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City may seek distressed status

| Friday, Nov. 7, 2003, 12:00 p.m.

Saying they want a court-ordered commuter tax to help bail out ailing Pittsburgh, Councilmen Alan Hertzberg and William Peduto unveiled a bill Thursday that asks the state to declare the city financially distressed.

Council needs a simple majority -- with no say from Mayor Tom Murphy -- to petition Gov. Ed Rendell's administration for the designation under state Act 47, which is a state form of municipal bankruptcy. The councilmen said they plan to introduce the bill Monday.

If the designation is approved, the state would appoint an overseer and the city eventually could petition Allegheny County Common Pleas Court to increase the 1 percent income tax on city residents and to impose the tax on suburban residents who work in the city.

Hertzberg, who lost a Common Pleas Court judicial race Tuesday, called the potential to tax suburbanites beyond the $10-a-year occupation tax the "big feature" of seeking an Act 47 designation.

"That's what makes it attractive and what (a federal bankruptcy filing) can't do for us," Hertzberg said at the afternoon news conference yesterday in City Council chambers.

Peduto said he supports an Act 47 designation.

"I have been disappointed with the (Murphy) administration, with our legislators, with our large corporate community and with our labor unions," Peduto said. "They have not been able to put their own self-interests aside and to think what's best for the city of Pittsburgh."

Peduto and Hertzberg were joined by Councilman-elect Doug Shields, who does not take office until January.

Murphy welcomed council's consideration of Act 47 but declined to say whether he supports it. The mayor plans to make his 2004 budget address to council Monday.

"(Act 47) is something that has always been on the table," Murphy said. "I'm happy that council will be able to have a full discussion on the act, and I have no problem with council having that discussion."

The proposal, though, has received a lukewarm response from several council members.

Finance Chairman Sala Udin said he is "still hopeful" the Legislature will authorize new and increased taxes for the city.

Lawmakers have been unwilling to act on new and increased taxes since Murphy last year introduced a "transitional" budget for 2003 that relied on two new taxes and a public-safety merger. Murphy found little support for his plan.

Pittsburgh faces a projected $40 million deficit this year but likely will get through 2003 by using nearly all of its savings. The deficit is projected to double in 2004.

The latest Republican-sponsored bills in the House and Senate would create a financial oversight board for Pittsburgh, but neither bill would grant new taxing authority. Both bills would preclude the city from seeking an Act 47 designation.

"Act 47 has always been an option that council and the administration have known to be available," Udin said. "Unfortunately, we may be down to the wire, and it may be the only alternative that is plausible."

Councilman Jim Motznik said he will consider the Act 47 proposal but, like Udin, hopes the Legislature will take action.

"My sense is we would be better off if we waited," Motznik said.

Talk of council voting on an Act 47 proposal has triggered a panicked response from some Republican lawmakers.

"The commuter-income tax permitted under current law via Act 47 is a foreseeable result of continued legislative inaction," said state Rep. John Maher, an Upper St. Clair Republican. "In this case, legislative inaction is equivalent to silently selecting the commuter-income tax that I oppose."

Under Act 47, either the mayor or City Council could act alone to petition Dennis Yablonsky, secretary of the state Department of Community and Economic Development, for designation as a financially distressed city. Hertzberg said he will make the case that Pittsburgh has run a budget deficit for years. Budgets were patched by one-time fixes, such as selling off water assets or tax liens.

If council approves seeking the designation, Yablonsky would review the request. If he agrees, he would appoint an overseer to plan a way out of Pittsburgh's fiscal crisis. The plan could include going to Common Pleas Court and asking for a temporary increase in the city occupation tax -- capped at 1 percent and paid only by city residents. A judge could decide to increase the tax and extend it to everyone who works in the city.

The increase would have to be renewed every year to remain in effect, but Hertzberg said he would consider that a "permanent status for the city."

Yablonsky, a Mt. Lebanon resident, was a member of a committee led by former U.S. Steel Corp. Chairman David Roderick and philanthropist Elsie Hillman seeking new revenue for the city. Yablonsky said through a spokesman yesterday that he supports a comprehensive solution to the city's financial problems.

"The secretary agrees with the conclusion of the task force that a comprehensive approach is the best solution," said spokesman David Chai.

A comprehensive approach would involve spending cuts, additional revenue and a state control board for the city.

"Act 47 does not supply the full range of solutions envisioned by the task force," Chai said.

Yablonsky has told lawmakers and business leaders that Act 47 is not intended for a city the size of Pittsburgh.

State Rep. Jeff Habay of Shaler, chairman of the Allegheny County Republican delegation, said yesterday that he will ask House leadership to speed up consideration of the oversight bill that would deny Pittsburgh the use of Act 47. The county's suburban Republicans oppose new or increased taxes on their constituents who work in the city.

"This is tantamount to the crossing lights going off for the Pittsburgh financial train wreck," Habay said. "We have to act immediately."

Republicans had planned to deal with the legislation before Thanksgiving anyway, but Habay said he will talk to the House GOP leadership about moving faster.

Republican lawmakers also are attempting to assess the validity of an Act 47 resolution by Pittsburgh by reviewing the annual statements that municipalities file with the state Commerce Department. The filings indicate no problems remotely meeting the Act 47 criteria for the years 1997 through 2001.

Only in the 2002 statement, filed March 18 of this year, is there a red flag.

"Currently recurring revenues are not sufficient to meet operating expenses," the statement says.

Each year's statement is signed by Murphy.

Act 47 primer

Key provisions

The Legislature approved the Financially Distressed Municipalities Act in 1987 to enable ailing municipalities to restore their finances under state supervision. The act:

  • Allows various entities to initiate a petition to determine financial distress, including the state Department of Community and Economic Development; the municipality itself, by either the mayor or a majority vote of city council after a public hearing; 10 percent of the voters in the last municipal election; a creditor with a long-standing claim owed $10,000 or more; 10 percent or more of beneficiaries of the municipalities; pension plans; and elected auditors.

  • Allows municipalities to restructure their debt, develop a long-term plan and qualify for state grants and interest-free loans. The financial-aid part of the law doesn't apply to Philadelphia, a first-class city; to Pittsburgh, a second-class city; or to counties. It would take a change in the law to provide Pittsburgh with aid under the act.

  • Prevents municipalities from receiving all but essential state money if they refuse to adopt fiscal-solvency plans.

  • Establishes "triggers" for financial-distress status, including missing a payroll for 30 days or more; defaulting on payment of principal or interest on bonds; maintaining a deficit over a three-year period (or two years if the deficit equals 5 percent or more of revenue); and failure to pay creditors.

    How Act 47 works

  • Application is made to the Department of Community and Economic Development.

  • The department secretary sets a public hearing within 30 days.

  • The department secretary initiates an investigation into the municipality's fiscal affairs, to be completed before the public hearing.

  • Within 30 days of the hearing, the department secretary issues a decision on whether the community is distressed.

  • The ruling may be appealed to Commonwealth Court.

  • Within 30 days of the decision, the department secretary appoints a coordinator, who will have access to all municipal records. The coordinator is typically a consulting firm.

  • The coordinator develops a plan within 90 days to satisfy judgments, reduce debt, balance the budget and avoid a fiscal emergency. The recommendations also could include enabling the municipality to negotiate new general-obligation bonds or to raise taxes.

  • A public meeting is held no later than 20 days after the coordinator files a plan.

  • Within 25 days of the public meeting, the municipality may approve or reject the plan.

  • A municipality that has adopted a final plan may petition the Court of Common Pleas for approval to increase taxation beyond established limits for real estate taxes, earned-income tax or both. The state limits the earned-income tax in Pittsburgh to 1 percent, but does not limit property taxes.

    Distressed communities

    Thirteen municipalities are governed under Act 47. Five are in Allegheny County, with one each in Beaver and Mercer counties:

  • Farrell (designated in 1987), Mercer County

  • Aliquippa (1987), Beaver County

  • Clairton (1988)

  • Braddock (1988)

  • Rankin (1989)

  • Duquesne (1991)

  • Homestead (1993)

    Communities no longer under Act 47

  • Shenandoah, Schuylkill County (emerged 1993)

  • Ambridge, Beaver County (1993)

  • Wilkinsburg (1998)

  • East Pittsburgh (1999)

  • North Braddock (2003)

    Source: Pennsylvania Department of Community and Economic Development

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