Aug. 9 (Bloomberg) -- In Harrisburg, Pennsylvania’s capital, drivers navigate past sinkholes that won’t get filled. By next month, city officials may not have money to fuel emergency vehicles, or even issue paychecks.
The fiscal crisis underscores the shortcomings of Pennsylvania’s municipal-oversight law, even as states including Rhode Island and Michigan have strengthened theirs. Pennsylvania’s aid program was established in 1987 after local tax revenue collapsed along with the steel industry. Harrisburg was designated a distressed city in December, after missing bond payments it guaranteed on an incinerator project.
The capital joined cities including Pittsburgh and Reading in the state’s Act 47 program, which helps develop financial-recovery plans. Even with state intervention, municipalities are unable to void labor contracts and pension benefits that are driving up their costs, said James J. Holman, a bankruptcy attorney at Duane Morris LLP in Philadelphia. Eleven cities have remained in Act 47 for at least a decade.
“On pensions and union benefits, these have been a festering problem for many years, and are coming into play now,” Holman said. “Unless there’s some massive resuscitation of the employment market, or of real estate prices, these problems will just get worse.”
Harrisburg’s City Council in July rejected a recovery plan from state consultants, the first time an Act 47 proposal was spurned. Mayor Linda Thompson will review her alternative plan with the council today. It must pass a blueprint by Sept. 6 or risk losing aid, said C. Alan Walker, the state’s secretary of community and economic development. The city, which has weighed bankruptcy, would also lose funds if it seeks court protection before July 2012, under a state law enacted in June.
Rhode Island, Michigan
Lawmakers in Rhode Island and Michigan have taken steps to improve their rules governing distressed cities, while proposals have been made in Indiana and California.
In Michigan, Governor Rick Snyder signed a measure in March that empowers state-appointed financial managers to change or terminate employee contracts. Two of the state’s four emergency managers have already used the law.
On July 29, Roy Roberts, the emergency manager for Detroit Public Schools, announced a 10 percent cut in wages and 20 percent contribution to health benefits to save $81.8 million.
Michael Stampfler, emergency manager for the city of Pontiac, in June overrode objections of an 11-member dispatcher union that was blocking closure of the city police department and the transfer of services to a county sheriff’s office, said Caleb Buhs, a spokesman for the state treasury department.
“They had reached an impasse, and this was the only course of action to achieve these savings” of $2 million a year, Buhs said.
Emergency managers were first established in 1990, and the current economic climate “warranted some change, to be more aggressive,” Buhs said.
Rhode Island has also reacted to crises in its municipalities, specifically Central Falls. As the state’s poorest city contemplated bankruptcy, the legislature passed a law in June giving general-obligation debt holders priority on payments in a municipal reorganization. Central Falls, overwhelmed by its pension obligations, sought court protection Aug. 1.
Harrisburg, the 26th city to enter Act 47, wouldn’t be in its situation if the oversight program was stronger, said state Senator Jeffrey E. Piccola of Susquehanna Township in Dauphin County.
Piccola crafted legislation, passed by his chamber in June, that would force cities to implement a state recovery plan. He said he expects hearings on further changes to the program when lawmakers reconvene in September.
“Act 47 really doesn’t have any teeth,” Piccola said. “It’s more like guidance and recommendations to our municipal governments on how to get out of their fiscal stress.”
Harrisburg’s crisis stems from an overhaul and expansion of an incinerator whose debt it guaranteed that serves the city and nearby communities, and resulted in a burden five times its general-fund budget. The community of 49,500, where about a third live below the poverty level, is also dealing with declining tax revenue.
With incinerator fees insufficient to cover the bonds, Harrisburg was next in line to pay them. The city skipped payments, which then fell to its home county, Dauphin County, or bond insurer Assured Guaranty Municipal Corp. to cover. Harrisburg owes $310 million on the debt and related fees and penalties, according to state-appointed consultants.
The consultants recommended the city sell or lease the incinerator and parking system, a plan that was rejected by a majority of council members. Thompson’s alternative hews closely to the renounced plan, except it asks the county, state and Assured Guaranty to fully retire the debt, estimated at $26 million, that proceeds from the sale and lease wouldn’t cover.
Harrisburg is expected to run out of money in September, the Act 47 consultants said, throwing into question whether it can pay its workers and make $3.3 million in general-obligation bond payments that month. The city is only filling 14 out of 25 sinkholes, and is hoping it can shift money in its budget to cover fuel costs for emergency vehicles, according to Robert Philbin, a spokesman for Thompson.
Though Act 47 has helped stabilize communities, there are problems beyond its control, such as guaranteed labor benefits, said Fred Reddig, executive director of the Governor’s Center for Local Government Services.
“Is it the cure-all for municipal ailments? No,” Reddig said in a telephone interview. “It doesn’t have the ability because of some of the constraints it operates under.”
The oversight laws haven’t changed much since 1987, said David Miller, a professor at the University of Pittsburgh’s Graduate School of Public and International Affairs who has helped develop Act 47 recovery plans.
Mayors, already dealing with an “antiquated” tax base, are frustrated by their rising personnel expenses, said John A. Garner Jr., executive director of the Harrisburg-based Pennsylvania League of Cities and Municipalities.
“When you can’t control your pension and contract costs, you’re digging a hole every year,” he said. Gardner said he expects six more Pennsylvania cities to announce fiscal distress over the next five to 10 years, without saying which.
The actions in Rhode Island and Michigan show that states want to isolate municipal problems and reassure bondholders, said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York.
‘Stop That Contagion’
“States are trying to stop that contagion and try to give investors comfort that state intervention is going to take place,” Cure said.
Pennsylvania, though, is unlikely to adopt an initiative like Michigan’s emergency-manager measure because it has a “long tradition of local-government sovereignty,” said Gerald Cross, executive director of the Pennsylvania Economy League, Central Division, a nonprofit public-policy organization in Wilkes-Barre that is part of the consulting team on Harrisburg’s recovery plan.
“They really want councils to make the decisions,” Cross said. “We don’t believe in imposing from above.”
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