Familiar Threads Woven in Harrisburg Recovery Plan

Over three years ago, in February 2010, we asked if the debt related to a trash incinerator was pervasive enough to cause a municipal bankruptcy filing-colloquially, that the City of Harrisburg’s finances could possibly end “up in ashes”. 


After the City was placed into Act 47 status, saw the General Assembly make changes to the statute as it applied to Harrisburg, and operating under the direction of an appointed receiver, a plan, somewhat pretentiously titled “Harrisburg Strong”, has come together for placing the City on the path to a solid financial future.


Readers of our reports, especially as they pertain to Pittsburgh, will notice some familiar themes and one very different situation; namely, the presence of the aforementioned dollar devouring trash incinerator. That facility is slated to be sold-to another public authority-and some of the proceeds will go to satisfy creditors (but only partially satisfy since negotiations have produced settlements for less than owed) and reimburse Dauphin County.  That won’t pay all the bills, so a 40 year lease of parking garages, lots, and street spaces to a public-private partnership is expected to yield enough money to pay off parking debt, the rest of the incinerator debt, for the City itself, and for funds related to economic development, infrastructure development, and a trust fund for retiree health care obligations.


That last point is a good starting place to assess how the City and its employees are partnering up at this critical juncture.  As the February 2012 recovery plan pointed out, Harrisburg is similar to many municipal governments in that it is a very labor intensive undertaking and the lion’s share of costs are attributable to employee compensation.  Three bargaining units represent the majority of the workforce covering police, fire, and non-uniformed staff (461 employees total including non-represented staff) and all negotiated early-bird contract extensions that limited the City’s and the receiver’s ability to make changes.  Compared to other cities of the third class in Pennsylvania (Reading, York, Allentown, etc.) the plan found that Harrisburg public safety minimum salary ran about $10,000 higher. The recovery plan projected workforce costs to rise from $45 million to $52 million from 2012 through 2016. 


As described in the “Harrisburg Strong” plan, two of the three bargaining units (police and non-uniformed) have agreed to concessions during the lives of the existing contracts to move the City toward its goal of getting $4 to $4.8 million in savings.  There are tradeoffs for both the City and the bargaining units: for police, what were to be 3 percent annual wage increases through 2016 are now 0 rising to 1 percent in the final year.  Payments toward health care coverage for current employees will be made with variations based on the number of people covered on an employee’s plan with the percentage of income paid for insurance rising throughout the duration of the agreement.  Current employees who retire after the ratification of contract changes are treated the same as active employees and, as is almost always the case when it comes to legacy cost changes, new hires will not be eligible for post-retirement health care benefits. The police contract opens up the possibility that certain positions might be offered to civilian employees and that booking could be transferred to Dauphin County. Most of those same terms will apply to the adjustment for non-uniformed employees.  


So what sweeteners do the employees get in return for these concessions? For one thing they are asking for elimination of the residency requirement. This issue has been bandied about in Pittsburgh over the summer and will no doubt intensify closer to Election Day. In Harrisburg, the proposed amendments for both police and non-uniformed contracts contain language stating “…the residency requirement contained in prior collective bargaining agreements between the parties is eliminated, and employees, regardless of hiring date, shall not be required to establish or maintain a residence within the corporate limits of Harrisburg”.  Could that be a deal breaker for City officials who must pass some of the necessary ordinances to make “Harrisburg Strong”? 


Overall approval for the plan falls to the Commonwealth Court, which plans to review the proposal in mid-September. 

Parking Garage Economics

Leasing or selling public parking garages to shore up finances. Readers of the Institute’s work will recall days of yore around 2009 and 2010 when the City of Pittsburgh had a plan to lease the garages and meters to put the proceeds into the pension system. That did not happen, but the details of the plan are touched upon here, here, and here.

The idea did keep traction in the capital city of Harrisburg: we wrote in June 2011 that the Act 47 recovery plan for Harrisburg mentioned the possibility. Instead of paying off pensions, the 2012 final recovery plan noted "if the parking assets are included in the debt solution, the proceeds from the parking assets transaction will first need to be applied to repay the existing debt of the Harrisburg Parking Authority. The remaining proceeds…could potentially be used to pay a portion of the incinerator debt and to contribute over time to address a portion of the City’s structural deficit".

Such deals can be quite complex and raise a lot of questions. One that was raised in a news article is whether the Harrisburg arrangement is a lease or a sale. When the arrangement involves not leasing the garages to a private interest but a state-level economic development authority who will also involve another local non-profit economic development agency and then two private interests will have a role in managing property and parking operations, things can get a bit complex.

Why the involvement of the other authority and the non-profit? Because locals were worried "…that parking rates could increase out-of-control to boost profits while the assets themselves could languish and degrade in the hands of a company with no long-term interest in the welfare of the city." Similar thoughts arose many times during the debate in Pittsburgh. Of course, it is safe to assume that policymakers in both cities did not contemplate that a private operator would have to pay property taxes (unlike a municipal or authority owner), collect parking taxes, pay expenses, and still make a profit while recognizing that simply imposing higher rates would eventually result in a drop in parking customers.

Should the State Subsidize Pittsburgh to Harrisburg Train Service?

AMTRAK has informed Pennsylvania that the Pittsburgh to Harrisburg service-known as the Pennsylvanian-would likely be suspended unless the state comes up with the $5.7 million needed to cover the subsidy now being covered by money from the Federal government. 




The Keystone train service between Harrisburg and New York via Philadelphia offers several departure and arrival times each day. The Pennsylvanian, on the other hand, provides only one train a day inbound to Pittsburgh and one train outbound from Pittsburgh to Harrisburg with continuing service to New York City.  The single inbound train arrives in Pittsburgh at 8:05 PM having left New York at 10:52 AM and Harrisburg at 2:36 PM. Outbound from Pittsburgh departs at 7:30 AM and arrives Harrisburg at 12:55 PM and New York at 4:50 PM.



Does it make good economic sense for the state to contribute such a large sum to keep the Pennsylvanian running? The following discussion of the train’s status and some key data will shed light on the advisability of the state government subsidizing half the annual cost of operating the train between Pittsburgh and Harrisburg.



For fiscal year 2012, there were 129,372 boardings and disembarkings at the Pittsburgh station for both the Pennsylvanian train and the Capitol Ltd. service that goes on west to Chicago by way of Cleveland and east to Washington DC. The Capitol Ltd service is also one train per day in each direction leaving for Chicago at midnight and DC at 4:50 AM. Total ridership on the Capitol Ltd and Pennsylvanian are very nearly the same, posting just over 100,000 passengers each in the first six months of fiscal 2012.



The Pittsburgh station passenger count has fallen substantially since 2008 when it was well above 140,000. In any case, even if the majority of passengers at the Pittsburgh station are from the Pennsylvanian, the number of Pittsburgh passengers from that service is almost certainly fewer than 100,000 per year or 270 people per day-probably about evenly split between boardings and disembarkings.



Furthermore, the passenger count at the Altoona station, the busiest between Pittsburgh and Harrisburg, has fallen from 35,850 in 1998 to 26,798 in 2012, a drop of 25 percent. Thus, the recent trend of ridership on the Pennsylvanian is clearly down.  The key question is, “will the downward trend be reversed soon?” If not, should the state be putting money into a train route that will require increasing subsidies year after year as the gap between revenues and costs widens?  Obviously, with falling passenger counts, raising ticket prices to offset the loss of riders is not a viable option as an effort to raise revenue. 



Moreover, the single daily train in each direction way is obviously a weak selling point.  The departure and arrival times in Pittsburgh (the biggest station on the line) is not convenient for many potential passengers.  Then too, the five and half hour travel time to Harrisburg is off putting considering the alternatives.  Granted, the trip from Altoona to Harrisburg is shorter and if the final destination is Philadelphia or New York the trip times are much more comparable to travel by car or bus. But, that being the case, why has the passenger count at Altoona fallen so steeply?



Passengers going from Pittsburgh to Harrisburg on the train will pay $40 for the trip. Meanwhile, passengers traveling by MegaBus from Pittsburgh to Harrisburg pay $14 or $16 depending on which of the three daily departure times they choose. The MegaBus trip is a three and half to four hour journey with no stops.  Thus, the advent of the MegaBus has created major competition for the train in terms of departure time convenience, travel time and cost. By way of note there are three return trips from Harrisburg by MegaBus as well.



And without question, for most people making the trip to Harrisburg, especially people on business, getting to the Harrisburg train station is just the start of the excursion.  If they want to go to a meeting in Swatara or other neighboring communities, they will need transportation.  Unless someone is there to provide transportation, it will mean getting a cab or renting car. Either would represent considerable extra expenditure of money and time.  Moreover, the business person going to New York would not arrive in NYC until very late in the afternoon and would have missed most of the work day, meaning a night in a hotel. Whereas a flight leaving Pittsburgh at 7:30 AM or so would have the person in NYC in time to get in several hours of meetings or sales calls and still catch a late afternoon or early evening flight home.



In short, business travelers are unlikely to ever make up a big part of the Pennsylvanian’s passengers. And non-business travelers seeking to save time and money now have a much better alterative in MegaBus.



For the state to ante up the $5.7 million, which is about half the estimated cost of running the Pennsylvanian service, it will have to justify the expenditure of funds on other than economic considerations. Indeed, the state ought to survey the ridership to ascertain whether subsidizing half the cost of the trip is warranted.  Do passengers have alternatives or are they too poor to travel any other way? Are they riding the train simply because they enjoy the train ride experience and are happy that taxpayers are paying half the cost of the ride? What, if any, non-transportation benefits accrue to spending millions in subsidy to keep the Pennsylvanian running?



Absent compelling answers to these questions in favor of providing the subsidy, the only other reason to keep the line going would be to have it available and in working condition against the possibility of a major long term east-west corridor highway outage or restriction. Or perhaps Turnpike tolls will rise to a point that people will abandon the Turnpike in favor of a train ride.  


Romantic notions surrounding train travel should not drive the decision. The Commonwealth does not have money lying around that is not needed more elsewhere. Roads and bridges and unfunded pension fund liabilities come to mind.

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.

One Last Chance for Harrisburg

Distress, and receivership, and bankruptcy, oh my! The continuing effect of Harrisburg’s Resource Recovery Facility-the incinerator-turning the capital city’s finances to smolders continues on as the Governor signed into law what is now known as Act 79, providing for fiscal emergencies in cities of the third class, of which Harrisburg is one.

According to the Governor’s press release, the act gives the City "a final opportunity to develop or agree to a financial recovery plan that is acceptable to the DCED secretary". The City has thirty days altogether, but the plan must be completed and sent to DCED within twenty days. That leaves the remaining ten for review and time to pass an ordinance codifying the plan locally.

If the Council opts not to take that opportunity, then the law triggers an emergency action plan that ensures public safety and other municipal services are carried out at the discretion of the DCED secretary.

Pending behind these two separate courses of action is a Chapter 9 municipal bankruptcy filing, an action that is supposed to get a hearing sometime in November depending on what happens with the provisions of Act 79. One Council member stated "We’re going to be bankrupt in five years anyway" and that "Under the state’s receivership plan…the city would likely have to sell water and sewer assets as well parking garages, but filing bankruptcy now could prevent such drastic measures." That’s taking a leap of faith in that the bankruptcy court could call for remedies that could be quite similar to what the state would attempt; it is unknown, but the Council members advocating for bankruptcy might be hoping to see something similar to what happened in Westfall Township where a $20 million debt was negotiated down to $6 million in bankruptcy court.

But what is being talked about is a $310 million debt and a rather rapid timeline to get something done. The previous Governor said there was "no Santa Claus" riding to rescue the City but then released money to help them make a bond payment. This time things look different, and no one is going to eat the outstanding tab.

Page Turns to Chapter 9

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.

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?

The Recovery Road Show

Friday marked the release of what will likely become the final Act 47 recovery plan for the City of Harrisburg and a lot of work lies ahead on debt levels, worker benefits, and financial management for the state’s capital community.

Is there anything Harrisburg can take from the largest city in Act 47 status, western Pennsylvania’s own Pittsburgh? A lot of the situation is going to be unique. But Harrisburg, like many local governments, is a labor-intense enterprise so much of the change on the cost side is going to be focused on headcount, salaries, and benefits. Based on the employee headcount and Census population, Harrisburg has 10.7 employees per 1,000 people this year. Five years ago the rate was 13.4; the City’s headcount fell while population bumped up. By comparison in Pittsburgh, where population fell and headcount went up a tiny amount over that same time frame, the per 1,000 person employee count stands at 10.9, up slightly from 10.6.

The similarity in employee to population right now is likely to diverge as the Act 47 plan comes into effect. As with many changes to employee benefits like post-retirement health care, change often comes to new hires. That’s what Pittsburgh did in 2005 when post-retirement health care coverage was ended for police and fire coming into the employment ranks and those retiring after the adoption of the plan would have higher coverage obligations. That too, is what is proposed for Harrisburg under their Act 47 plan.

Finally, on pensions the ability to collect benefits is virtually identical between the cities (50 years of age, 20 years of service for police and fire, though non-uniformed employees in Pittsburgh can retire with benefits at age 60 where in Harrisburg it is 65) but there is a big difference in the funding health of the plans. Pittsburgh has a funded ratio (AA/AAL) of 34% on average for its three plans, while Harrisburg has more assets than liabilities and has a funded ratio of 116%.