An extra layer of state oversight may evolve from Pennsylvania's new time limit for cities in its distressed workout program, according to one capital markets expert.
"Harrisburg showed what a strong intervention by the state can do," said William Rhodes, chairman of the public finance department at Philadelphia law firm Ballard Spahr LLP and practice leader of its municipal recovery initiative.
Gov. Tom Corbett intends to sign the bill that limits cities and towns to eight years in the so-called Act 47 program, after which they would face receivership or in extreme cases, dissolution. The Senate on Friday put final concurrence on the bill that the House passed 134-61 on Friday.
Twenty-eight communities have entered the program since its inception in 1987 and 14 have remained more than 10 years. Only seven have exited.
"Act 47 wasn't intended to be this perpetual," said Rhodes. "Act 47 can't be the final answer."
Fitch Ratings on Monday said the long stays underscore Act 47's limitations. Scranton, in the program for 20 years, defaulted on a 2012 payment it guaranteed to make for city parking authority bonds, triggering a shutoff from the capital markets and forcing then-Mayor Chris Doherty to pay employees the federal minimum wage for two weeks.
Fitch called the new measure a positive for local governments under this supervision.
"In our view, a municipality that cannot improve its financial operations sufficiently to run on its own within [eight years] likely needs more radical change than the program can provide," managing director for public finance Amy Laskey wrote in a commentary.
Pennsylvania placed state capital Harrisburg into receivership late in 2011 after the City Council rejected the proposed state workout plan three times. Under receivership, Harrisburg crafted a recovery plan aimed at erasing more than $600 million of debt and keeping the 49,000-population city out of bankruptcy.
The plan hinged on the sale of the city's incinerator to the Lancaster County Solid Waste Management Authority and a long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority.
Harrisburg exited state receivership on March 1 and returned to mainstream oversight under Act 47, named after its enabling legislation.
"Harrisburg is not easily replicable," said Rhodes. As a state capital with many suburban commuters working in state office buildings, for instance, the city had parking revenue it could leverage.
Still, said Rhodes, Pennsylvania's handling of Harrisburg could serve loosely as a blueprint for more involved state oversight to avoid a Chapter 9 filing.
"What you now might see is something more intense, to keep a 47 from becoming a 9," he said, referring to Chapter 9 bankruptcy.
The state Department of Community and Economic Development oversees distressed communities. According to DCED spokesman Steve Kratz, 21 communities are now in Act 47. Seven have exited, including Millbourne in March. Shamokin is the latest to apply, while West Hazleton and Westfall Township applied to exit.
Fitch noted that not all governments in the program remain stressed. Pittsburgh, for example, was on the verge of exiting Act 47 when new Mayor Bill Peduto in January urged the city remain to leverage labor contracts and negotiate long-term concessions from the city's major nonprofits.
Pittsburgh, according to Fitch, was "highly stressed" at BB when it entered in 2003. After a series of upgrades, Fitch now rates the Steel City A. Moody's Investors Service and Standard & Poor's rate Pittsburgh A1 and A-minus, respectively.
"Pittsburgh can be marked as a success for Act 47, although the city remains in the program despite having the tools, in our view, to maintain stable credit quality without it," Laskey wrote.
