Pittsburgh among 21 Pennsylvania cities jockeying to avoid bankruptcy
By Bob Bauder and Salena Zito
Published: Thursday, July 26, 2012, 12:01 a.m.
Pennsylvania cities are teetering on the brink of bankruptcy because of ebbing revenue, skyrocketing employee legacy costs and a growing need for municipal services, officials say.
The state defines 21 cities, including Pittsburgh, as financially distressed, and dozens more could seek refuge under Pennsylvania's Act 47 fiscal oversight law. Scranton Mayor Chris Doherty this month took the radical step of slashing municipal salaries to minimum wage to meet payroll.
Pennsylvania is not alone in the financial dilemma. In the past month three California cities filed for Chapter 7 bankruptcy protection. Cities in Illinois, Michigan and Alabama are in the same situation.
Experts say Pennsylvania in many ways is better off than states such as California, which limits the amount of money that distressed municipalities can raise through real estate taxes. Pennsylvania fared better when the housing bubble burst, forcing foreclosures and further reducing cash flow.
“I don't think that having 21 cities in Act 47 is really a bad thing,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. “Act 47 is sort of the canary in the mine. It says, ‘Look, the city is not performing the way it ought to, and we need to have some help.' It's given the cities a chance to take a breath. That's well before the city is bankrupt.”
Common ailments among cities include the recession, receding tax collections and obligations to pay millions of dollars each year in employee pension and health care benefits.
“What's happening to cities across the country is pretty typical,” said Allentown Mayor Ed Pawlowski, who kept the city from state oversight by drastically cutting expenses, selling assets and restructuring union contracts. “We're going to see a lot of cities falling into the same situation that is happening to Scranton, that's happening in Harrisburg, that's happening in Stockton, Calif. They're going to be falling like dominos.”
Solutions are more complicated than simply cutting services and salaries.
“It's hard to pinpoint one particular solution because each of the municipalities has different issues,” said Steve Kratz, spokesman for the state Department of Community and Economic Development, which oversees Act 47. “We definitely recognize that there are issues that need to be evaluated at the state level, and we're starting to really get into that now. Obviously you can't make wholesale changes overnight.”
From Scranton to Stockton
In Scranton, city leaders disagree about how to deal with a $16.5 million budget deficit. Doherty said he supported a tax increase, but city council decided to borrow money.
Without a financial recovery plan, however, the city cannot find a bank.
Its bank balance recently fell to $5,000. Doherty cut employee salaries to $7.25 an hour, promising to reimburse people when money arrives.
“The bills were coming in on an even keel; the revenue was not,” he told the Tribune-Review. “I had no choice. I still have to pay for health care, landfill for garbage, all of those costs you have when you are managing a city.”
City unions sued and won a court injunction that ordered full salaries. Court hearings will continue next week.
Scranton last week met its $1.1 million payroll and restored full pay to about 400 workers, but Doherty said he would cut salaries again if revenue drops back to crisis levels.
DCED proposed a temporary bailout, offering a $2 million low-interest loan and a $500,000 grant if the mayor and council could agree on a fiscal recovery plan.
“I don't think what he's doing is going to work,” said Jeff Brauer, a political science professor at Keystone College north of Scranton. “There are legal obligations. The court has already told Doherty he has to (pay the employees). He has to do it.”
In Harrisburg the problem is debt. The Legislature this month nixed a capital city bankruptcy plan to reorganize $320 million in debt from upgrades and repairs to a trash incinerator.
Charlie Gerow, a longtime Harrisburg resident, businessman and member of Mayor Linda Thompson's 2010 transition team, said the mayor clashes with city council over solutions such as a tax increase, the sale of assets, the lease of the parking system and the potential sale of the water system.
Other parts of the country have other problems.
Connie Cochran, spokeswoman for Stockton, one of the three cities seeking bankruptcy protection, said the housing crisis zapped revenue for California cities. Stockton, with a $26 million deficit this year and a deficit totaling $90 million for the past three years, cut services and employee pay and benefits.
California caps real estate taxes at 1 percent of a property's cash value, so Stockton could not raise taxes, Cochran said.
“This was like ground zero for foreclosures,” she said. “People aren't spending money, so the sales tax isn't available anymore. It just got to the point where we couldn't take any more from our employees and the community.”
The Pittsburgh ‘model'
Observers offer few solutions to Pennsylvania's fiscal woes. Some say towns should combine to reduce costs, and that the state needs uniform real estate taxes.
“Why don't we consolidate municipalities to stop the slow bleed? The answer is nobody has the political courage to do it,” said Robert Strauss, professor of economics and public policy at Carnegie Mellon University. “If I live in Mt. Lebanon and you live in the city, and you're telling me that I have to take on the indebtedness that the city of Pittsburgh and all of its authorities have engaged in, I'm going to tell you, ‘Not in my lifetime.'”
Pittsburgh Mayor Luke Ravenstahl, who wants to seek release from state oversight by year's end, said the city reduced its debt by $222 million over the past five years and diverted parking tax money to pensions. He said the city population, about 305,000, stabilized after years of flight, and its economy evolved from a manufacturing base to one revolving around education, technology and health care.
“I think the reason Pittsburgh has done better than other cities is because of our ability to diversify our economy,” he said.
But Pittsburgh faces daunting financial problems.
As of March, its unfunded pension liability totaled more than $400 million. Controller Michael Lamb said Pittsburgh must plow at least $60 million annually into pensions to stay above a 50 percent funding level mandated by the state. The city put about $58 million into pensions last year and projects less for 2013, he said.
Lamb said city debt totals about $581 million. The budget balanced last year only after the city received $20 million in one-time state payments. City roads, public facilities and sewer infrastructure suffer from years of budget-cutting neglect, he said.
Yet other cities look to Pittsburgh as a model.
Doherty said he hopes to transform Scranton's economy to one more dependent on health care and education as Pittsburgh did.
“It is a great model to follow,” he said.
Pension law changes
The Pennsylvania League of Cities and Municipalities is lobbying for the Legislature to enact pension law changes that would, among other things, require employee contributions, said Rick Schuettler, deputy director. We're willing to do our part, but we need help from Harrisburg,” he said.
Legislative leaders, particularly those from suburban areas, are reluctant to act. House Majority Leader Mike Turzai, R-Bradford Woods, said he first wants more privatization of city operations such as water and sewer authorities.
“They have to ... privatize operations that are not core government operations,” he said. “We need to transition to defined contribution plans, but that's the first step they have to take.”
Pawlowski said Allentown, with an $89 million budget this year, had a $10 million deficit when he took office in 2005. The city, which projects a $479,000 surplus, reduced staff by 10 percent, restructured debt, renegotiated employee contracts and sold a cell tower and properties to avoid state oversight, he said.
Allentown still faces a $130 million unfunded pension liability. Its minimum annual pension payment, $15.5 million, is projected to be $23 million in three years, Pawlowski said.
“You have to look at some creative ways to fix it, or quite honestly you're going to see city after city fall off the cliff rapidly over the course of the next five or 10 years,” he said.
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