As litigation began Monday against the city of Harrisburg and the Harrisburg Authority, other Pennsylvania municipal governments are facing similar fiscal woes — rising labor costs and sluggish revenue streams.
TD Bank NA and Assured Guaranty Municipal Corp. sued the city and the authority in the Dauphin County Court of Common Pleas. The litigation involves $282 million of outstanding incinerator bonds on which the authority and the city, which guarantees the debt, have failed to make principal and interest payments.
Dauphin County, co-guarantor of much of the incinerator bonds, and Assured have been making debt-service payments to bondholders. TD Bank serves as bond trustee on the debt.
Harrisburg declined to comment on the lawsuit, as it has yet to be served. The suit follows Gov. Edward Rendell’s announcement Sunday that the state will expedite nearly $3.6 million of payments already intended for Harrisburg so the city can avoid defaulting on a $3.3 million debt-service payment on its general obligation bonds due Wednesday.
The authority does not have sufficient revenue to pay bondholders. Harrisburg’s $64.7 million fiscal 2010 budget for the year that began Jan. 1 does not include incinerator debt-service payments. The City Council earlier this year rejected property-tax increases and other plans to generate revenue proposed by Mayor Linda Thompson that would have helped the city meet incinerator debt-service costs in 2010.
TD Bank and Assured are seeking appointment of a receiver for the incinerator bonds and a court order to require the city to meet its obligations.
Assured has made debt-service reserve surety payments totaling $900,000 on the authority’s Series 2003F bonds and a scheduled interest payment of $400,000 on its Series 2002A bonds, as of Sept. 13, 2010, according to the insurance company.
Assured said that discussions with the city and the authority will continue in an effort to craft a debt-restructuring plan that will help resolve the issue.
“Though we have been forced to exercise our legal rights and remedies, we are committed to continue to work with the county, authority and city to develop a restructuring plan that allows the authority and city to meet their obligations,” Dominic Frederico, Assured’s chief executive officer, said in a prepared statement.
Compared to other local governments in Pennsylvania, Harrisburg’s situation is unique. The incinerator debt that it guarantees has placed a strain on the city’s credit profile, and as the state capital, the city has a lot of property that does not generate real-estate tax revenue.
Still, many municipal professionals say that other Pennsylvania municipalities are also facing fiscal challenges.
Many of the state’s smaller cities, known as cities of the third-class under state law, were struggling before the recession to keep their budgets balanced and maintain services.
Places like Allentown, Bethlehem, Easton, and Wilkes-Barre were trying to address older tax bases and increasing pension and health care costs before the economic downturn, said Karl Jacob, analyst at Standard & Poor’s.
“You get to the cities of the third class and many of them seem to just have to deal with short-term crisis rather than trying to plan for the long term,” Jacob said. “And it’s difficult to plan long-term and then you’ve got such high fixed costs and then you’re hit with a recession and you don’t have significant levels of reserves. There’s a lot of issues working against you.”
Pennsylvania’s city classes are based on population. Philadelphia is the state’s only first-class city. Pittsburgh is a second-class city while Scranton is second-class A. The state has 53 third-class cities.
“These are older, former industrial manufacturing cities that lost a lot of their tax-base in the 1980s and 1990s and have struggled to try to find ways to replace the lost valuation and jobs,” Jacob said.
Local officials are working on suggestions for how the state could help municipalities face these economic challenges. The Pennsylvania League of Cities and Municipalities, a nonprofit, nonpartisan organization, is spearheading an initiative, called the core communities in crisis task force. That 29-member panel includes mayors and city council members from across the state.
John Garner, the league’s executive director, said he anticipates the panel to finalize its recommendations next month and submit its findings to the state legislature and the executive branch. Pennsylvania will have a new governor in January, as Rendell will be term-limited out at that time after serving as the state’s chief executive for eight years.
Garner said that state lawmakers need to help local governments cope with increasing retirement costs and also enable municipalities to tap into a broader tax base by implementing county-option sales taxes in Pennsylvania’s 67 counties. In addition, salary and benefit costs for government employees are agreed upon without any indication as to how the city or town will meet those obligations, he said.
“If we had those new regional tax bases, changes in the way benefits are provided so that they’re fair but less expensive, and changes in the collective bargaining process so that it’s reasonable and the ability to pay is calculated in the process, that would have huge impact on our cities,” Garner said. “And a very positive impact in the future.”
Fred Reddig, executive director of the Governor’s Center for Local Government Services, which is within the state’s Department of Community and Economic Development, said his team helps municipalities look towards ways to combine services with other communities to help lower costs.
“With more than 2,500-plus units of local government, there’s a lot of opportunities for cooperation,” Reddig said.
The LGS helps cities, counties, and towns with handbooks on municipal governance that it publishes, training classes, and technical assistance.
For communities that are in need of outside financial advice to help craft a multi-year spending plan, the LGS offers an early-intervention program within Act 47, the state’s legislative framework for addressing financially distressed municipalities.
In Harrisburg’s case, Rendell on Sunday said that along with the expatiated state payments, the city will receive $250,000 of early-intervention funds — along with a $500,000 state loan and a $100,000 grant — to help pay for outside financial adviser Scott Balice Strategies.
The consultant will help develop a debt-restructuring plan and fiscal blueprint for the city.
Under Act 47 the state increases oversight of a municipality to help fiscally distressed entities regain fiscal strength. There are 19 local governments in the Act 47 program and its aim is to prevent local governments from filing for bankruptcy protection.
Harrisburg Controller Dan Miller and some City Council members have said that the capital city should look into a bankruptcy filing.
It’s not clear whether the state would allow Harrisburg to file for bankruptcy as under state law, there are very specific conditions in which an entity may file Chapter 9, Reddig said.
“Clearly we view municipal bankruptcy as a very worst-case situation,” he said. “That’s why the state enacted Act 47.”
To date, only one Pennsylvania community has entered into bankruptcy. Last year, the state allowed Westfall Township to file for bankruptcy as it faced a more than $20 million liability due to a court ruling.
The township operates on a budget of about $1 million.