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.

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.

Act 47 Prescribes Remedies for Reading

Though separated by a distance of over 200 miles and a population difference of more than 200k people, Pittsburgh and Reading now share the distinction of both being Act 47 financially distressed communities. Late last week Reading’s Act 47 plan was published on DCED’s website.

Reading has been operating at a deficit since 2007, and the recovery team recommends a variety of solutions related to workforce (a three year pay freeze, employees pay more for health benefits), turning services over the Berks County, and exploring various revenue raising options.

A brief snapshot of three indicators in Pittsburgh-which has been in Act 47 since 2004-and new entrant Reading shows that Reading has fewer employees (on a per 1000 person basis), its ratio of fringe benefits to salaries and wages is lower, and so too is its per capita debt level.

Indicator

Pittsburgh

Reading

Headcount (FTE per 1000 people)

10.6

8.2

Ratio of Fringe Benefits to Salaries

$0.54

$0.30

Debt (per capita)

$2200

$1802

While Reading might find encouragement that its situation might not be as bad as Pittsburgh’s (which raises questions of its own since Pittsburgh has been in for six years and has a separate oversight board to boot) it should be known that only six municipalities have emerged from Act 47 since its inception. For every one community that has exited there are three still in fiscal distress.

The Best Laid Plans Not Good Enough

govt city

When the Secretary of Pennsylvania’s Department of Community and Economic Development rejected Pittsburgh’s petition to have its Act 47 designation lifted last July, he noted that the City needed “a blueprint for it to exit Act 47 and address pending legacy costs of debt, pensions, post retirement benefits, [and] workers’ compensation”.

 

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