President Schweder, while agreeing it was the right thing to do, pointed out that the City owes $3 million in debt service reserve fund payments for the last several years. Further noting Mr. Leeson had asked about the money that the City must pay back to the Sewer Assessment Fund, President Schweder continued on to say that Mr. Leeson had asked Mr. Reichard if there is a proposal to fund it and Mr. Reichard did not have a proposal. President Schweder restated that, without Council’s seeing what is in the Proposed 2005 Budget including expenditures and new programs, Council would not be able to make a determination whether some expenditures should be cut or other revisions should be made to limit the amount of money that might have to come out of the General Fund for the Pension Bond. President Schweder stressed this “is not the way we should be doing this. This is blind man’s bluff.” President Schweder, remarking that the process is flawed, stated that Council is being asked to expend funds before Council sees what the total package is, and he thinks that is wrong.

Mayor Callahan, with reference to President Schweder’s comments, explained that unless the Administration has Council’s agreement to change fees or issue a Pension Bond it makes it very difficult for the Administration to develop a Budget. Mayor Callahan expressed that, if he presented a Budget to City Council that contains fee changes or a Bond Issue, he would be chastised for including fees and changes without Council’s consent. Mayor Callahan said, after he presents the Budget, if Council determines they do not want to change a fee, or wants to find another revenue source, then at that point Council is free to change items in the Budget any way they wish. Mayor Callahan restated that he cannot present a balanced Budget until he knows what Council has or has not consented to. Otherwise, Mayor Callahan stressed he would be accused of forcing changes and fees “down Council’s throat” in that context, and he is not trying to do that. However, Mayor Callahan communicated he is trying to paint the general picture of the financial state of the City, and he can let Council know that the Administration is recommending the Pension Bond not just because the Administration thinks it is a good thing in relation to the Pension Bond and the funding of the Pension Fund but in relation to this year’s Budget and next year’s Budget, and Budgets going out forward for the next 30 years. Mayor Callahan stated “it is our recommendation that it makes sense in the overall micro and macro context of the City’s financial situation, coupled with all the economic development that is ongoing in the City.”

Mr. Leeson, stating that he would preface his remarks by noting his comments are only half related to the Pension Bond, said he would characterize where the City stands right now is probably one of the worst fiscal crisis that the City has had in the history of the City, and added it is really unprecedented. Mr. Leeson explained that “the origin of the City’s crisis dates really back to a pattern of borrowing from Peter to pay Paul, and draining the surplus funds from municipal authorities, such as the Bethlehem Authority, the Housing Authority, the Parking Authority.” Mr. Leeson, highlighting the fact that this is not a crisis created by this Administration, denoted that the Mayor and Council are now forced to deal with it. Mr. Leeson communicated that an event happened at 8:30 this morning that elevated the crisis to an unprecedented level. Mr. Leeson noted there are six factors he has been able to identify that he thinks have contributed to bringing the City to where it is. Mr. Leeson stated the first has to do with the Bethlehem Authority. He continued on to say that, for many years, the City has drained funds from the Bethlehem Authority accounts. By the numbers acknowledged by the City’s financial consultants, Concord Public Finance, the City owes $3.4 million to the Bethlehem Authority. Mr. Leeson added that Mr. Reichard has indicated the number has to be evaluated. Mr. Leeson stated the City owes $800,000 for the failure to meet the bond obligations concerning the 105% debt service coverage ratio. The $3.4 million only covers the period from 2000 to 2004. Mr. Leeson said he understands the accountants are currently working on the millions the City owes for the period before the year 2000. Mr. Leeson recounted that, for many years, the leadership of the City recognized that eventually a day of reckoning would arrive with the constant transfer of funds to drain other accounts to pay bills. Advising that he has been monitoring the cash flow of the City, Mr. Leeson remarked the City is in dire circumstances. Agreeing that Mr. Reichard did the right thing this morning by asking the Bethlehem Authority for $2 million from the debt service reserve fund to make the bond issue payment, Mr. Leeson advised that the City owes about $3.3-$3.4 million on November 15 and it has to be wired by November 12 in order to be credited. Pointing out that the City does not have that amount of money, Mr. Leeson noted the City has about $1 million and with the $2 million requested this morning from the Bethlehem Authority the City is still short several hundred thousand dollars to make the bond issue debt service payment or the City would be in default, and would be the second municipal government in the history of the United States to default on a municipal bond. Acknowledging he knows that is not going to happen, Mr. Leeson communicated that if Council had to hold a special meeting it would in order to address the situation. Mr. Leeson stressed “if we default in the bonds it would destroy the City’s credit rating, not to mention a host and avalanche of other problems. That’s not going to happen. We’re not going to let it happen.” Mr. Leeson commented he is not sure what will be left after the City takes the $1 million out of the Water Fund. Mr. Leeson affirmed he was not at the special Bethlehem Authority meeting this morning but Mrs. Belinski was. Pointing out Mrs. Belinski confirmed one of the concerns on an ongoing basis into the future is draining the surplus funds from the Bethlehem Authority, and being locked into the current water charges because the City does not have the authority to raise the rates without PUC approval, Mr. Leeson asserted “there isn’t going to be any more money next year in the Water Fund either.” Mr. Leeson observed that the City is likely to turn up short again and face possible risk of defaults in 2005. Mr. Leeson, pointing out that Mrs. Belinski has raised the issue repeatedly, stressed it apparently was confirmed at the Bethlehem Authority meeting this morning that perhaps real estate will have to be sold at the Watershed to raise money because the Water Fund is not bringing the money in. Mr. Leeson remarked “not only we have mortgaged the house to pay the bills, maybe we’re going to be selling the house to pay the bills.” Mr. Leeson, stating the second issue is the Bethlehem Housing Authority, highlighted the fact that it is a problem not created by this Administration. Mr. Leeson pointed out that the City owes the Bethlehem Housing Authority $150,000 and that has not been paid. Third, Mr. Leeson noted is the Sewer Fund. Recounting that several years ago, $1 million was taken out of the Sewer Fund, Mr. Leeson confirmed Ordinances 4029 and 4061 were passed that mandated the repayment of $1 million during the year 2005. Mr. Leeson noted that, in recent exchange of memorandums with Mr. Reichard, he understands that is not being addressed. Mr. Leeson advised “we are going to comply with the laws of the City, and we expect that the Mayor who took an oath to uphold all the laws will do so.” The fourth factor is the municipal bond payments in view of the Water Fund not generating enough revenue. Stating the fifth point is the PMRS situation, Mr. Leeson recalled that in December 2002 the director of the Pennsylvania Municipal Retirement System (PMRS), James Allen, was notified that the City had given options for early retirement to about 50 City employees. At that time, one of the issues was what that was going to cost the City long term, although short term the City was going to have some immediate savings in the Budget. Mr. Allen wrote a letter in December 2002 that basically said the cost is going to be $2 million. While the City did not have to front that money at that time, in the year 2004 PMRS was going to do an actuarial evaluation as to what would be needed to fund the actuarial loss in the PMRS fund because of the early retirements. Mr. Leeson commented “the jury is out on that problem.” Sixth, Mr. Leeson said in looking at the Auditor’s report for December 31, 2003 for the City, the debt levels were $24 million for current liabilities, and approximately $200 million for long term liabilities that included municipal bond debt. In the interim, the City has taken out more municipal bond debt. Mr. Leeson, observing that recent correspondence indicated that the figure may be $28 million, and noting Mr. Reichard is nodding yes, pointed out that puts the number up to $225 million long term debt. Mr. Leeson highlighted the fact that, if the City takes out the $72 million obligation, the debt figure will be $300 million in principal and interest payments which is an all time high for the City, if not one of the highest for Third Class Cities in Pennsylvania. Mr. Leeson stressed the problem is that the City is not able to pay its bills any more. Mr. Leeson continued on to say, if that were not bad enough, “if you monitor the City’s cash flow and look at the numbers that come in each month, we are down approximately $1.1 to $1.4 million between reduced revenues and increased expenses. Mr. Leeson acknowledged there are things over which the Administration has little or no control. Mr. Leeson communicated that means, with the projected cash balance at the end of the year, the City will be in the red, and might not be able to meet payroll either at the end of December or in early January until the tax revenues for 2005 start to come in. While querying what is the solution to this dire circumstance, Mr. Leeson observed that, as was debated this evening, either expenses must be cut or revenues increased which means increased taxes. Mr. Leeson said in his own estimation an illusion is being created, not by intent or not by plan, that somehow things are not going to be that bad, the City can borrow its way out of this, can mask the pain, postpone the pain, make people think this is going to go quietly away in the night and disappear, and it is not going to hurt anybody financially. Mr. Leeson asserted “that’s just not so.” Mr. Leeson expressed his belief that borrowing and incurring $72 million in debt and putting the money into the equity markets “is basically what is known as investing on margin in the stock market. It’s a practice that stock brokers are required to tell every single person who…borrows money to invest money is among the highest risk activities that a person can engage in, and it’s only suited for people who can afford to lose the money.” Stated another way, Mr. Leeson stressed “you don’t borrow money and then invest it in the stock market unless you can afford to lose it. But that is essentially what we are doing is borrowing money to put it in the equity markets. That assumes we can afford to lose it. We cannot afford to lose it, given the circumstances that the City is in. We cannot afford to assume that risk. The City of Philadelphia has lost tens of millions of dollars to this. The City of Pittsburgh has lost tens of millions of dollars to this type of a plan. The State of New Jersey, I understand, although I don’t have the figures, has lost millions of dollars to doing this. If that happens to us…the debt doesn’t go away, now we’ve got to borrow more money on top of it. Now, if that weren’t bad enough, it gets worse. The proposed payment schedule offered by the Administration basically builds in most of the savings to the year 2005. Now, I ask you, what’s the magic about the year 2005. Well, I’m not going to answer that question. I’ll leave it to you. But, we’re going to have artificially low payment in 2005, not paying any principal, and then we’re going to whack everybody in the year 2006 with the payments basically skyrocketing because we took most of the savings in 2005. And by deferring payment of principal in the year 2005, we also add interest expense to the City by a factor of approximately $300,000, a $300,000 added expense that we don’t need amidst all this financial misery in order to have an easy year in 2005. Now, what justification is there for that to add $300,000 in more debt so we can sort of create the illusion in 2005 that things aren’t that bad.” Mr. Leeson stated he is going to vote no on the Pension Bond plan because he thinks it is time that the City starts paying its bills, starts telling the public that it owes a lot of money, and it is time to say that the City is not going to push its debt up to $300 million. Mr. Leeson commented, unfortunately, that does mean tax increases. Mr. Leeson, while acknowledging he does not like tax increases any more than any other person does, stressed it is time for a healthy dose of candor with the public that the City is in trouble and needs to get out of it. Mr. Leeson noted “when you’re in the hole, you don’t dig further. When you’re in a hole you stop digging. But if we adopt this plan, we’re going to dig ourselves further into the hole. And, I say it’s time to climb out of it.”

Mayor Callahan commented “I will say, as Mayor of the City of Bethlehem, that the City is not in a fiscal crisis. Is the City, like any other Third Class Cities, [or] like Philadelphia, like Pittsburgh, in tough fiscally difficult times, yes. Will we default on our payments, no. Are we a distressed community, no. Look around. I would ask you, Mr. Leeson, instead of focusing on all that negativity, take a look around the City in the $330 million of economic development going on, $14 million of…increases in ratables…from last year to this year, and the fact that the City is going through a very difficult period in its history. We have 20% of the land mass of this City in transition. We have weathered the storm of a tremendous reassessment of the Bethlehem Steel properties, and we are back to that level and growing beyond that. I believe that the City turned the corner financially. But does that mean we’re not going to continue to have tough years going outwards, yes. Do I think we should reach into the taxpayers pockets first to pay the bills, no. And, in what I have put forward this evening, I don’t know how many times we can say it, the debt exists whether we fund it now, or fund it over a period of time. It doesn’t change our debt picture. What you said is just completely inaccurate. And…I believe that much of what you said as an official of the City, as a Councilperson, is inaccurate and irresponsible. I’m disappointed with much of what you said this evening.” Referring to the points raised by Mr. Leeson, Mayor Callahan highlighted the fact that he is working with the Authority and will find a way to address the issue. Mayor Callahan, focusing on Mr. Leeson’s comments that these were not the creation of this Administration, said “let’s roll up our sleeves and work together to fix it. But, let’s not go to the taxpayers first to do it. I know we’re going to have to have a tax increase in the City. But, I put forth a plan that does not increase the City’s debt, and it saves the City money over the 30 years.” Mayor Callahan stated that, all of the doomsday scenarios that Mr. Leeson is painting about the City with which he does not agree, he will argue all the more to take a step that is being recommended this evening that is the same thing that any private person would do if they had the opportunity to take an existing debt that they pay 7-1/2% on and refinance it at 6%. Mayor Callahan explained the reason why the Administration is putting more savings in 2005 and the year after that is because now is when the need exists. Mayor Callahan communicated that he thinks the economic outlook for the City is quite positive, the City has turned the corner economically, and he thinks there will be less need in the future for those savings. Mayor Callahan reiterated that the City needs the savings now, not because he is running for election next year. Mayor Callahan stressed that money is there because that is where the need exists. Mayor Callahan added that, since the actuarial valuation was done as of January 1, 2003, the City’s pension fund is up 15% so that the City is already experiencing the benefit of a turnaround in the stock market. Mayor Callahan, pointing out that the City is not throwing the money into the stock market, advised it is 60% fixed income and 40% in the stock market. Highlighting the fact that the investment return assumption is 7-1/2%, Mayor Callahan noted the Administration is refinancing a debt, decreasing pressure on the City, and avoiding a tax increase. Mayor Callahan commented that is his job as Mayor to come up with creative solutions to fix the fiscal problems that affect the City. Mayor Callahan thought all the other issues that Mr. Leeson has brought up this evening are “a lot of smoke and a lot of dust to cloud what we’re here to hear about which is to discuss the merits of this pension bond and whether it makes sense in the context of next year’s budget.” Mayor Callahan, communicating that much of what Mr. Leeson talked about are problems, said “I’m going to roll up my sleeves and I’m going to try to tackle [them]. I would hope that Council would do the same along with me.” Mayor Callahan, while noting that his Administration is paying the 5%, stated that the lack of paying the 5% goes back to 1990. Mayor Callahan, asserting what Mr. Leeson is advocating “is essentially to pay off a 30 year mortgage in the first year” insisted “I’m not going to do that.” Mayor Callahan, questioning why Mr. Leeson wants to pay it off next year, wondered if it is because he is up for election and Mr. Leeson wants to force the largest tax increase in the City’s history. Mayor Callahan queried why put enormous pressure on the taxpayers next year when the Administration has put forth a plan that is responsible and that makes sense. Continuing on to affirm that there will be a tax increase next year, Mayor Callahan said he would like to keep the tax increase down as low as possible in the most fiscally responsible way possible, give the City some time to breathe, give some opportunity for the taxpayers to get some relief, and move forward as a City. In addition, Mayor Callahan communicated “let’s go about tackling some of these other problems that have gone on for 14 years, for 5 years, for 10 years, together.”

Mr. Leeson explained the reason why he wants this next year is that “it’s time to start to pay as you go. It’s time to stop borrowing from Peter to pay Paul. The level of financial risk associated with borrowing this money and committing the City to repayment of it is an inappropriate risk level for the City to take. And, finally, if the market is doing as well as you feel, we’re going to owe less money in the future, and the pension fund will be overfunded. So, if the market is going to do well, we’re not going to owe $35 million.”

Mrs. Belinski stated she resents the Mayor’s accusation of using smoke and mirrors, and of Council’s being irresponsible. Mrs. Belinski asserted that the one who used smoke and mirrors on Council was the Mayor when he called each individual Member of Council concerning the resolution of the Hirko trial. Mrs. Belinski insisted there would not be $850,000 in the budget next year if it was not that Council was misled. Mrs. Belinski, recounting that the Landfill was the first situation she can recall where the City borrowed from Peter to pay Paul, stressed that the City took as much as $3 million a year for the tipping fees for the Landfill and is why the City no longer has a landfill. Mrs. Belinski continued on to say the City let the Landfill be neglected year after year, and violated rules of the former DER now DEP because the City took the money to subsidize the General Fund. Mrs. Belinski, asserting that the Landfill was a cash cow, stressed the City ruined it by taking all the money. Mrs. Belinski inquired whether the $14 million increase in real estate assessments includes the Moravian Village. Mr. Reichard explained that is starting to come on the books, some of the Moravian Village development came on the books last year and some is coming this year, more will be coming on next year, and the final will be in 2006. Mrs. Belinski, referring to the Conectiv plant on Applebutter Road, highlighted the fact that the plant is located in the Enterprise Zone and consequently only pays a portion of their tax. Mrs. Belinski advised Ms. Szabo told her that Conectiv has not even paid their $14,000 taxes yet. Ms. Szabo stated that was as of October 26. Mayor Callahan affirmed to Mrs. Belinski that 120 acres at Bethlehem Works is in the Enterprise Zone. Mrs. Belinski said she agrees 100% with Mr. Leeson’s comments.

Mr. Donchez confirmed that many of his questions were answered over the last several meetings, and he asked questions at the Finance Committee meetings. Mr. Donchez recounted that most Members of Council over the last five or six years were on public record saying they felt uncomfortable taking certain amounts of money from the Enterprise Funds to balance the budget. Mr. Donchez noted that the General Fund budget was being balanced with about $1.5 million from the City’s Enterprise Funds. Mr. Donchez, acknowledging the City is in a difficult situation now because most of those funds are very low, said there are some very difficult decisions to make. Mr. Donchez pointed out that the Mayor has said there will be a tax increase to deal with some of these issues. Turning to the pension issue, Mr. Donchez highlighted the fact that the City is required by State law to come up with some type of plan by December 31 of this year. Mr. Reichard advised that the City is required by State law to make an annual Minimum Municipal Obligation (MMO) payment according to the actuarial study. Mr. Donchez observed the options are a Pension Bond or a year by year tax increase to make the annual MMO payments. Mr. Reichard indicated in the affirmative. Mr. Donchez continued on to state other options would be a combination of a tax increase or layoffs. Mr. Donchez noted the City cannot step back for a year or two and take out a bank loan, or a line of credit. Mr. Donchez pointed out that the City must either fund the whole thing or it is a year by year tax increase.

Mr. Killick advised the law that authorized pension bonds stated that the City could issue bonds to pay off an unfunded accrued liability but the City cannot issue bonds to meets its annual obligation payments. Mr. Killick, stating that if the City wanted to issue pension bonds it can only do so one time to pay off an unfunded accrued liability, said the result of that would be that the City’s annual obligations in future years would be less because the unfunded accrued liability is now gone.

Mr. Donchez was informed by Mr. Killick that under pension bond law the City cannot take out a line of credit to help pay.

Mr. Donchez asked if Attorney Carlucci, Bond Counsel, has signed off on the Pension Bond. Mr. Reichard affirmed that Attorney Carlucci prepared the Pension Bond Ordinance. Mr. Donchez, noting that Attorney Carlucci is not present this evening, said he would like to get the firm on the record stating they have signed off on the Pension Bond. Scott Mehok, of Eckert Seamans, replied correct. Attorney Mehok advised that the City could not borrow or take out a bank loan under the Local Government Unit Debt Act. Attorney Mehok added that any time the City borrows money it has to obtain DCED approval and the City would be in violation of that.

Mr. Donchez noted the amount of State pension aid that the City would receive annually would not be affected by the Pension Bond, and whether it is in a deficit or surplus situation the City would still get the annual State contribution. Mr. Reichard said yes.

Mr. Donchez asked when the bonds will be callable if the rates permit refinancing. Mr. Peck responded that the bonds would be callable in 10 years or less.

Mr. Donchez, advising that he spoke with Andrea Caladie, of Parente Randolph, the City’s Auditors, said he asked her to be here tonight but Ms. Caladie was unable to attend. Mr. Donchez noted he was informed by Ms. Caladie in his telephone conversation with her that other cities have done it, and acknowledged there have been some horror stories with Philadelphia, Pittsburgh, and New Jersey as was noted at the Finance Committee meeting. Mr. Donchez, stating that the loss in New Jersey was $2 billion, added that San Diego was in the newspaper last week. Mr. Donchez pointed out that in some cities it has worked. Mr. Donchez informed the assembly that Ms. Caladie said it may be the right thing to do, but it is a decision that Council has to make with all the information provided. Mr. Donchez stated that Ms. Caladie agreed it is a very difficult decision to make. Noting that the City would be taking out a bond and investing it in the market, Mr. Donchez observed the City would be placing its faith in the market. Mr. Donchez communicated that, as he said at the Finance Committee meeting, the City has always had a return in the market going back 20 or 30 years and hopefully that will be the case in the future. Mr. Donchez stated his concern is that the stock market today may be a little more volatile because of external factors beyond the City’s control, such as the global economy, terrorism, etc. Mr. Donchez, acknowledging that the City is faced with a difficult decision, said he does not want to see an 18% or 20% tax increase, and does not want to see 50 or 60 employees or whatever the final number is laid off. Stressing that the City does have a responsibility, Mr. Donchez highlighted the fact that there are only a few options. Mr. Donchez said it is really down to two options, either a Pension Bond or a tax increase, or layoffs, or a combination. Mr. Donchez agreed that many of the financial problems in dealing with cash flow, making bond payments, and going to the Bethlehem Authority which, he said, they did the right thing and Mr. Reichard did the right thing today, have been because over the years there should have been small tax increases but it was not done. Commenting that probably goes back several years with different Mayors, Mr. Donchez expressed the thought that many times the public would accept a small tax increase as long as it can be justified rather than one large tax increase after the end of five years. Mr. Donchez pointed out that is not the fault of this Administration. Mr. Donchez highlighted the fact that Council is faced with an issue now, outside of the Budget or the Hirko situation, on which a decision must be made. Mr. Donchez commented that, if the Pension Bond were to be approved, Members of Council should become an ex-officio member of the Pension Board. Mr. Donchez affirmed that, as Chairman of the Finance Committee, he requested that City Council receive copies of the Pension Board minutes. Mr. Donchez thought it would be fair that the President of Council and future Presidents, and Chairman of the Finance Committee and future Chairs be ex-officio members of the Pension Board so that Council has more oversight. Looking back at a few past issues, Mr. Donchez recounted that City Council and the Administration have worked together dealing with insurances for the first time that was very constructive and which he said was a plus. He continued on to state that passing an Ordinance to require a minimum of $10 million liability insurance for the City was a plus. Recognizing that a budget deadline is being faced that cannot be changed, Mr. Donchez recalled that the pension funding issue was first discussed in June and as soon as the Administration received the information they did come to City Council and a Finance Committee meeting was scheduled as soon as possible. Mr. Donchez continued on to note there were two additional Finance Committee meetings to discuss the pension funding issue. Mr. Donchez said “we really have to be very cautious if this is approved. We have to be very conservative. This is the taxpayers money, but we are faced with some difficult choices.” Mr. Donchez advised he is willing to support the Pension Bond on the 30 Year Tiered approach. However, Mr. Donchez thought that very strict oversight is needed and reiterated that the City has to be extremely conservative in its investments because, he said, “we have to do this right. We cannot make a mistake here. We cannot end up like a Philadelphia or Pittsburgh…But we need to do this right because we owe it to the 72,000 residents of this City.” Mr. Donchez commented that the workforce of the City was much higher at the time of Black Friday when there were many layoffs at Bethlehem Steel during the Marcincin Administration than it is today. Continuing on to say “there’s just so much you could cut before you really affect City services,” Mr. Donchez thought that, in many areas, the City is at that point. He expressed the belief that if 50 or 60 employees were laid off it could affect City services in many different areas. Mr. Donchez said that looking at this whole picture he is going to support the Pension Bond, but he is going to try to keep a close eye on it as much as possible. Mr. Donchez expressed the hope that, if it does pass, thought should be given for Council to have some oversight as ex-officio members of the Pension Board so that Council is part of the process.

Mr. Mowrer stated that he agrees basically with what Mr. Donchez said, and he is willing to vote in favor of the Pension Bond. Mr. Mowrer asked what would it do to the Administration to present two Proposed 2005 Budgets to City Council, with one budget including the Pension Bond as if Council passed it, and one budget that does not include the Pension Bond but includes a tax increase.

Mayor Callahan, observing that while it would double the work, said he does not mind working hard so whatever it takes to do that he would guess the Administration could do so. Mayor Callahan communicated he has already begun to think about what the Administration would do in case the Pension Bond does not pass.

Mr. Mowrer, noting if the Mayor did that and presented two budgets to Council then Council would be the ones who would make the decision, added he does not think that has ever been done.

Mayor Callahan, also expressing he does not know that presenting two budgets has ever been done, observed that could be done for a lot of different issues, such as police cars, medical costs, and so on. Mayor Callahan reaffirmed that his role is to present a balanced budget to Council and then have Council determine whether they think it makes sense or not.

Mr. Mowrer asked if the Mayor can present one Budget that includes the Pension Bond with the 30 Year Tiered Match with No Principal in 2005, and one Budget with not doing it that way.

Mayor Callahan said he could do that. Mayor Callahan continued on to point out there is also an issue of timing needed to move forward with the Pension Bond. Mayor Callahan recounted that the timing to move forward with the Pension Bond was discussed at the Finance Committee meeting in order to get the money, and also the change in interest rates between Thanksgiving and Christmas.

Mr. Peck advised that, in order to get the effects of the Pension Bond, the transaction needs to be closed before the end of the year because the City needs to have $35 million in the fund so that it takes effect on the January 1, 2005 valuation. Mr. Peck continued on to say that, backing up from there, there is the normal 20 to 30 days to get the bond issue approved at the State level. Mr. Peck, informing the Members that the ultimate goal was to sell the bonds before the week of Thanksgiving, observed there is usually a little move adversely to the borrower in selling bonds after the Thanksgiving holiday. Mr. Peck noted th