Arnold precluded from seeking state financial oversight
By Liz Hayes
Published: Sunday, Nov. 25, 2012, 12:01 a.m.
Even if they wanted to, Arnold officials can't yet apply for state aid under the financially distressed municipalities program.
Known as Act 47, the Municipalities Financial Recovery Actallows the state Department of Community and Economic Development to step in and assist foundering communities by developing a recovery plan.
That can include tax increases, spending cuts and layoffs, debt restructuring or bankruptcy, and municipal consolidation or mergers.
The act establishes about a dozen criteria to determine a community's financial stability; the department can approve Act 47 status if at least one criterion is met.
Criteria include operating at a deficit for at least three years, defaulting on a loan, missing payroll for a month, failing to forward payroll taxes for Social Security benefits, failing to make pension contributions, reaching the maximum levy on real estate taxes while experiencing a substantive decrease in municipal services and declaring Chapter 9 bankruptcy.
Arnold Mayor Larry Milito and Solicitor John Pallone said Arnold does not yet meet the criteria for Act 47 status.
“They are exhausting all options first,” Pallone said. “It is certainly the last option of all options. It's part of the conversation, but I don't believe it's an option today.”
“We've been considering it,” Milito said. “We've not reached a maximum point yet where we can try that. We have to expend all avenues first.”
One of those avenues will be council's proposed tax increase in the 2013 budget, which will take Arnold to the maximum property tax levy allowed for general purposes for a third class city, which is 25 mills.
In actuality, the city exceeds that millage rate. That's because residents pay 23.45 mills for general purposes and 11.3 mills for debt payment — for a total of 34.75 mills.
The proposed budget would take the property tax rate up to a total of 43.5 mills: the 25-mill maximum for general purposes plus 18.5 for debt services.
In all, that equates to a property tax increase of 8.75 mills, or 25 percent.
Financial circumstances converged
But even that substantial increase won't cure Arnold's financial maladies.
City officials have applied for a $1 million unsecured loan they hope to pay back over 10 years, Milito said.
“That would get us back in the ballpark,” he said. “In about three years, we'd probably start seeing the rewards.”
Two banks have turned down the city, Milito said, but city officials are awaiting word from several other lenders.
The loan would be in lieu of the $750,000 tax anticipation loan Arnold usually takes out. A tax anticipation note is a common short-term loan many municipalities use at the beginning of a year to tide them over until tax revenue begins to roll in.
Arnold Treasurer Joe Puet said the city typically pays back the tax-anticipation loan in December. It is not yet clear if Arnold will be able to pay off the 2012 loan next month.
Several circumstances converged in the last year to exacerbate Arnold's financial problems, Puet and Milito said.
First, the city had to make a lump-sum payment in excess of $250,000 to settle a court case with the Municipal Sanitary Authority of New Kensington, which treats the city's sewage.
That payment left the city with a deficit at the end of 2011 and, they say, started the 2012 financial unraveling.
The second circumstance was the change in how residents are billed for sewage and garbage services.
At the beginning of 2012, council agreed to switch from charging all residences a flat $800 service fee to fees based on actual usage, which was considered more fair for residents who use less water.
At first the bills were sent out monthly, but Arnold switched mid-year to quarterly billing.
The switch was supposed to make billing more practical, but it means Arnold won't receive the last quarter of its 2012 fees until 2013.
The quarterly revenue could approach a half million dollars, Puet said.
“That's a big chunk of money,” he said. “That is going to come, but it will come in 2013.”
The city dealt with increased overtime costs in the police department this year, Milito said, because of a few officers being off for extended periods and other officers working extra hours to cover shifts.
Finally, officials in prior years drained Arnold's fund balance, leaving it with no reserve funds to cushion the city's budget against unexpected expenses, Milito said.
Former Mayor John Campbell, who lost a re-election bid to Milito last year, took exception at being blamed for Arnold's financial problems.
“When I left on Dec. 31, I had a balanced budget (for 2012),” Campbell said.
The city would be in its current situation regardless of who was in office this year, Puet said. “John Campbell would be facing the same problems as Mayor Milito.”
Changes to police, public works
Aside from the loan and raising taxes, Arnold officials are considering other options to promote long-term solvency.
The contracts for the unions that represent the city's police officers and public works employees expire next year, Milito said.
He hopes to negotiate terms more favorable for the city's financial reality. Current contracts call for raises of 3 to 3.5 percent, he said.
Arnold officials also have had preliminary talks with their New Kensington counterparts to determine whether a consolidation of police departments would be possible, Milito said.
New Kensington Mayor Tom Guzzo confirmed he and Milito have discussed merging police departments, but he cautioned a study would have to be completed. Technicalities like dealing with both cities' pension plans and officer seniority would need to be worked out — something that won't happen overnight.
Arnold has proposed to spend about $875,000 on police services next year, about 20 percent of its total $4.5 million budget. Police expenses increased by nearly $50,000 from the 2012 budget, a rise Milito said was primarily because of contractual increases in salaries.
Arnold officials also are looking into whether contracting out garbage services would save money.
The city is projecting a 5 percent increase in the cost of having city employees continue to collect trash next year.
Meanwhile, the street department budget is projected to decrease by about 7 percent next year, which the mayor attributed to tentative plans not to replace at least one of the three employees who retired this year.
On paper, the city's total expenses are projected to decrease from this year's budget by almost $600,000.
But that's largely due to the elimination of debt service on the new tax anticipation loan, which currently is not included in the 2013 budget.
Tax revenue up
One positive development for Arnold is that tax collection is going well, Puet said.
Berkheimer Tax Administrator Inc., which began collecting the city's earned income taxes this year, has been reliably submitting tax payments, which are coming in about 5 percent over budget, he said.
Property taxes also are coming in slightly over budget, Puet said.
The city received $12,000 in an unanticipated Marcellus shale impact fee payment from the state.
While the added revenue is good news, it won't dig the city out of its hole.
If the city doesn't get the $1 million loan, Milito said, their next step will have to be layoffs.
The city employs about 20 people — half of them in the police department.
Laying off police would come with its own complications as the union contract calls for a minimum of 10 officers. And state code requires third class cities to have a full-time police department, although Pallone said there may be some wiggle room in how a “full-time” department is defined.
“If we don't get the $1 million loan, we're going to have to go against the contract,” Milito said. “It's what we'll have to do. We'll have to go against the bargaining agreement and deal with the consequences.”
Liz Hayes is a staff writer for Trib Total Media. She can be reached at 724-226-4680 or email@example.com.
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