Hits and Misses in Pew Report

Elected and appointed officials in the field of economic development are often long on the benefits of proposed spending to stimulate growth but very short on the follow up to find out if the programs actually work.

That’s not new news. Pennsylvania’s Legislative Budget and Finance Committee (LBFC) did a report in 2000 that served as a fairly comprehensive performance audit on DCED’s programs and found the monitoring of efforts ranged from "rigorous to none" and that the Department rarely "verif[ied] the accuracy of jobs data". More recently, the Auditor General looked at the Opportunity Grant program and found lax effort to check on job creation numbers.

So the new Pew Center on the States report on evaluating how well states do in monitoring their incentive programs is treading on familiar ground. It is a very ambitious undertaking, ranking all 50 states and DC. All states spend the money to attract and retain jobs, the report notes, but there is great variation in how well the states do in monitoring the effectiveness, the "bang for the buck" of the incentives. There should be more emphasis on measuring whether what is promised is what is delivered, and there should be consequences for not achieving targets.

By reviewing documents and interviewing officials, Pennsylvania comes out in the middle of the pack, along with 11 others, labeled as having "mixed results". Under the dual evaluation of "scope" and "quality" PA got high marks for having a schedule for reviewing programs and determining whether incentives are achieving stated goals. The problem is that the rating came from the review of two documents from LBFC, one on tax credits and one on Keystone Opportunity zones.

Besides the 14 tax credits reviewed in the LBFC report that Pew referenced a quick look at DCED’s program and funding finder shows that 53 links for "loans" and 61 links for "grants" come up, meaning that PA might be rigorous on a fraction of its incentive programs reviewed by Pew. The same could hold true for the other 49 states based on what the evaluators examined, meaning they could look rigorous or lax in relative standing. This does nothing to include the plethora of incentive programs states might have authorized for their local governments to carry out but are not monitored by the state itself.

City Wants to be Free

After presenting the 2012 budget to Council, the Mayor raised the idea that the City is ready to be released from state oversight. Now whether the Mayor meant Act 47, or the oversight board, or both is not clear from the newspaper article or the Mayor’s press release (which does not mention the request). The Mayor’s spokesperson had stated the City could function on its own in mid-October. Plenty of elected officials, both from the state and the City, weighed in on the Mayor’s statement.

Recall that the City formally petitioned DCED for removal from Act 47, a petition that was denied in July of 2008. There was a chance that the state was moving to eradicate the oversight board early in its tenure, but it is still in place and several new appointments have been made to the board.

In denying the Act 47 request, the DCED Secretary at the time noted the City had several issues to address:

  • Debt service requirements that exceed 20 percent of the City’s operating budget and will not decline until 2018
  • Unfunded pension liability currently at $467 million
  • OPEB liability that ranges from $220 million to $320 million
  • Workers’ compensation liabilities have remained high and are projected to reach $24.7 million by 2012

So what do things look like now, more than three years later? We know that debt service is still around 20% of the budget ($87 million for 2012); as a result of the pension bailout and asset infusion unfunded pension liabilities stand at $381 million; OPEB liabilities are now $488 million; and workers’ comp costs are down slightly, at $21 million for 2012.

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?

More Changes Needed in Pittsburgh Oversight Groups

The recent addition of Ms. Dugan to the Intergovernmental Cooperation Authority (known as the oversight board) was a tremendously positive step for the Governor to take in addressing the lackadaisical approach of the board and its habit of too often being irrelevant to the job at hand-guiding the City’s financial matters with strict discipline.

But more remains to be done to bolster the resolve and performance of the oversight board and the Act 47 recovery team. The Republicans in the House should move quickly to replace the appointment made several years ago by then Speaker Perzel. The appointment of a Democrat union leader by the House Republicans was disappointing in that it gave the Democrats a four to one majority on the board. Leaving this appointee in place keeps the board in the hands of a majority likely to be friendly to the City’s employees and higher spending and less likely to be worried about the taxpayers, fiscal discipline and the business climate.

At the same time the Governor, through the Secretary of DCED, should evaluate the performance of the Act 47 coordinator with an eye to replacing the group with someone less intimidated by the Pittsburgh government and its political and civic supporters.

The latest report from the City Controller, showing Pittsburgh spent more than it took in last year along with the debacle over the City’s massively underfunded pension plans, point to seriously inadequate financial oversight for the last seven years. What do Pennsylvania’s taxpayers have to show for the millions of dollars spent since 2004 for the two oversight groups? Not much apparently.

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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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.

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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Distressing Times

"…it is our recommendation that the City of Harrisburg be declared financially distressed"-Governor’s Center for Local Government Services, Consultative Evaluation for the City of Harrisburg, October 20, 2010

If the Department of Community and Economic Development follows through on the recommendation of its Center for Local Government Services, Harrisburg will become the 20th active participant in Act 47 distressed status. Since Homestead (in Allegheny County) came out of Act 47 in March of 2007, three new entrants (including Harrisburg) have gone in.

Act 47 lays out eleven criteria of which a municipality must meet one in order to be declared distressed. Harrisburg asserted that it had met three of the ten, but the evaluation found that only one-that the City had defaulted in payment of principal or interest on bonds or notes due to an authority-to satisfy the petition.

The evaluation found that of five comparable PA cities (one of which, Chester, is also in distressed status) Harrisburg has "a low and diminishing ability for the residents to produce the necessary resources to support services at current levels".

Another Entrant into Act 47

Does this sound familiar? A city with "year end structural deficits that were addressed by one-time solutions; debt burden in excess of 10% of its general fund revenues; and a stagnant tax base that raises serious concern about the ability of the City…to generate the revenue necessary to support core municipal services".

It could be Pittsburgh, or one of any number of towns in the Mon Valley, but it turns out that the description is of Reading in Berks County, the Commonwealth’s fifth largest city (population of 80k according to the most recent Census estimate). Reading was just granted entrance into Act 47, a classification of municipal distress that holds 18 other cities currently and from which only 6 have emerged.

Four of the state’s ten largest cities are in some type of financial oversight, either Act 47 (Scranton and Reading), an oversight board (Philadelphia), or both (Pittsburgh). The Department of Community and Economic Development (DCED) has completed its initial assessment of the City and found that its per capita and median household income was lower than other similarly-sized cities as well as lower than Berks County and the Commonwealth.

How long the City will remain in Act 47 is anyone’s guess. Some have been in since 1987 and are operating under second, third, or even fourth revised plans. Reading is just beginning its quest for financial solvency.