Tag Archives: Act 47

Familiar Threads Woven in Harrisburg Recovery Plan

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Over three years ago, in February 2010, we asked if the debt related to a trash incinerator was pervasive enough to cause a municipal bankruptcy filing-colloquially, that the City of Harrisburg’s finances could possibly end “up in ashes”. 

 

After the City was placed into Act 47 status, saw the General Assembly make changes to the statute as it applied to Harrisburg, and operating under the direction of an appointed receiver, a plan, somewhat pretentiously titled “Harrisburg Strong”, has come together for placing the City on the path to a solid financial future.

 

Readers of our reports, especially as they pertain to Pittsburgh, will notice some familiar themes and one very different situation; namely, the presence of the aforementioned dollar devouring trash incinerator. That facility is slated to be sold-to another public authority-and some of the proceeds will go to satisfy creditors (but only partially satisfy since negotiations have produced settlements for less than owed) and reimburse Dauphin County.  That won’t pay all the bills, so a 40 year lease of parking garages, lots, and street spaces to a public-private partnership is expected to yield enough money to pay off parking debt, the rest of the incinerator debt, for the City itself, and for funds related to economic development, infrastructure development, and a trust fund for retiree health care obligations.

 

That last point is a good starting place to assess how the City and its employees are partnering up at this critical juncture.  As the February 2012 recovery plan pointed out, Harrisburg is similar to many municipal governments in that it is a very labor intensive undertaking and the lion’s share of costs are attributable to employee compensation.  Three bargaining units represent the majority of the workforce covering police, fire, and non-uniformed staff (461 employees total including non-represented staff) and all negotiated early-bird contract extensions that limited the City’s and the receiver’s ability to make changes.  Compared to other cities of the third class in Pennsylvania (Reading, York, Allentown, etc.) the plan found that Harrisburg public safety minimum salary ran about $10,000 higher. The recovery plan projected workforce costs to rise from $45 million to $52 million from 2012 through 2016. 

 

As described in the “Harrisburg Strong” plan, two of the three bargaining units (police and non-uniformed) have agreed to concessions during the lives of the existing contracts to move the City toward its goal of getting $4 to $4.8 million in savings.  There are tradeoffs for both the City and the bargaining units: for police, what were to be 3 percent annual wage increases through 2016 are now 0 rising to 1 percent in the final year.  Payments toward health care coverage for current employees will be made with variations based on the number of people covered on an employee’s plan with the percentage of income paid for insurance rising throughout the duration of the agreement.  Current employees who retire after the ratification of contract changes are treated the same as active employees and, as is almost always the case when it comes to legacy cost changes, new hires will not be eligible for post-retirement health care benefits. The police contract opens up the possibility that certain positions might be offered to civilian employees and that booking could be transferred to Dauphin County. Most of those same terms will apply to the adjustment for non-uniformed employees.  

 

So what sweeteners do the employees get in return for these concessions? For one thing they are asking for elimination of the residency requirement. This issue has been bandied about in Pittsburgh over the summer and will no doubt intensify closer to Election Day. In Harrisburg, the proposed amendments for both police and non-uniformed contracts contain language stating “…the residency requirement contained in prior collective bargaining agreements between the parties is eliminated, and employees, regardless of hiring date, shall not be required to establish or maintain a residence within the corporate limits of Harrisburg”.  Could that be a deal breaker for City officials who must pass some of the necessary ordinances to make “Harrisburg Strong”? 

 

Overall approval for the plan falls to the Commonwealth Court, which plans to review the proposal in mid-September. 

Parking Garage Economics

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Leasing or selling public parking garages to shore up finances. Readers of the Institute’s work will recall days of yore around 2009 and 2010 when the City of Pittsburgh had a plan to lease the garages and meters to put the proceeds into the pension system. That did not happen, but the details of the plan are touched upon here, here, and here.

The idea did keep traction in the capital city of Harrisburg: we wrote in June 2011 that the Act 47 recovery plan for Harrisburg mentioned the possibility. Instead of paying off pensions, the 2012 final recovery plan noted "if the parking assets are included in the debt solution, the proceeds from the parking assets transaction will first need to be applied to repay the existing debt of the Harrisburg Parking Authority. The remaining proceeds…could potentially be used to pay a portion of the incinerator debt and to contribute over time to address a portion of the City’s structural deficit".

Such deals can be quite complex and raise a lot of questions. One that was raised in a news article is whether the Harrisburg arrangement is a lease or a sale. When the arrangement involves not leasing the garages to a private interest but a state-level economic development authority who will also involve another local non-profit economic development agency and then two private interests will have a role in managing property and parking operations, things can get a bit complex.

Why the involvement of the other authority and the non-profit? Because locals were worried "…that parking rates could increase out-of-control to boost profits while the assets themselves could languish and degrade in the hands of a company with no long-term interest in the welfare of the city." Similar thoughts arose many times during the debate in Pittsburgh. Of course, it is safe to assume that policymakers in both cities did not contemplate that a private operator would have to pay property taxes (unlike a municipal or authority owner), collect parking taxes, pay expenses, and still make a profit while recognizing that simply imposing higher rates would eventually result in a drop in parking customers.

Could Pittsburgh Be Following Detroit to Bankruptcy?

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While Pittsburgh has some similarities with the problems in Detroit (albeit nowhere near the same magnitude) and there is cause for concern about Pittsburgh’s financial wellbeing, there is little chance that on its present course the City will face bankruptcy. That is not to say that it can be allowed to return to the spendthrift, reckless behavior that had the City headed toward financial collapse and brought it to the point of being placed under two state financial overseeing groups-the ICA board and the Act 47 financial coordinator team-a decade ago.

 

 

There was period in 2009 when the legacy cost issue reared its head and prompted renewed speculation of a possible bankruptcy. See our Policy Brief Vol.9 no. 51 for a full discussion of that period and an explanation of some of the technicalities involved in a Pennsylvania municipality seeking to file for bankruptcy.

 

Without question Pittsburgh has made significant progress under state oversight and under legislative edict to lower spending, reduce debt levels, cut employment and address the City’s massively underfunded pensions.  Still, there is no denying that fairly large problems remain and there must be no backsliding that would aggravate them. Based on the Allegheny Institute’s work in constructing a benchmark city to compare Pittsburgh’s financial performance indicators, it is clear that the City government continues to spend more per capita, taxes more per capita, and has more employees per 1,000 residents than a composite of similarly sized and situated cities from across the country.

 

Moreover, Pittsburgh’s debt per resident remains very high compared to the typical, well run city despite having dropped significantly from the 2004-05 level when it exceeded $2,000 per citizen.  Then too, even though the pension funding level has been raised above 50 percent, as required by the state to avoid having the state takeover management of the pension plans, it is still far below the 80 percent level where it needs to be and its rate of return calculation assumption for the investment portfolio is by all accounts too generous. By pledging parking tax revenues for decades to shore up the pensions, the City averted a takeover and a period of dangerously low funding of the pensions.  

 

Finally, it must be noted that Pittsburgh’s public schools are, by and large, a major obstacle to population growth in the City. This is especially true for the 30 to 50 age group, the age group having families and raising school age children.  The last census showed continued decline in that group while the college and the 20 to 25 age groups expanded. The desire to be attractive to young people has paid off but the City cannot thrive when parents in high percentages abandon the City because of poor schools.

 

In certain respects Pittsburgh appears to have some of the problems Detroit faces. However, Pittsburgh has a number of factors going for it that Detroit does not have.  First, the City of Pittsburgh has a much smaller population than Detroit and has far less deep seated and widespread social problems including markedly lower crime rates. Pittsburgh has a large, strong, and recession resistant employment base in medicine, post-secondary education, government and the financial sector.  Pittsburgh weathered the 2008-10 recession well because of its favorable industry structure and the fact that the absence of a construction boom in the years prior to the recession reduced the need for a major correction.

 

Pittsburgh is also very fortunate in having a disproportionately large charitable foundation community that supports education, welfare, and cultural activities in the City. And for a city its size it has an unsurpassed aggregation of top quality museums, performing arts, music, cultural amenities and major league sports.

 

The City’s small population compared to its home County and the metropolitan region means it derives enormous benefits from its hub status in terms of commuters, visitors, attendees at cultural and sports events.  An excellent symbiotic relationship exists between the City and the region.   

 

In short, with continued oversight from the ICA board and Act 47, and a commitment by the City’s government to avoid the fiscal and management mistakes of the past, the City will be able to stay far away from the need to file bankruptcy.  Quite unlike the situation in Detroit which was allowed by the state to descend into a hopeless morass.

 

Nonetheless, there are danger signs posted in the City that it cannot afford to ignore-and the oversight teams should not permit it to ignore. A growing, dynamic Pittsburgh will require a major overhaul of the k-12 education system.  The current failed system is depriving far too many young people of a decent chance at a good, productive and satisfying life.  And until that system is substantially reformed, parents of child rearing age and children will become increasingly hard to find in Pittsburgh. In the long term, that is probably the biggest negative in the outlook and cannot be left unaddressed much longer.

 

The other cautionary warning is that the Pittsburgh government must move away from the heavily statist mentality with regard to business and the economy that has for so long dominated its decision and policy making processes. And it must begin to reduce the number of employees per 1,000 residents and bring itself into alignment with other well managed and prospering cities in this key measure of management and financial efficiency.

Pittsburgh Taxpayers’ Debt Load Getting Lighter

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In 2011, the debt per capita in Pittsburgh was $1,901, based on the Census count of 306,000 and $581.8 million in general obligation debt of the City.  A decade earlier the average resident carried a much heavier debt load of $2,651.  Both the debt and the City’s population were higher in 2001 but debt has fallen faster than population in the intervening years resulting in the per capita debt drop. 

 

 

It is no small feat what the City has accomplished with regards to its debt.  Over that time frame it resisted issuing new obligations and set a target for bringing down the ratio of debt outlays to general spending (which has been running around 20 percent) over the coming decade.  When the Act 47 team examined debt service as a percentage of operating expense in 2009, Pittsburgh’s 21 percent was well above Newark (4.6%), Buffalo (7.6%), St. Louis (7.9%), and Cleveland (11%). The City wants to get the level down close to 12 percent.

 

Beyond the obligations of the City government, Pittsburgh taxpayers are liable for various other debts issued by related governments that perform functions such as owning sports stadiums, land, parking facilities, and schools.  City financial data shows that City taxpayers are responsible for all the debt or a portion of debt for some of the other borrowers. A look at the decade from 2001 to 2011 shows that some shares have increased, some debts have disappeared, and some have increased.

 

2001

 

 

2011

 

 

Debt

(Direct and Overlapping)

Percent

Obligation of City Taxpayers

$ Amount (millions)

Debt

(Direct and Overlapping)

Percent

Obligation of

City Taxpayers

 

$ Amount (millions)

Pittsburgh General Obligation

100

885.7

Pittsburgh General Obligation

100

581.8

Stadium Authority

100

22.7

Stadium Authority

0

0

Auditorium Authority

50

13.5

Auditorium Authority

50

1.4

Urban Redevelopment Authority

29

64

Urban Redevelopment Authority

61

40.2

Parking Authority

100

83.9

Parking Authority

100

93.4

Pittsburgh Schools

100

399.4

Pittsburgh Schools

100

451.7

Allegheny County

25

176.3

Allegheny County

25

192.9

Total

 

1,645.5

 

 

1,361.4

 

While the City government’s debt was falling, so too was the debt of the authorities related to stadia and the URA.  The percentage of URA debt attributable to the City rose while the amount of URA debt fell. It is reasonable to assume the City has agreed to back more of that agency’s debt and, should it incur more obligations, the City would be on the hook for a larger share than in the past. By way of explanation, note that if the City were still responsible for only 29 percent of URA debt in 2011, the dollar amount of the obligation would have been $19 million rather than the actual $40 million it now actually has.

 

Going in the opposite direction by taking on more debt from 2001-2011 was the Parking Authority ($9.5 million), Allegheny County ($16.6 million), and perhaps most surprisingly, the Pittsburgh Public Schools ($52 million).  The School District has been losing enrollment and is currently being advised on what to do with twenty school buildings no longer in use. Some are in the process of being sold.  The District is expected to be “insolvent” by 2015 by some observers, so it’s puzzling as to why the debt was issued and why the District has not put itself on a self-imposed “debt diet”. 

 

In total, all the debt obligations City taxpayers are responsible for amounted to $4,926 per capita in 2001, falling by about 10 percent to $4,449 in 2011.  Note that much of the property tax in the City is paid by commercial and industrial properties, many of which are owned by non-residents who pay a large share of taxes collected in and by the City.

 

How does Pittsburgh compare to other cities?  As we noted in our recent Benchmark City report, the per capita debt in Pittsburgh was 64 percent higher than the Benchmark City just on general obligation debt, and that the gap between Pittsburgh and the Benchmark shrank since we did our first Benchmark report in 2004 (it was 233% higher then).  But how about Pittsburgh compared on the total direct and overlapping debt to another city that is very similar on population and square mileage?  The City is Stockton, located in the San Joaquin Valley of central California.

 

The City has a lot of debt applicable to it in varying shares: school district, community facilities, and its own general fund and pension obligations, and the total comes in at $1.065 billion, just about $300 million less than Pittsburgh’s direct and overlapping total, and with a population of 296,000, the typical Stockton resident’s share of the debt is about $850 less than Pittsburgh’s ($3,601 to $4,449).

 

It is worth noting that Stockton’s pensions are in better shape than Pittsburgh’s (88% funded combined for police, fire, and non-uniformed employees compared to 62% combined for Pittsburgh) and it has slightly less accumulated in unfunded liabilities for other post-employment benefits like life insurance and retiree health care ($416 million in Stockton vs. $488 million in Pittsburgh).  Despite all the foregoing, the City of Stockton has been walloped by the effects of the recession and the housing bubble and it was successful in its Chapter 9 bankruptcy filing with a favorable ruling from a Federal judge in March. 

 

But the Stockton case does point to the absolute necessity of restraining municipal spending and being very prudent in agreeing to overly generous compensation and pension packages.  A lesson that Pittsburgh must keep in mind as it works its way out of distressed status and seeks to have the state appointed financial oversight board removed. 

 

Is City Selling Itself Short?

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This week City Council is taking up legislation to identify ways to raise revenue through advertising and sponsorship opportunities. One newspaper report pegged an estimate of expected revenue at a half a million dollars; the ordinance spells out what would and would not be allowed to have naming rights or a placard attached to it.

The Act 47 team, which the City is currently waiting on to see if its guidance will be removed by the state, twice mentioned these sponsorships and advertisements, identifying them as "Market Based Revenue Opportunities" or MBROs and defined them as including "advertising, exclusivity arrangements, rental agreements, and corporate sponsorships". In its first recovery plan in 2004 the team called on the City to inventory facilities, real estate, and other assets and have "MBRO arrangements…in place by January 1, 2005." Based on the team’s discounted fiscal analysis the City would be raising $1.2 million by fiscal year 2009-contrast that with the $500,000 the City expects to generate once the ordinance is put in place, possibly 2013.

Obviously the issue needed to be studied intensely: the Act 47 team wrote about MBRO again in its 2009 amended recovery plan and said that at the time there was no City MBRO policy, no RFP, and thus, no revenue from their estimate. Now the Act 47 directed the City to "implement the MBRO program by October 1, 2009". Again, assuming the ordinance passes, all of the legalities are in line, and some private interest sees a benefit from advertising or buying naming rights for something the City offers up, the City might get a check by October 1 of this year.

Act 47 Team: Pittsburgh “Completed” 64% of Initiatives

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If an exam with 132 questions was administered at any of the schools in western Pennsylvania and the student correctly answered 85 of those questions, the resulting percentage would be a 64%. On most grading scales that would be a "D": if the student was previously and "F" student, then there is progress.

Unless dealing with bond ratings, letter grades are rarely handed out to cities and towns. As Pittsburgh waits to hear if the state will release it from Act 47 distressed status, the team charged with recovery (in place since 2004) published its rescission report that shows what Pittsburgh has accomplished: debt levels are down, there is labor peace, a trust fund has been established for retiree health care liabilities, there is a financial management system in place, and the City has pledged a revenue stream to deal with pensions. Just as those successes are heralded by the coordinators, they also express "continuing concerns" on most of those big ticket items: dealing with escalating benefit costs, funding capital needs, and executing collective bargaining agreements in the future. Unlike 2007, when the City petitioned to get out of Act 47, the recovery coordinators are now in favor of rescission.

The team shows 132 initiatives that have come from the recovery plans and funnels them into one of four categories:

  • Completed: Action has been achieved or achieved to date and may require a recurring action to remain complete. (85 or 64% of initiatives)
  • In progress: Demonstrable progress made to achieve completion, but the action is not complete or it may require a long term effort. (38 or 29% of initiatives)
  • Not applicable: Opportunity has passed or it is out of the City’s control. (9 or 7% of initiatives)
  • Incomplete: No demonstrable progress has been made. (0)

Obviously there is a lot of leeway in this typology, even realizing that if DCED would accept the status of each initiative as gospel only 64% of them are actually done to the point of completion (or how something that is "completed" would require "recurring action"). If DCED looks at the initiatives "completed" or "in progress" as "good" then the City has made positive strides on 93% of the work.

But there are some head scratchers for sure. The Act 47 team considers the City’s establishment of a debt policy "completed"; whether the City sticks to it is another matter altogether, hence the recurring or further action. Same holds for the three decades long promise of money to the pension fund. Does anyone believe that "[pursuit] of City-County consolidation of departments" is "in progress"? Or that the City is not "incomplete" on any of the initiatives?

In order to have distressed status removed, a municipality has to have a positive operating fund balance for at least one year, have eliminated accrued deficits, retired obligations that were taken on to eliminate the deficit, and get the recommendation of the coordinator. Pittsburgh has satisfied the first two, never had the third, and has the fourth. It also has the situation where even if Act 47 goes away the oversight board stays in place.

Could Pittsburgh Shed Act 47 Status?

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Close to five years ago the City of Pittsburgh asked the state to remove it from Act 47 distressed status. At that point the City had been in Act 47 for just under four years. If the request was denied, the City asked that a new recovery plan be written telling what should be done in order to emerge. That plan was written in 2009 and focused heavily on the City’s legacy cost issues.

With articles today reporting that the Act 47 coordinators wrote to the DCED secretary that Pittsburgh should have its distressed status removed (here and here) Pittsburgh would be the seventh municipality to leave the Act 47 fraternity. The most recent was the Allegheny County municipality of Homestead, which came out in 2007 after spending fourteen years under state watch. The three preceding Homestead were all Allegheny County towns: North Braddock (out in 2003 after close to eight years), East Pittsburgh (out in 1999 after seven years), and Wilkinsburg (out in 1998 after ten years).

The statute leaves the determination to the DCED secretary. A public hearing has to be held, and the law points out several factors shall be considered including the monthly coordinator reports, that accrued deficits have been eliminated, that obligations issued to finance the municipality’s deficit have been retired, and that the municipality has operated under a positive operating fund balance for at least one year. The 2009 amended recovery plan noted that it would give "…the City a clear strategy to address the remaining obstacles to full fiscal recovery [and] completing these steps will allow Pittsburgh to leave Act 47 oversight".

The Scranton Fix, and Changes to Chapter 9 Bankruptcy

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Last October we wrote in a blog about the Supreme Court decision that said an "arbitration award" was not the same thing as an "arbitration settlement" and the impact that small distinction would have on communities in Act 47 distressed status. Language in the act stated "a collective bargaining agreement or arbitration settlement executed after the adoption of a [Act 47] plan shall not in any manner violate, expand, or diminish its provisions".

Under Act 111 of 1968, the collective bargaining law that outlines binding arbitration procedures for police and fire employees, the Court’s decision would have far-reaching consequences for communities in Act 47. Left unchanged, there would have been an incentive for combing over old arbitration proceedings to see if anything retroactive could be awarded. There would also be motivation for public sector unions to get to arbitration so as to fall into this grey area.

In the blog we noted "the onus is on the General Assembly and the Governor to act quickly to amend Act 47 language so that ‘awards’ are covered as well as ‘settlements’…A few word changes should do the job…The need for the Legislature to move as rapidly as possible cannot be more clear."

Legislation that has been signed into law does just that, adding language that defines an "arbitration settlement" to include that a "final or binding arbitration award or other determination" would be covered by the definition. The act allows for an arbitration award to deviate from the plan as long as it does not jeopardize the stability of the municipality and does not prevent relieving the distress (note that only six municipalities have emerged from Act 47 status, 21 are currently in). Deviation requires an evidentiary hearing.

Another significant change as a result of the act is on municipal filings for Chapter 9 bankruptcy. Now municipalities that want to file will have to apply to the Department of Community and Economic Development (DCED) and the Secretary will make a "yes" or "no" recommendation on filing after weighing the criteria contained in the statute. As we noted in our 2009 report, states are free to place as many restrictions on their local governments when it comes to filing for Chapter 9 bankruptcy, including prohibiting them from filing.

Golden State Municipality Hopes Chapter 9 Brightens Future

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Stockton, CA has a population of just over 291,000 people, making it slightly smaller than Pittsburgh. Located in the central part of the state, the city has just filed for Chapter 9 municipal bankruptcy. Unlike Pennsylvania, which has Act 47, oversight boards, and a receiver in the capital city of Harrisburg, California allows for bankruptcy filings without many conditions. California has a mediation process, and that is what just wrapped up for the City of Stockton.

Satisfying the various criteria to file (state has to explicitly authorize, filing must be done by a municipality, filing has to be voluntary, has to be insolvent, and has to have explored other options) Stockton has approved a "pendency plan" that describes how operations will continue during the filing. That plan states "…the city is insolvent. Now, only the difficult process of restructuring its long term financial obligations and personnel costs will enable the City Council to protect the community and make sure the City emerges from this financial crisis as a viable, sustainable institution".

Stockton has made significant reductions in headcount, with public safety employment falling 25% and non-public safety positions down 43%, bringing total general fund employment to 930, down from 1,350 in the 2008-09 fiscal year. In comparison, from the first Act 47 plan in 2004 to the revised plan in 2009, Pittsburgh’s headcount fell 10% (there were over 400 layoffs in 2003, prior to the Act 47 declaration).