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.

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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Yes Virginia, There is a Santa Claus

In a February article in the Harrisburg Patriot Times the Governor had this to say about the financial woes facing the state’s capital city, woes that raised the possibility of Act 47 and possibly Chapter 9 bankruptcy: "there’s no easy, pain free way out…there is no Santa Claus riding into the aid of the city".

Perhaps it was the fact that back in February the Governor, like most people, was not in the spending mood due to the post-Christmas spending hangover. Because just this week the state announced it is riding in to rescue Harrisburg with a $4.4 million package that will help the city to avoid missing a payment on its bond debt and hire a consultant to help steer the City to financially calm waters.

But don’t call it a bailout because according to the Governor the package includes money Harrisburg was due anyway like its municipal pension aid ($2.6 million) and money the City gets for protecting the State Capitol complex against fire ($1 million). There is also money from a loan fund that must be paid back ($500k). "We’re just front loading it and expediting it" not bailing the City out, said the Governor, who felt that it would be disastrous for Harrisburg to miss the debt payment. How the City is able to use what appears to be restricted money to pay a debt is not clear.

And rest assured that the money is just there as a temporary step so the City and its consultant can come up with a long-term solution. Just like flexing highway money did for the Port Authority.

Some of the early Christmas cheer must also be extended to the City from banks or foundations because even with the cash infusion the Mayor noted that they are still $500k short of making payroll.

Parking Garages on the Block in Harrisburg?

A city with budget woes, many of them related to long-term debt, comes up with a plan: why not lease or sell the parking structures owned by the city (or a related city authority) and use the proceeds to pay off the debt?

This sure sounds a lot like Pittsburgh, but as we’ve chronicled in earlier blogs and a Policy Brief it is Harrisburg that is looking around for dollars. After this past week in which the Mayor vetoed a revised budget and still has to contend with a $4 million shortfall but did nothing to address the debt related to an incinerator owned by the Harrisburg Authority but guaranteed by the City of Harrisburg the possibility of asset sales became more real.

According to published reports the Mayor of Harrisburg "has supported looking into the sale or lease of certain city assets – including parking garages, City Island and McCormicks Island – to help retire the debt." Now the City seems prepared to hire outside experts to see how much money the assets could bring in.

There will likely be more cities and local government that might be hoping that their parking structures can deliver quick fix savings for debt and legacy cost problems that are staring them in the face. Unfortunately, this will be happening in retrospect (looking for money to close budget gaps) instead of prospectively (making a judgment as to whether parking or other municipal functions are a core function that ought to be moved to the private sector).

State won’t Bailout its Host City

Regarding the tangled web of debt between the City of Harrisburg, Dauphin County, and the Harrisburg Authority over obligations on a trash incinerator and whether those obligations could lead Harrisburg into Act 47 distressed status or Chapter 9 municipal bankruptcy, the Governor of Pennsylvania offered this statement:

"There’s no easy, pain free way out…there is no Santa Claus riding into the aid of the City".

Maybe not as harsh as the 1975 headline "Feds to New York: Drop Dead" but clearly a message that the Commonwealth won’t advance funds or bailout Harrisburg over the debt. Instead, a meeting between the Governor, the Mayor of Harrisburg, and other officials produced a consensus that technical advice from the state would be available, but the City should look to sell assets and increase disposal fees to County residents.

The Mayor wants to avoid Act 47, and said that "bankruptcy would be the last option". With some $17 million in debt coming due in four months, that last option might be approaching rapidly.