Bankruptcy Will Test Pension Promise

Stockton, CA is similar to Pittsburgh, PA in terms of population (2010 Census showed the former with 291k, the latter with 305k) and land area (61 square miles and 55 square miles) but while Pittsburgh waits to see if its nearly decade long existence under Act 47 recovery status and oversight will be lightened by at least one Stockton has been given permission to declare bankruptcy. When Act 47 was on the horizon for the Steel City in 2003, many observers felt that the City was indeed entering bankruptcy (see footnotes on page 3 of our 2009 report on municipal bankruptcy) but the reason municipal distress and oversight were put into place was to stave off a Chapter 9 filing.

But Stockton has entered, following a filing by Vallejo in 2009 and one newspaper report on the filing notes "At issue will be whether U.S. bankruptcy law trumps California law, which says the pension plan must be funded". It is interesting to note that a memorandum on the Vallejo filing stated that once in a bankruptcy court-since the municipality cannot be forced there, and the state is free to place as many hoops for the municipality to jump through, even outright prohibiting a filing-"presumably, state constitutional provisions [on the abrogating of contracts, such as pensions for current employees] would yield".

Note that the article points out the City of Stockton has done a considerable amount of action: cutting employees, stopping bond payments, cut employee benefits (presumably other than pensions) and enacted an emergency spending plan but it keeps depositing money into the state pension system. It is almost the reverse situation of a Pennsylvania municipality that enters Act 47 and then drags its feet on agreeing to a recovery plan: the state will withhold money, but not if it is for pensions (natural disasters and redevelopment projects already underway also qualify).

But it makes the point that we made nearly three years ago to the day that asked what municipalities are to do if they can’t get out from under bad pension promises: cut services and tax themselves out of existence in order to pay pensions? Is that not what appears to be happening in Stockton?

The Scranton Fix, and Changes to Chapter 9 Bankruptcy

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

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).

Supreme Court Undermines Act 47 Coordinators’ Authority

A recently announced momentous decision of the Pennsylvania Supreme Court has severely limited the power of Act 47 to impose steps aimed at helping financially distressed municipalities return to fiscal stability.


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Page Turns to Chapter 9

Whether comparatively easier or very difficult as is now the case, entering Chapter 9 bankruptcy is a huge step with possible unforeseen negative consequences. For one thing, the judge involved might require asset sales, labor contract renegotiations or other actions the municipality would rather than not be forced to undertake. But once in Chapter 9 protection, some exposure to such risks has to be contemplated. Then too, the stigma attached could hamper future municipal borrowings for many years and thus reduce the ability to provide needed capital intensive services. Being a bankrupt community could make attracting new residents and businesses harder.

This is what we wrote in February of 2010 when the possibility of Harrisburg declaring municipal bankruptcy was rather slim. Eight months later, in October of 2010, the City was declared to be in Act 47 status and fiscally distressed. Since then there has been a coordinator’s recovery plan that was rejected and a mayoral plan that was rejected. There was also a sweeping change to Act 47 that would apply to cities of the third class, of which Harrisburg is one. Then just last night Harrisburg’s City Council voted 4-3 to file for Chapter 9.

Whether the motion to file or the changes to state law win the day to determine whether Harrisburg can get into a bankruptcy court is probably going to be decided by courts prior to then. Obviously the fact that Council did not like the coordinator’s recommendations to address its structural deficit and debt payments as a result of the City’s relationship to the financing of a trash incineration facility moved them closer to this point. The coordinator’s plan stated that to avoid bankruptcy the City would need "cooperation from its creditors, a consensual debt solution, and immediate reopening of labor contracts". If the matter does make it in front of a bankruptcy judge it is a good possibility that a solution would hinge upon similar themes.

Bankruptcy for PAT? Councilman Agrees with Institute

A member of County Council plans on introducing a resolution this evening that, if approved, would call upon the Governor and the General Assembly to permit the Port Authority to file for Chapter 9 bankruptcy. Right now, under Pennsylvania law only municipalities are able to file for bankruptcy, so it would take an act of the Legislature to extend such ability to an authority like PAT.

It is an idea the Allegheny Institute first raised in a Policy Brief this past November (see Volume 10, Number 65) for the reason that the legacy cost burden for PAT was so severe "benefits" would soon be outpacing "wages". With transit workers preferring layoffs to benefit concessions and enjoying the right to strike, PAT management is left with the choices of cutting service and/or raising fares. The resolution states that "…the best interests of the Port Authority of Allegheny County and the County’s residents may be served by seeking the protections afforded by Chapter 9…"

Federal bankruptcy law allows states to permit or forbid bankruptcy filings by their local governments and to place as many pre-conditions on filing as they wish, including defining which types of local governments can file. In Pennsylvania filing is restricted to municipalities and the conditions are laid out in Act 47. Philadelphia and Pittsburgh have additional pre-conditions upon them. Since the PA Constitution prevents revocation of already granted benefits by ordinance or statute, the bankruptcy court would be an avenue under which the Authority could get pensions and benefits under control.

So will Council pass the proposal? Who knows. Given the fact that the Council stands ready to implore PAT to spend all of its bailout money ASAP they seem content to think that the state will be ready to rush in with more money. Unfortunately, recent history has proven that line of thinking to be accurate.

Op-Ed Misfires on Commuter Tax

A recent opinion piece in the Harrisburg Patriot News states "Harrisburg needs to have financial options to raise revenue. One of those options, despite the renewed opposition by some elected officials, is a commuter tax…If a modest commuter tax is part of a broader and comprehensive plan to finally get the city on the mend, then our local representatives should be out making the case for it…"

Harrisburg has serious financial problems, for sure. The city was declared distressed under Act 47 in December of 2010 and the specter of Chapter 9 bankruptcy is very real. The editorial points out that Harrisburg has already taken advantage, as many other cities and towns have, of the state permitting an increase in the Local Services Tax to $52 on every person who works in Harrisburg regardless of where they live. That boost came about in 2005 when Pittsburgh was a newly minted Act 47 municipality and complained that it was not fair for people who work in the City to be paying a $10 occupational privilege tax. The tax was increased, renamed, and the General Assembly allowed all municipalities that wanted to increase the tax up to $52 to do so. The proceeds of the tax were directed toward public safety and public works functions.

A "commuter" tax under Act 47 would be percentage based on wages, but if a court was to permit Harrisburg to levy the tax it would have to enact a commensurate increase on residents of Harrisburg by the same percentage. It does not fall exclusively on people living outside the city who work there. It would not be long before residents paying a higher wage tax would see that there is a bit of false advertising in the name of sharing the tax burden.

And besides, where is the proof that more revenue will solve the City’s problems? The close to two and a half decades’ history of Act 47 shows that there are twenty municipalities in Act 47, some for a very long time, and only six municipalities have seen their distress status rescinded. Chances are that many of these places had or still have a higher wage tax under Act 47 yet still linger under supervision.

Bankruptcy for States?

Troubled by crushing debt? Overwhelmed by pensions and post-retiree health care costs? Unable to bargain with public sector unions? Well, there may be a new solution on the horizon, bankruptcy for states.

We have written plenty about Chapter 9, the Federal law that governs municipal bankruptcy. In order to preserve the balance of power between the Federal government and the states, Chapter 9 allows states to act as gatekeepers: they can permit municipalities to file without restriction, limit filing to certain types of local governments, place hurdles, or outright prohibit filing altogether. Right now 19 states permit their municipalities to file, so a new Federal law permitting states to file would create a situation in which 30 states that currently prohibit municipal bankruptcy would enjoy the right to file.

Of course this proposal raises Constitutional issues. One observer says that so long as state bankruptcy would be treated as municipal bankruptcy-that the governing body could not be forced into a filing and the courts could not dictate tax increases or service cuts-then it would be permissible. But states would quickly run into the "insolvency test" in which the courts would be able to dismiss a filing if it were determined that tax hikes or service cuts and efficiencies could be achieved. Difficult to do for a City like Pittsburgh with a $400 million plus budget; even harder to do for a state like Pennsylvania with a $28 billion budget. If the courts dismissed state filings based on that test, then it would be back to square one of negotiating and cutting outside the oversight of the judge.

Capital City is Distressed

A press release from the state’s Department of Community and Economic Development (DCED) yesterday ended the suspense about the status of Pennsylvania’s capital city of Harrisburg as to whether the City would be declared financially distressed under Act 47. It has been done; Harrisburg is now the 20th city in Act 47.

Fully one-half of the Commonwealth’s ten largest cities, representing about 16% of total population based on Census data, are now under some sort of state oversight-either a cooperation authority (Philadelphia), Act 47 (Harrisburg, Scranton, and Reading) or both (Pittsburgh).

DCED’s secretary noted in the release that that the designation will soon be followed by "a comprehensive recovery plan that will lay the groundwork for long-term financial solvency" that will get the City back on track.Recovery could take a long time: eleven Act 47 communities have been in that status since 1995 or earlier. Only one community (Ambridge) entered and exited distressed status in a period of three years.

An interesting angle to the determination was that a separate community group petitioned DCED to direct Harrisburg to file for Chapter 9 municipal bankruptcy. The press release and the DCED order noted the conditions for bankruptcy outlined in Act 47, and among them there is no mention that DCED can compel a city to file for Chapter 9.

The Allegheny Institute’s recommendations on Chapter 9, included in our most recent report, include streamlining the process for pursuing a bankruptcy filing and creating an independent panel to review filings so as to prevent misuse.

Getting Serious About Public Sector Pensions

A Tribune Review article of November 8 reminds once again just how desperate the unfunded pension plan situation is for many Pennsylvania communities, including the two largest cities as well as several midsized cities. With assets to liabilities ratios below 50 percent in Pittsburgh, Philadelphia and Scranton and others below 65 percent, there can be little doubt that a crisis is at hand.


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