Universities Need to Visit History Department

Pursuing a court case against the University of Pittsburgh Medical Center (UPMC) will tangentially affect the City’s institutions of higher education according to the Pittsburgh Council of Higher Education, which in turn will affect the task force working on non-profit issues (such as payments in lieu of taxes) that was created as a condition of the oversight board for approving the 2013 budget. Sounds like a house of cards or a big city version of the domino theory.

Because if the City challenges the medical system’s charitable status, as it has made clear it wants to, then the universities will feel threatened, and then any talk of cooperation on the task force will crumble under the specter of a lawsuit.

The universities indicate through a letter to the Mayor that they would prefer to move on to less controversial subjects like "…the city’s burgeoning pension obligations and the imposition of a tax on those who commute to the city". If the universities’ focus sounds eerily familiar it should: it was not long after the Mayor floated a variety of taxes and fees to see what would stick that what survived was the "post secondary education privilege tax" on college tuition. After that was eventually dropped in late 2009, the universities (along with one large Pittsburgh corporation) promised to go to Harrisburg and seek reform for pensions (this was post Act 44, but prior to the garage privatization plan) and possibly spreading the tax burden on to others. We noted at the time that "the universities should not, and in good conscience cannot, move from celebrating their hard work against the tuition tax to helping the City lobby Harrisburg for some other tax, most likely to be one imposed on people who cannot vote for the City’s elected officials."

There is a glimmer of hope four years later: the Council letter did note "The ultimate solution is not to look at another source of funding, but rather looking at the financial stresses of the city…Maybe there are some approaches that would reduce the need for funds". There’s been no shortage of recommendations on that line of thinking.

Receiver Completes Triple Option for PA Cities

On January 3rd of the coming year, the newly appointed receiver for the City of Harrisburg is to submit a recovery plan to the state and City officials. Harrisburg is in Act 47 distressed status and filed for Chapter 9 municipal bankruptcy. The former designation remains while the latter was dismissed by a judge. The City will appeal the decision.

The position of receiver came about when Harrisburg punted on adopting an Act 47 recovery plan and then the amended plan written by the mayor as required by the statute. The Legislature amended Act 47 as it applies to cities of the third class who had not adopted a recovery plan (read Harrisburg) and that is how the position of receiver came about.

If anything can be taken from the creation of the position it is that financial recovery for municipalities as envisioned in 1987 has definitely changed. That was when Act 47 was established and it has twenty municipalities under its umbrella. But the application of the law and the idea of recovery is getting tweaked. Harrisburg has the receiver; Pittsburgh has an Act 47 team coupled with a separate oversight board and has a prohibition on using a higher earned income tax to tap non-residents; Harrisburg likewise is forbidden from using that tool; Philadelphia is not in Act 47 but it has had an oversight board since 1991, with that agency primarily in place to administer the payback on bonds that were sold to erase other obligations. That board was the inspiration for placing one in Pittsburgh, where no long-term debt has been incurred as a way to get rid of outstanding costs.

More than half of the twenty municipalities are operating under their initial recovery plan without amendments, some of them stretching back to the late 1980s when the law was passed. When the next community gets declared financially distressed, who knows whether a coordinator, receiver, board, or some combination will be in place to guide it back to health.

Big Changes to Act 47

That’s true in the case of cities of the third class, a municipal classification that differentiates cities from those of the first class (Philly), second class (Pittsburgh), and second class a (Scranton) and allows legislation to appear as something other than tailored to a specific city.

Harrisburg-a third class city and the latest entrant into Act 47 distressed status-has yet to approve a recovery plan. Its council rejected to one written by the Act 47 coordinator, and then the revised plan written by the Mayor. As a result there is legislation pending that would make provisions for the state’s capital city by permitting the Governor to declare a fiscal emergency and eventually appoint a receiver for the city. What follows is a consent agreement between the city’s officials and the receiver which is supposed to outline the terms for a long-term stability plan. No "commuter tax" is permitted and there is a prohibition on filing for Chapter 9 bankruptcy. Failure to follow through leads to interactions with the courts and a follow up plan by the receiver and mandatory directions to the council and mayor.

Unless the history of Act 47 communities is significantly abridged on DCED’s website Harrisburg seems to be one of the few municipalities that has gone the route of rejecting the coordinator’s plan and having one written by a municipal official, only to see that one rejected as well (the City of Scranton had sanctions taken against it at one point). One has to suspect that the state is using the current legislation to nudge the City toward accepting a plan noting "…local officials are unwilling or unable to accept a solvency plan developed for the benefit of the community".

Whatever happens, the track record on Act 47 is clear: for every one municipality that has exited Act 47 there are three still in. And seven municipalities that are still in have had their original recovery plan amended some point after their initial one was written (Johnstown is on its 5th). So what does that say about the prospects for financial recovery in Harrisburg and other places?

Harrisburg’s Plan B

In a recent blog we noted how Harrisburg’s City Council said "no thanks" to the proposed recovery plan its state-appointed Act 47 coordinator had written. Of course, rejection does not mean the state folds up its tent and the Act 47 status disappears. According to Act 47 rejection in a home rule or optional plan municipality (which Harrisburg is) it is incumbent upon the municipality’s CEO to develop a plan within two weeks time.

So what is in the alternative plan? Asset sales, including off-loading the problematic trash incinerator and parking garages, are on the list. The Mayor also wants payments in lieu of taxes from tax-exempt facilities, and with the City serving as the seat of state government that hinges on the Governor and the General Assembly increasing its payments to about $5 million annually.

There is a commuter tax, which, as we have pointed out before, is a misnomer because an increase in the earned income tax under Act 47 falls on residents of the distressed municipality as well as those that work there.

The Mayor is not going to pursue a countywide 1% sales tax a la the Regional Asset District Tax or the add-on in Philadelphia (which is now up to 2 points) because "of the unlikely success of such a passage of such a law" according to the Mayor’s statement at the beginning of the alternative plan.

Harrisburg Council to Act 47 Plan: Get Lost

Harrisburg’s City Council has refused to approve a state oversight plan to deal with Harrisburg’s financial distress threatening the loss of any state aid and enormous repercussions from bond holders. Council members voting against the plan did not want to sell assets and were upset that the state’s plan did not include a commuter tax or local option one percent sales tax-which it was claimed would raise $37 million a year. In a city of 49,000 that is highly unlikely. Allegheny County, which is 25 times larger in terms of population, collects about $160 million per year with its one percent local tax. Obviously, the Council members who were positing the $37 million figure were contemplating a countywide tax-something the plan did not propose or would not have proposed.

As we have seen in other communities that dig themselves into financial holes, it is as predictable as night following day that local officials will look to the state or their neighboring communities to bail them out.

Legislators in the state capital have shown little patience with Harrisburg’s imprudent behavior and lack of resolve in dealing with its problem. Nor does the county seem eager to help. The question is: since this the city where the seat of state government resides, will the state appoint a city oversight group with total power to manage and direct city finances? Is there any alternative given the recalcitrance and lack of seriousness of the Council?

No Magic Bullets for Harrisburg

That’s the word from the team that is preparing the Act 47 recovery plan for the state’s capital city. Harrisburg was declared financially distressed in December of 2010, much of the City’s problem linked to its interrelationship with a trash incinerator and the massive amount of debt piled up from that facility.

Don’t forget, however, that the former Governor also said that there was no Santa Claus riding in to aid the City, and soon after did exactly that by delivering millions of dollars so the City would not miss a bond payment.

Ironically, one of the tools that usually comes with a financial distress plan-viewed as a magic bullet or perhaps a trump card by many-may be unavailable to Harrisburg. The statute allows an Act 47 municipality to petition the courts for an increase in its earned income tax so that non-residents that work in the municipality would pay a "commuter tax". However, the director of the Governor’s Center for Local Government Services noted "…the big problem with that for Harrisburg is that so many of the city’sneighboring municipalities raised their own wage taxes several years ago to eliminate the archaic occupation assessment tax".

Under state law a non-resident would only be subject for the difference between the earned income tax in his own home municipality and the place where the earned income tax is higher. It is a complication we pointed out in 2003 for Pittsburgh prior to its entrance into Act 47 given the presence of home rule communities that could raise their wage taxes.

According to the newspaper report there is even a suggestion of a countywide local option sales tax, which would presumably make Dauphin County the third such county in Pennsylvania to have a higher sales tax rate than the rest of the state. That would be quite a stretch if County officials had to approve the tax if the revenues were going to flow disproportionately to the City of Harrisburg. It would also require a separate state law since Act 47 only mentions property and wage taxes. In that case Harrisburg’s tax plan would be similar to Pittsburgh’s where separate state laws like Act 222 (which created the payroll tax and allowed the Local Services Tax to increase) and Act 187 (which reformed the wage tax sharing between the City and the Pittsburgh Schools) defined the tax structure.

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.

Is the Capital City Headed for Bankruptcy?

Just last week, the state’s capital city, Harrisburg (population 47k), was declared financially distressed under Act 47.  Harrisburg becomes the 20th city since the statute became law in 1987 to be so designated, joining Pittsburgh, Reading, and Scranton among others.

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What Will Become of the Oversight Board?

Next year marks the end of the current life span of the Intergovernmental Cooperation Authority (ICA) for Cities of the Second Class, commonly known as the Oversight Board.  Created by Act 11 of 2004, which was signed into law on February 12 of that year, the statute’s language declares the Board “shall exist for a term of at least seven years”.  An act of the Legislature is required to extend the life of the Board beyond 2011.  


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