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Too many towns, too much debt: Welcome to Pennsylvania

| Sunday, March 21, 2010

The small town of Westfall in Pike County this month quietly became the first municipality in Pennsylvania to declare bankruptcy.

It might not be the last.

"A train wreck is coming, and, because of my position, I think it's my duty to alert people," said George Cornelius, secretary of the state Department of Economic and Community Development. "Some of these municipalities may get into a situation where they have no choice; bankruptcy is the only option left."

Cash-strapped municipalities suffering from the industrial decline, population loss and overwhelming tax increases common in the Rust Belt face a "downward spiral," Cornelius said. He wouldn't single out cities but said a major reason is that Pennsylvania is bloated with local governments and many resist cutting costs through government consolidation with neighbors.

"We have municipal boundaries that were drawn in a different era that bear no relationship to current economic realities," he said.

Act 47, the state-managed safety net that provides "financially distressed" cities with state-prescribed recovery plans while requiring them to cut costs, "failed in its essential purpose," Cornelius told the House Appropriations Committee last month. In November, he predicted that "financial distress is almost assured" for all mid-size and large cities in the state.

Since 1987, 25 cities and towns, including Pittsburgh, fell into state receivership. Six escaped. Eleven languished there for a decade or more. The state's capital could be the next. Harrisburg officials are contemplating selling City Island Park, parking garages and other public assets to cover a looming debt larger than the city's annual budget.

Similarly, Pittsburgh Mayor Luke Ravenstahl wants to lease city parking garages and meters for 50 years to infuse at least $200 million into Pittsburgh's anemic pension funds and avoid a state takeover of the pension system. The funds contain 30 percent of the money needed to cover $899 million in long-term obligations.

Pittsburgh remains under state oversight. Its general debt payments consume 17 percent of the city's budget, and anticipated deficit spending could begin eroding the city's surplus next year.

Potential solutions

In the 1970s, Houston, Phoenix, Charlotte, N.C., and Roanoke, Va., significantly enlarged their tax bases through annexations.

That almost never happens in the Northeast because little unincorporated territory exists near urban areas, and state laws treat townships and boroughs as "fully empowered municipalities," said Mary M. Edwards, a regional and urban planning assistant professor at the University of Illinois Urbana-Champaign.

From 1990 to 2005, there were 68 annexations in the Northeast that affected 2.05 square miles. In the West, Midwest and South there were 61,150 annexations affecting 7,172 square miles during the same period, according to Edwards' research of census data.

Lancaster Mayor Rick Gray knows the problem well.

His town, a major charcoal iron producer in the 18th century, was laid out in 1730, and its boundaries "haven't changed much since," he said.

Gray authorized layoffs, increased property taxes 25 percent and dipped into cash reserves to balance this year's budget. Lancaster could face a $20 million deficit in six years, Gray said.

Many people who work in the town of 55,000 commute a few miles from neighboring Lancaster Township, where taxes are lower. At least one major employer, cabinet- and flooring-maker Armstrong World Industries, greatly reduced its work force.

"The balkanization of local government is killing small municipalities," Gray said. "You can walk across the street and go from 12 mills to paying 0.6 mills (in property taxes). What's wrong with that picture?"

Potential solutions abound, but city and state officials agree it's unlikely legislators will muster political will this year to revamp chronically debt-laden police, firefighter and non-union pension funds; hasten cost-cutting municipal mergers; and restrict how much land large nonprofits can claim as tax-exempt.

Most members of the General Assembly face re-election this year. The timing isn't favorable for reform that might invite controversy.

Democratic Rep. Tom Caltagirone, whose hometown of Reading is in state receivership, is drafting two bills he knows will receive heavy opposition: assessing a surcharge on glass bottles, and giving counties (not municipalities) the authority to collect taxes and provide services, a move that could eliminate government redundancies.

"These communities all want their independence, but how in the hell are you going to pay for it?" Caltagirone said.

One possibility is a House Democratic bill Caltagirone supports that would allow counties to levy an additional 1 percent sales tax, money the municipalities would share. If Sen. John Eichelberger, R-Altoona, has his way, it could face a fight.

"I'm not going to vote for a tax increase," said Eichelberger, who is pushing a sales or income tax that requires a dollar-for-dollar trade-off to lower property taxes.

House Minority Whip Mike Turzai, R-Bradford Woods, said municipalities must concentrate on "core government functions" such as roads, police and, in some cases, firefighting.

"If there's a private company doing the same thing, they ought to do it. That allows you to significantly reduce the legacy costs," he said, referring to retiree pensions.

More bankruptcies forecast

Municipalities often turn to tax increases to stave off the specter of bankruptcy and protect fragile bond ratings, which dictate how much it costs municipalities to borrow money to build bridges, pave roads and maintain other critical infrastructure.

J. Gregg Miller, a bankruptcy attorney with Philadelphia-based law firm Pepper Hamilton, guided Pike County's Westfall through Chapter 9 bankruptcy.

With no money to pay a $6 million legal settlement owed to a housing developer, township officials boosted property tax rates on the community's 2,400 residents by 48 percent -- a rate that will drop gradually over a 20-year repayment period that begins this year.

Miller, like Cornelius, believes Pennsylvania has so many towns in financial distress because it has so many towns.

With 1,016 municipal governments, Pennsylvania has the third-highest number in the United States behind Illinois (1,299) and Texas (1,209), according to 2007 U.S. Census figures.

Like Cornelius, Miller said more bankruptcies could occur, a last resort with serious consequences.

"If there's a flurry of (bankruptcies) in any state, the interest rates for any bond issues are going to go up because the risk is apparent," he said. "That's what happened in California. Interest rates on California bonds are always higher than it would be for a similar bond in Pennsylvania."

Nationwide, U.S. Bankruptcy Court recorded 614 Chapter 9 municipal bankruptcies since 1937. Temporary special taxing districts created to pay for sewer, irrigation and similar work filed most of those, said James Spiotto, a Chicago lawyer and an expert on municipal finances.

No direct assistance here

Other states with receivership laws similar to Act 47 vary widely in the number of distressed cities.

Michigan has 37, New Jersey has seven, Illinois has one -- but it's difficult to compare each state's financial safety net because the laws differ.

In stark contrast to Pennsylvania, New Jersey regularly provides tens of millions of dollars in direct assistance to financially-strapped cities. That includes $67 million that outgoing Gov. Jon Corzine authorized in January to Camden and $55 million that four other cities will split to balance their budgets.

Pennsylvania pays consultants about $1.4 million a year to oversee its cities under Act 47 control, said Fred Reddig, executive director of Gov. Ed Rendell's Center for Local Government Services.

Reading Mayor Thomas McMahon said that, without changes to state law, he's uncertain how he can improve the financial condition of his beleaguered city, where 34 percent of families live below the poverty line.

He said Pennsylvania must give cities some ability to tax some large nonprofits and restrict arbitration awards to labor unions during collective bargaining.

To balance Reading's 2010 budget and eliminate a $5.3 million deficit, McMahon laid off 27 city employees, including 11 police officers.

"We don't have the ability to restructure our taxes, and we've been up against things like binding arbitration," he said, lamenting that when arbitrators side with unions in contract disputes, they don't consider a city's ability to pay.

"What we have to do is constantly extract more money from those who are less able to afford it because they're from a lower socioeconomic status," McMahon said.

From 2003 to 2007, Reading police and firefighter salaries increased 28 percent and benefit costs increased more than 80 percent -- much of it because of arbitration awards, he said.

In a speech to Berks County officials, Cornelius said the arbitration process for resolving labor disputes "is tilted against the municipality."

Les Neri, president of the Pennsylvania Fraternal Order of Police, defended the arbitration process under Act 111, which prevents police officers and firefighters from striking.

"One of the very first things we look at is (cities') ability to pay," he said. "I don't think pointing the finger at the police or the neutral arbitrator is the right place to be pointing."

Act 47 failure

In Harrisburg, City Controller Dan Miller argues the city should file for bankruptcy.

Harrisburg's per capita debt is $9,679, the highest in the state and triple that of Philadelphia's. It's four times as big as Pittsburgh's.

Much of the debt comes from a $288 million incinerator built in 1982. Two city-backed bonds issued to help pay to overhaul the incinerator, owned by The Harrisburg Authority, must be redeemed in December. The authority provides water, sewer and waste water treatment service to the Harrisburg area.

The $68 million due this year exceeds the city's proposed $65 million budget for 2010.

"I am not trying to kick the can down the road," said Mayor Linda Thompson, who took office in January. "I'm looking for permanent solutions."

Pittsburgh Mayor Luke Ravenstahl urged Thompson and other mayors not to look to state receivership as a solution to their problems.

Pittsburgh entered state receivership in 2004. Its pensions have only 30 percent of the $899 million needed to cover its obligations, and the city could return to deficit spending next year.

"Clearly, Act 47 and its intent is not being fulfilled. ... And it's only going to get worse," Ravenstahl said.

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