Can DCED Recover Money from a Bankrupt Company?

Summary: Aquion, a recipient of state tax incentives by promising to create hundreds of new jobs, recently filed for Chapter 11 bankruptcy.  Comments from the state’s Department of Economic and Community Development (DCED), which handles these incentives, indicate the state will try to get the money back.  A 2014 audit looked at the department’s efforts to recover money from companies that do not fulfill job promises as well as what may happen with companies that go bankrupt.

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When a company receives economic development incentives (grants, loans, loan guarantees, etc. from taxpayer sources) in return for a promise to retain and/or create jobs and fails to meet job goals promised in return for those incentives, the public agency can choose to impose various penalties on that company.  Recovering the penalty funds from companies that are still operating but falling well short of their sales and job goals could be very difficult—but the situation is even more problematic in the case of bankruptcy.

Case in point: Aquion, highly touted recipient of incentives from the state Department of Community and Economic Development (DCED), was involved in the manufacture of renewable energy batteries in a facility that has seen its share of public involvement over the decades. The company filed for Chapter 11 bankruptcy in March in the U.S. Bankruptcy Court in Delaware.

Based on DCED’s investment tracker and news articles, Aquion promised to retain 70 jobs and create 341 new ones in return for five separate incentives, all awarded in 2012.  Three were grants (a $2 million Alternative Clean Energy award, a $5.6 million Opportunity Grant, and a $1 million Discovered and Developed in PA award) and two loans (a $3 million Alternative Clean Energy award and a $5 million MELF award).  In addition money was awarded to customize part of the former Sony plant in Westmoreland County for the company ($2.2 million from PIDA-Multi awarded to the Regional Industrial Development Corporation (RIDC) according to the investment tracker; a March 10th news article said RIDC loaned about $1.5 million to the company).

In the filing listing the “creditors who have the 20 largest unsecured claims…” DCED is listed three times: for the Opportunity Grant, the Alternative Clean Energy Grant, and the Discovered and Developed in PA Grant (RIDC is listed as an unsecured creditor for $191,726 for unpaid rent and utilities).   In different news articles separate DCED officials stated DCED “…will pursue full recovery of [the development] money in the bankruptcy reorganization proceeding” and “…is prepared to take whatever steps are necessary and legal under the bankruptcy code to recover our loans”.

Sounds good, but a 2014 audit on DCED’s job creation programs and its penalty efforts casts a shadow on how likely taxpayer dollars will be recovered when bankruptcy is involved.  In December 2014 the Auditor General’s office produced a performance audit which included a finding on penalties imposed by DCED on companies that fell short of their job creation promises (finding two).  The penalties included increases in interest rates on loans and recouping some or all of a grant, which the audit referred to as a “clawback”.  In the time period covered in the audit (July 1, 2010 through June 30, 2013) DCED had imposed interest rate increases on 46 companies that received a loan and penalties of $10.9 million against 72 businesses receiving grants.  At the time of publication $4.5 million of the $10.9 million had been collected; $1.6 million in payments were outstanding; $0.5 million had been written off; and $4.2 million was with DCED legal staff.

The audit finding spoke to efforts to get money back from bankrupt recipients, noting “…the probability of DCED collecting the penalty from these bankrupt businesses is low because DCED is an unsecured creditor and by its own admission, it is unlikely that they will be able to recover a significant portion of their claim”.

In the Department’s response to the audit finding, the DCED director at the time wrote “it is true that, as an unsecured creditor, if a grantee files bankruptcy it is very unlikely the Department would be able to recover grant funds”.

Still, this current bankruptcy could develop differently from the experience covered in the 2014 performance audit (according to the Auditor General’s office, this was the most recent examination of DCED and according to DCED they agree with the sentiments expressed on bankruptcy in the audit, although according to DCED they are a secured creditor for the loans).  If DCED does recover some or all of the secured credit, it will no doubt go back into the pool of dollars for other companies to compete for in the future, not to the taxpayers.

But this latest episode raises two important questions.  Would having to return funds to DCED not make it tougher for struggling companies to stay afloat and make it even harder to fulfill their promises?  This is a real dilemma created by having the taxpayers underwrite businesses in the first place.  Should DCED be giving grants or loans to companies with untested technology in terms of reliability or marketability?  If a lot of research and development is still required, the projects should be funded by angel investors or venture capital.  The state can provide assistance in the form of loss carry forward and greater deductibility of R and D spending in the company’s taxes. However, there is little merit in having a state agency borrow money to be put at risk as the Commonwealth Financing Authority does in funding untried technology, (see Policy Brief Volume 14, Number 8).

A WOW Question: At What Cost?

Summary:  The announcement of two new international airlines beginning service at Pittsburgh International Airport in 2017 has been applauded by local officials and the media.  However, these two new airlines will be receiving taxpayer subsidies to operate here.  If history is any guide these subsidies will likely end up being another misuse of taxpayer money.

 

Recently Pittsburgh International Airport (PIT) announced the arrival of two new airlines to the fold, WOW Air from Iceland and Condor Airlines from Germany.  Both are discount no-frills airlines that will fly to Europe beginning in 2017.  While the media hails this move as a big positive for PIT, it must be asked at what cost and what effect on the airport’s lackluster passenger count?

 

Both airlines are reported to begin receiving public subsidies to operate at PIT in 2017.  News accounts place the amounts at $800,000 over two years for WOW and $500,000 for Condor.  In addition neither airline will have to pay landing fees for those years, which according to the news story, is a cost reduction given to all new airlines beginning service at PIT.  The money for the direct subsidy will come from the State’s Department of Community and Economic Development.

 

It has been noted in the media that subsidies to entice airlines is a regular practice.  PIT bested Cleveland-Hopkins International Airport for both airlines as Cleveland reportedly offered WOW $400,000 over three years.  No word on what Cleveland offered Condor.

 

Delta launched the PIT to Paris summer route with $9 million in subsidies from the Allegheny Conference on Community Development and the state (Post-Gazette, Sept. 23, 2016). Baltimore-Washington International subsidizes British Airways routes to London.  However, just because airports are eager to boost their portfolio of destinations served does not mean that taxpayer dollars should be used to do so.  And even if the subsidies are enough to bring these carriers to the airport, ultimately it will be passenger demand that will keep them long term.  The Condor route to Frankfurt is to be seasonal and its future will depend upon local demand for the flight.

 

 

We have commented in many Policy Briefs about the troubles PIT has had, not only financially, but with passenger counts as well.  For the most recent month available, September, the airport boasted an increase in passenger traffic, (combined enplanements and deplanements), of 45,142 compared to the same month a year earlier—an increase of 6.8 percent.  Since 2010 only three months had better year-over-year growth:  November 2015 (7.0%), February 2011 (12.2%) and January 2011 (8.9%).

 

But when taken in context of similarly sized airports, September’s year-over-year gain is quite modest.  As outlined in Policy Brief, Volume 16, Number 12, for 2014, PIT was the 46th busiest airport in the country as designated by the Federal Aviation Administration (FAA).  PIT ranked higher than the airports of Cleveland, Indianapolis, Milwaukee, and Columbus, 47th through 50th, respectively, but not as high as Sacramento, San Antonio or Fort Myers, Florida (42nd, 44th, and 45th).

 

Of these comparably sized airports (in terms of traffic), PIT’s September year-over-year growth bested Sacramento (5.5%), Cleveland (4.9%), and Fort Myers (-3%).  At the same time however, it fell below that of Columbus (12.6%), Indianapolis (9%), Milwaukee (8%), and San Antonio (7.4%).  It appears that September was a fairly active month for air travel overall and PIT may have benefited from the national upswing in passengers travelling.  There is no apparent, ready explanation for the September jump in travel.

 

On a year to date basis, the first nine months of 2016 saw a total increase in passenger traffic at PIT of nearly 130,000 over the same period in 2015—an increase of 2.1 percent.  However, that growth rate was better than only San Antonio (1.4%) in our list of comparable airports.   The year to date growth for the eight airports ranges from 1.4 percent to 9.3 percent (Indianapolis).  The average growth rate for the comparable airports is 4.9 percent, more than double PIT’s growth over the nine months. Note that the gain in passenger count in September 2015 to the count in September 2016 is much higher than the year to date increase, suggesting that unless the monthly pickups continue, September will in retrospect likely be considered an anomaly.

 

The crucial question: Will the addition of two new airlines with destinations to Reykjavik, Iceland and Frankfurt, Germany substantially improve the passenger count at PIT? Consider that Delta’s seasonal flight to Paris remains just that; seasonal after several years. In June of this year, Delta announced it was paring the days the flight will be offered from seven to five days, including taking off at a later time to accommodate leisure travelers instead of business passengers. Another important question: Will flights to Frankfurt take some passengers away from Delta’s Paris flight because Paris was merely an entrance point to Europe for them or not their primary European destination?

 

What’s more, when American Airlines recently eliminated a flight to Los Angeles, an airline spokesperson called the route “underperforming” and unprofitable.  This is a pointed reminder that unless travelers pack the planes on their way to Iceland and Germany, the commitment of the airlines is unlikely to extend beyond the subsidy period.  Success might also depend heavily on the layover times in Reykjavik for travelers going on to other WOW destinations and the number and location of other destinations on the continent.

 

In the long run passenger demand will dictate the flights and destinations of the airlines.  Dangling subsidies in front of airlines as an incentive to bring them here is at best a risky exercise. Who benefits from these subsidies? Pennsylvania taxpayers? Not if all the subsidies do is allow vacationers to travel at lower than market based cost. It remains to be seen whether any related new jobs in the region or state ever produce the taxes needed to cover the subsidy.

 

Once the subsidies are gone, too often so are the airlines.  To repeat a cautionary comment from previous Policy Briefs; until the Pittsburgh area economy begins to make major strides in job and income growth and climb out of its recent doldrums, the number of passengers travelling through Pittsburgh International is unlikely to grow much.

The Large and Growing Commonwealth Financing Authority

There is a large component unit of Pennsylvania’s government that seekers of public funding know about all too well but which the public and taxpayers know very little about—the Commonwealth Financing Authority (CFA).  The CFA came into existence through the Public Authorities and Quasi-Public Organizations Act of 2004, P.L. 163 as amended by the Commonwealth. The Authority was created to provide financial assistance in the form of loans, loan guarantees, grant and private equity participating loans to promote the creation and retention of jobs, to establish economically viable communities, to develop stable tax bases, reuse of abandoned sites, the promotion and commercialization of Pennsylvania products and services, and investment of private capital in Pennsylvania communities.

 

To carry out this vast assignment the legislation initially required the Authority to support eight specific programs:

 

  1. Business in Our Sites Program—site preparation assistance;
  2. First Industries Program—tourism and agricultural;
  3. Second Stage Loan Program—loans guarantees to lending institutions to make loans to certain industries;
  4.  Pennsylvania Venture Guarantee Program—guarantees to venture capital partnerships;
  5. Building Pennsylvania Program—loans for investment in real estate;
  6. TIF Guarantee Program—guarantees for TIF bonds;
  7. New Pennsylvania Venture Capital Investment Program—loans to venture capital partnerships;
  8. Penn Works Programs—loans and grants for water supply and wastewater infrastructure.

 

Since the original list of programs to be supported was enacted, there have been six more added having to do with water and sewer improvements, solar energy, renewable energy, alterative and clean energy, high performance buildings, mitigation of the impact of gaming and related activities, and grants for well plugging, greenways, watershed restoration, etc.

 

Initially, the CFA’s debt limit for all the programs was set by law at $1.135 billion. There were exceptions for borrowing to fund some individual programs and an unintelligible series of requirements for subsequent fiscal years.

 

Bear in mind that the CFA operates within and under the control of the Department of Community and Economic Development (DCED).  And the DCED has other programs with appropriated funds such as the Ben Franklin Partnership. In total the DCED budget for FY2013-14 is $236.38 million of which $78.02 million will be transferred to the CFA to cover debt costs.  In fact, total economic development outlays by the Commonwealth totaled $1.033 billion in fiscal 2012-2013. Of that amount, $473.06 million came from the General Fund and the other $555.77 million from non-major funds, primarily grants and transfers such as gaming revenue and gas impact fees. The current economic development spending is down about a half billion dollars as a result of the continued phase out of Federal ARRA (stimulus) dollars.

 

During its first fiscal year of operation ending in June 2006, the CFA issued bonds totaling $375 million. Operating costs and grants and provision for loan losses exceeded operating income by $5.16 million. Non-operating expenses including $8 million in interest on bonds issued and a transfer of $15 million to the Machinery and Equipment Loan Fund as required by statute were partially offset by a transfer of $5 million from the state. In total, after one year, the CFA had a net loss of $23.13 million, had amassed $369.25 million in long term debt and was obligated to debt service payments of $31 million per year beginning in FY 2006-07 and continuing through 2021, dropping to $28 million from 2022 through 2026.

 

Meanwhile, the CFA board was busy arranging to disperse the $316 million in cash it had raised from the bond issue (less the dollars already distributed or spent). According to the audit report for the fiscal year ending June 30, 2006, the Authority had approved loans of $245.82 million, grants of $151.3 million, $28.5 million in venture capital and $6.75 million in loan guarantees—for a total of $432 million.  Obviously, the CFA would need to issue more bonds to fund those approvals as well as new ones to be made in the next year.

 

And borrow it certainly has done over the last eight years to raise money to fund the grant and loan requests flowing from all the programs the Authority was created to support.  By year end June 30, 2013, the CFA had amassed total liabilities, mostly bond debt, of $1.727 billion. Assets totaled $966 million, $630 million in cash and equivalents, receivables of $31 million and non-current assets of $305.6 million held in loans. Thus, the CFA had a net asset position last June of negative $760 million. And, while the exact amount is not yet published, a large part of the $630 million in cash has been dispersed in grants and loans since last June, further worsening the net negative asset position. More borrowing to replenish the cash will not improve the balance sheet. Only net pay down of debt or receipt of far more non-borrowed funds will improve the net asset position.

 

Note that the negative net asset situation at the CFA worsened dramatically from June 2010 to June 2013, jumping from a minus $287 million to a negative $760 million.  No doubt, this is due in large part to the new programs requiring support that have been added to the CFA’s list of beneficiaries by the Commonwealth. The $330 million in bond issuance in FY 2012-13 pushed the total since the inception of the CFA to $1.872 billion of which $1.658 billion is still outstanding. The 2013 bond debt stood $313.5 million above the June 2012 level. Moreover, last year’s borrowing boosted the annual debt service payments from $125 million to $147.9 million.

 

Because net operating expenses always swamp operating revenues at the CFA, a source of funds to make the debt service payments is needed. Where does the money come from? In FY 2013, the Commonwealth provided $119.5 million while another $27.5 million arrived from gaming funds to be used in a county of the second class and redevelopment authority created in 1945—presumably the URA of Pittsburgh. Beginning with 2013, a portion of the Marcellus Shale gas well impact fee revenue is slated to come to the CFA. Its use is specified but might offer a source for debt service payments as well.

 

In any event, the $147.9 million payment for year ending June 2014 and every year through 2042 will require a substantial increase from the general fund or other special funds. And, the projected annual debt service payment assumes no further borrowing. The current budgeted transfer from the DCED is about $80 million and that will not be nearly enough to cover the total needed. So where will the other $67 million or so come from? The CFA could reduce the outflow of loans and grants and use some of the interest on its loan portfolio or loan repayments to cover the amount or the Commonwealth will have to meet the short fall. For the CFA to reduce loan and grants would mean lowering its support level to the programs it was created to raise money for.

 

As is typical in legislation creating authorities, there is a provision in the CFA creating law stating that the debt of the CFA will not constitute any indebtedness, liability or obligation of the Commonwealth nor can it pledge the faith and credit of the Commonwealth or any political subdivision—64 PA C.S. section 1521, paragraph d. (See Article VIII, sections 8 and 9 of the Pennsylvania Constitution for legal requirement language regarding obligating the Commonwealth.)

 

However, according to all the audits since the inception of the CFA, there is a service agreement between the Authority and the Commonwealth wherein the Commonwealth has pledged to seek annual appropriations to pay the debt service of the CFA. After all, if the Authority is borrowing large amounts of money and giving sizable fractions of that money away in grants, it will almost certainly need infusions of money from somewhere to pay back the debt with interest.

 

So far, the Commonwealth has been able to come up with necessary funds to cover CFA debt service.  As mentioned above DCED has been providing about $80 million a year. But that is not going to be enough. Gas impact fees presumably are helping fill the gap. But to meet the $67 million dollar hole this year and perhaps bigger gaps in future years as the borrowing continues to pile up the total indebtedness, the Commonwealth will be constantly looking for ways to meet this obligation.

 

And therein lies the problem. The bonds being issued by the CFA are very highly rated by the rating agencies because there is a commitment by the Commonwealth to make sure the debt service is paid. As the CFA annual debt service grows, will there come a point when the commitment of the Commonwealth to the CFA cannot be met without a tax increase because of the rising demands of pension funding and other pressing core function funding needs?

 

It certainly appears that could be the case. The question is: has the Commonwealth entered into an agreement that in fact does pledge the faith and credit of the state to the CFA?  That is something the law creating the Authority says cannot and will not happen.  It might be a matter of legal semantics but it appears the Commonwealth has gone too far with respect to obligating itself to repay CFA borrowing.  One of the primary reasons for creating authorities is to be able to have borrowing for public purposes increased without having the debt show up as sovereign government debt. But unlike most authorities created in the state, the CFA was not provided any independent revenue source such as the power to levy fees for services provided as at a water authority. The CFA is totally reliant on its limited portfolio to produce revenue and tax and fee revenue collected by the state that must be appropriated or dedicated by the Legislature.

 

Given the breakneck pace at which the net asset position is sliding toward a billion dollars and the inability of the state’s economy to generate faster revenue gains without tax rate hikes—which would themselves be a deterrent to faster job and revenue growth—it is becoming apparent that the rapid debt growth of the CFA (theoretically not a claim on Commonwealth taxpayers’ wealth and income) needs to be brought to a halt. It should be stopped at least long enough to see if the Commonwealth can afford to meet the growing debt service of the CFA without dipping into core government spending or forcing tax increases, either of which would be a de facto constitutional violation.

 

This situation is similar to the legal requirement for the Turnpike to borrow $450 million a year to fund highways and public transportation. The debt is piling up and is being serviced by ever rising tolls on the Turnpike.  With CFA, it is borrowing to meet the needs of a dozen or more state programs in order to provide far more money than the state could afford if it funded them through the normal budget process. Indeed, the CFA is simply a way to leverage limited DCED dollars and other funds by using them as debt service payments as opposed to directly spending them on economic development and other DCED programs. This is inherently a limited and possibly imprudent course of action. It depends heavily on the economic returns on the CFA loans and grants and the additional tax revenue they generate. There is no free lunch. Sooner or later if not checked borrowing by the CFA will haunt taxpayers. Just as the borrowing by the Turnpike is already hurting Turnpike users.

Washington County Opens Bids

Late last week Washington County opened bids from four contractors interested in undertaking a countywide reassessment, one that is moving ahead after years of delay and court battles as we documented this year (here and here). A newspaper article states that the companies are essentially the same as the ones who expressed interest in 2009, before the matter went to court.

So what are assessors getting ready for? As we noted in the latter Brief, the state passed legislation that moved the State Equalization Board into the Department of Community and Economic Development: the board is now known as the Tax Equalization Division, and its section of DCED’s website has a couple of interesting links to data.

The total assessed value of property in Washington County in 2011 was $1,550 million: that counts value from residential, trailers, seasonal, lots, industrial, commercial, agriculture, oil/gas/minerals, and land (by way of comparison Allegheny County’s 2011 market value measured by TED was $58,906 million). About 68% of the $1.5 billion in Washington County is tied to "residential" (statewide the average was 69%) and one-quarter of the residential value is concentrated in Peters Township. When the municipalities of North Strabane and Cecil are added, just over 45% of all the residential value in Washington County is accounted for.

Of much interest will be the value of the oil/gas/mineral category given the focus of Marcellus Shale activity in the County. There were two municipalities that the TED data shows has more than $5 million in assessed value for this category. East Finley Township had $10.7 million and South Franklin Township had $6.2 million.

Reassessment Reforms Become Law

When we wrote our recent Brief on the pending reassessment in Washington County we noted that legislation had passed both chambers of the General Assembly that would make significant changes to the state-level oversight and guidance of property reassessments carried out by counties. The Governor has signed that legislation and it now becomes known as Act 2 of 2013.

The press release on the Governor’s action does not say much but we did note that the most significant changes would bring some degree of uniformity to the process by creating a manual, training, and outlining best practices, but no changes to how often a reassessment has to be conducted or giving counties a tool to inform them to get ready for a reassessment.

Major Assessment Developments for Washington County

 

Two big developments regarding property reassessments have occurred in the last three weeks that will have a tremendous impact on Washington County.  As we noted in our inaugural Brief of this year, the County has been in a court battle with two of its school districts since 2008 over conducting a revaluation of property, a task not carried out since 1981.

 

 

The first big development occurred this week when the Supreme Court of Pennsylvania declined to hear an appeal from the County on the matter.  In December of 2012 Commonwealth Court noted that the parties to the case had agreed in 2008 to a document containing “nine stipulations of fact and a proposed order” that stated if the Legislature or the courts had not made substantial change to the property assessment system in Pennsylvania by September 30, 2009, the County was to move forward with a reassessment.  County officials opposed to a reassessment dispute the nature of the 2008 agreement and were hoping that the Supreme Court would overturn the lower court rulings, but that was effectively ended with the April 9th decision. 

 

The second development came about three weeks ago when the Pennsylvania House of Representatives passed legislation with no opposition (as did the Senate in late January) to move the State Tax Equalization Board (STEB), an independent agency since 1947, into the Department of Community and Economic Development (DCED).  Prior to this legislation, and following the Supreme Court’s 2009 decision on Allegheny County’s base year plan, the Legislature had attempted a legislative moratorium on court ordered reassessments and created a task force to examine the issue.

 

The rationale is that by making this move DCED will, according to a fiscal note prepared on the bill, “provide appropriate administrative, legal, and technical support needed by the Board to accomplish its purpose”.  STEB will be charged with determining the market value of real estate in each school district, obtaining lists of properties transferred in each county on a monthly basis, establishing the common level ratio of assessed to market value by July 1 of each year and informing counties if their ratio has increased or decreased by 10 percent or more, among other duties.  Perhaps most important with respect to counties carrying out reassessments, STEB is to:

  1. “Create an operations manual in consultation with the County Commissioners Association of PA and the Assessors’ Association of PA for counties to utilize when completing a countywide reassessment or when valuating property”.
  2. “Create and maintain a centralized and standardized statewide database for counties to utilize and report all property values and data to the Board.”
  3. “Develop and maintain statewide basic and detailed training programs for all persons involved in the valuation of property within all counties. The programs shall be completed and passed by any person that is employed to collect, compile, compute or handle data for purposes of reassessment valuation within the State.”
  4. “Develop standards on contracting for assessment services in consultation with the County Commissioners Association of PA and the International Association of Assessing Officers.”

 

These steps should go a long way to improving the assessment process, and, according to the fiscal note, would do so for a very inexpensive sum of $35,000.  However, while making these changes, the bill does not say when a reassessment has to happen, how often one has to happen, does not call for a statistical trigger that would inform a county that its values are out of kilter and possibly violating the uniformity clause. On the other hand and to its credit, it does not recommend or dictate a moratorium on court ordered reassessments during the implementation of the STEB-DCED integration. A version of the legislation in last year’s session attempted to do that, but it did not pass the General Assembly. As we have noted on several occasions, a legislative order that contravenes a court order is a constitutional crisis waiting to happen.

 

Here’s the question. Are state and local officials from Washington County looking at the state’s bureaucratic reorganization and the development of reassessment assistance as a moratorium of another stripe?  One Commissioner was quoted as saying “[the County] will take a wait-and-see attitude. We’re going to see what this means…how this will affect us and what we need to do to become the pilot program” and a state representative stated “I don’t know how a vendor could respond to a (request for proposals) even as state law is changing under their feet…we need to sit down with DCED and estimate a timeline and find out what [the County] need[s] to do.” 

 

While this might sound like due diligence, it could also be interpreted as an opportunity for foot dragging by officials who have no desire to conduct a reassessment as evidenced by the court battle and public statements made by members of the Board of Commissioners.  It is worth pointing out again that the Commonwealth Court quoted the 2008 stipulations of fact and proposed order that said if there was no state level change by September 2009 the reassessment process would begin.  How can anyone argue with any persuasiveness that a legislative change in April 2013, while substantive, could be grounds to hold off moving forward with a reassessment?  Especially now that the Supreme Court has denied the County’s latest appeal, thereby effectively ending the judicial channel for delaying a reassessment? 

 

Clearly, the recently enacted legislative reforms are long overdue. We pointed out in a 2007 report that some state level department or agency, perhaps the Department of Revenue or STEB, be involved as an overseer of the assessment process, including bringing some standardization to the process.  And it appears there might be some movement in that direction six years later. We also argued for mandated reassessments every three years, zero revenue windfalls from reassessments, and voter approval of all millage hikes.  Unfortunately, the first of these three recommendations has yet to be adopted. However, legislation was enacted earlier requiring municipalities to take separate votes to roll back millage rates to achieve revenue neutrality after a reassessment and then another vote to take a five percent increase. If desired, municipalities can petition the courts for millage rate hikes above five percent following a reassessment. School districts are limited to a revenue increase determined by their state calculated index.

Could State Guide Washington Reassessment?

Earlier this week the Board of Commissioners in Washington County, a county where a reassessment has not been conducted since 1981 (their base year, but they adjusted their predetermined ratio of assessed to market value in 1985) and enacted a 16% millage hike in 2010, reached back to 2009 to the vendors who said they would be interested in conducting a countywide reassessment should that ever happen. Based on articles (here, here, and here) that may be coming soon, albeit with a state level change.

Under a bill pending in the General Assembly the state’s Equalization Board would be housed inside of the Department of Community and Economic Development (DCED). The hope is that by making this move there will be more professionalism and sharing of expertise. The powers and duties of a shifted Board would include notifying county assessors when there is a change in a county’s common level ratio of plus or minus 10%, informing school districts of certified market values, etc. The key points that might affect a reassessment in Washington County or other counties conducting assessments after the legislation (should it become law) are these:

  • 1. "Create an operations manual in consultation with the County Commissioners Association of PA and the Assessors’ Association of PA for counties to utilize when completing a countywide reassessment or when valuating property".
  • 2. "Create and maintain a centralized and standardized statewide database for counties to utilize and report all property values and data to the Board."
  • 3. "Develop and maintain statewide basic and detailed training programs for all persons involved in the valuation of property within all counties. The programs shall be completed and passed by any person that is employed to collect, compile, compute or handle data for purposes of reassessment valuation within the State."
  • 4. "Develop standards on contracting for assessment services in consultation with the County Commissioners Association of PA and the International Association of Assessing Officers."

Our 2007 report on improving the property assessment system in PA included a recommendation that the Department of Revenue or STEB be involved as an overseer of the assessment process, including bringing some standardization to the process. We argued for a three year time line on reassessments, zero windfalls, and voter approval of all millage hikes.

Washington County Commissioners, while holding their nose after much delay, hope to be guided by this legislation. Taxpayers should also be aware that the County has to abide by Act 93 of 2010, which prescribes what has to happen to millage rates following a reassessment. Much like Allegheny County’s Act 71, the taxing body (county and municipalities) have to roll millage rates back to be revenue neutral, then, in a separate vote, can get 10% more than the amount the revenue neutral rate would bring in revenue. Taxpayers, knowing that it is possible for their assessment to go up but their taxes could go down with revenue neutral rates, would know that they could gauge their increase against the increase in the community as a whole.

Why No State Reports on the TIF Program?

“The Department of Commerce, in cooperation with other State agencies and local governments, shall make a comprehensive report to the Governor and the General Assembly every two years commencing January 1, 1992, as to the social, economic, and financial effects and impact of tax increment financing projects.” –53 PS 6930.10, Tax Increment Financing Act

 

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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.

Another City Enters Act 47 Status

The City of Altoona, population just over 46,000, has been declared financially distressed by the state under the terms of Act 47 of 1987. It will be the 27th municipality placed in Act 47 status since the law was enacted; Altoona will join 20 others currently in. The City’s 2012 budget included a real estate tax increase.

Six municipalities have been released from financial distress, the most recent being Homestead in 2007. That municipality had been in Act 47 for fourteen years. The fastest entrance-to-exit time is for Ambridge, which spent three years in the program.

No doubt the hopes in Altoona are for a short stay. One councilman said that Altoona can be out in three to six years if "tough decisions" can be made. Two municipalities in neighboring Cambria County-Johnstown and Franklin-have been in for more than twenty years.

At a joint hearing of several committees of the General Assembly in October of 2011, the Executive Director of the Governor’s Center for Local Government Services testified "there is no limit to the amount of time a municipality can be in the Act 47 program, and the Commonwealth’s authority to address the factors of distress in a given municipality are the same in year ten of the program as in year one." A proposal in that testimony was to have a Fiscal Recovery Board appointed for a municipality that had been in Act 47 for five years