Pennsylvania to End 'Roach Motel' Stays for Distressed Cities

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Sound fiscal practices are essential for Pennsylvania's distressed communities regardless of how long they stay in a state-sponsored workout program, municipal analysts and other capital markets observers said Thursday.

They spoke one day after the House of Representatives in Harrisburg, in a 134-61 vote, concurred with a Senate bill that limits municipalities in the so-called Act 47 to eight years.

Gov. Tom Corbett intends to sign the bill, according to press secretary Jay Pagni.

Otherwise, cities risk receivership or in extreme cases, dissolution.

"In general, we have felt that while Act 47 is not the most effective and efficient answer for Pennsylvania's distressed municipalities, it is a credit positive where bondholders are concerned," said Tom Kozlik, a director at Janney Capital Markets in Philadelphia.

"The problem is that the factors that ail most of [them] are not going to be able to be solved with just Act 47, the old or the new version," said Kozlik. "Better public policy and financial solutions will require a much more active role from the surrounding communities and the state government."

Kozlik discussed Act 47 in a lengthy commentary on the Keystone State last year.

Since its 1987 inception, 27 communities have enrolled in the Act 47 program, named after its enabling legislation and formally called the Municipalities Financial Recovery Act. Only seven have exited, and 14 have remained more than 10 years.

Harrisburg City Councilman Brad Koplinski called the program "a roach motel" during heated deliberations amid the city's debt crisis three years ago. Harrisburg rejected the plan, but the state placed it into receivership and its post-recovery plan is now under Act 47's purview.

Aliquippa, outside Pittsburgh, has remained since 1987. Scranton, whose pension plan state Auditor General Eugene DePasquale called out for extreme distress, has been in it since 1992.

Act 47 does not allow cities to change labor contracts already in place. The state Supreme Court in 2011 ruled that Scranton could not use its distressed status to reduce pensions and other payments to retired firefighters.

Pittsburgh Mayor Bill Peduto, upon taking office in January, veered from predecessor Luke Ravenstahl and asked the state to keep it in Act 47. Peduto said the program could help the city provide leverage in municipal labor negotiations and to forge a long-term agreement with nonprofits for payments in lieu of taxes.

"I think it would be problematic if the state is going to let distressed municipalities blow out in the wind after the initial term, but that would surprise me," said Kozlik. "Pennsylvania is typically on the more active side in its local government oversight. If the state's intention is to become more active in aiding distressed municipalities after the initial term, then I would look more favorable on the new policy."

David Fiorenza, a professor at Villanova School of Business and a former chief financial officer of Radnor Township, Pa., sees the new law as a wakeup call.

"The Pennsylvania legislature is finally showing the distressed communities an ultimatum," he said. "Fiscal prudence and responsibility should be in the arms of the elected officials from each of these communities who are currently in the program.

"The State House is showing some leadership as they want each community to work within their budgets, even though there are tough decisions to make about cuts in programs and services in some of these municipalities."

Mark Schwartz, a Bryn Mawr, Pa., attorney who represented Harrisburg in its failed bankruptcy filing in 2011, sees a problem beyond Act 47. "What about zombie politicians who have done nothing to alleviate the structural problems?" he said.

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