Legislation has passed both houses of the General Assembly that would put in place financial recovery and receivership provisions for the state’s 500 school districts, though it is a safe bet that, like the fiscal distress provisions that could apply to all of the state’s 2,000-plus municipalities, not all will ever encounter any sort of fiscal oversight or guidance.
There are some key differences as well: under Act 47, there are parties besides the state that have standing to make a case that a municipality has qualified for distress. In the proposed legislation, it appears only the Department of Education can make the case. There is no cap on the number of municipalities that can be in Act 47 at one time (right now there are over 20) whereas the legislation for schools says that "no more than nine" can be in financial recovery, or the more drastic receivership, at one time. While Act 47 spells out much of the criteria on what it means to be distressed, the State Board of Education is supposed to determine the criteria for "moderate" or "severe" distress. And what causes the cessation of distress/recovery? For both, it is the determination of the respective Secretary.
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
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.
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.
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?
As the discussion over whether states should be allowed to declare bankruptcy heats up (they cannot do so now) several states are taking steps to make their oversight of local government finances stronger. A Wall St. Journal article notes that California, Michigan, and Indiana are among a group of states that is seeking to take steps to enhance oversight and distress statutes.
Pennsylvania is no stranger to distress provisions. There is Act 47, that has been in place for over twenty years, and oversight boards have been created specifically for Philadelphia and Pittsburgh. A national expert on the subject points out that "more than half of the states have some sort of active supervision or financial review of local governments" and the attention has only ramped up as bond defaults, bankruptcies, and fiscal stress becomes more of a reality for state and local governments.
If Pennsylvania can provide a lesson it would be that unless there are some very strict and possibly uncomfortable reforms, states can expect their local governments to be in oversight for quite a long time. Some Act 47 communities have been in for quite a long time and Philadelphia will be under oversight until bonds are paid off, which is sometime early in the next decade. The theory on strengthening distress is to stave off Chapter 9 bankruptcy, which may be the only real solution to many municipalities’ fiscal problems.
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.
Westfall Township, a community of just over 2,800 people in northeastern Pennsylvania’s Pike County, might be the tiny engine that could prompt some thinking about the process through which municipalities proceed to bankruptcy (debt readjustment is likely more appropriate) under Chapter 9 of the U.S. Code.
As we pointed out in earlier Policy Briefs and a full-length report, Chapter 9 filings are very rare and, under the national-state division of power in the U.S., under the discretion of the states. Due to amendments passed in 1994, a state must specifically authorize its local governments to enter into Chapter 9. If they grant permission, they are free to attach as many pre-conditions as they like. In Pennsylvania the requirements are spelled out in Act 47, the fiscal distress statute.
Westfall Township faced a $20 million bill due to a developer and could not pay it. They filed for Chapter 9 bankruptcy, four days later were placed into Act 47 status, and after going to court the bill was renegotiated to something more manageable ($6 million).
The municipality’s bankruptcy counsel pointed out that "filing for Chapter 9 should be the last resort for municipalities. The ideal option is to negotiate with the creditors. If that fails, the second alternative is to go through a financially distressed municipality proceeding under Pennsylvania’s Act 47…if those options fail, or if there is an emergency, then Chapter 9 should be considered" (emphasis added).
Perhaps the General Assembly will look to this recent example and ponder whether there should be an alternative way to enter Chapter 9 if there is a sudden catastrophe or fiscal emergency that cannot wait for the Act 47 process to play out. Then too, in light of the massive pension bill that is coming due for school districts in the near term it ought to be considered if school districts should have the right to pursue Chapter 9 filings (Act 47 applies to municipalities only, so school districts have no avenue by which to pursue debt adjustment under Chapter 9).
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.