Pennsylvania’s distressed cities program still easier to enter than leave

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Entering Pennsylvania’s workout program for distressed communities, known commonly as Act 47, remains a one-way ticket for most cities.

Pittsburgh’s recent exit from the program hasn’t changed that reputation.

“A majority of municipalities that have entered Act 47 have yet to emerge, with many having been there for decades,” Moody’s Investors Service said in a report.

Of the 31 communities that have entered the program since its inception in 1987, only 14 have shed the “financially distressed” label and exited the oversight program, a 45% success rate.

“It’s like the Hotel California, you can never leave,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “Aliquippa’s been in the program for 31 years. I’m not sure that’s a good thing."

Pittsburgh formally exited in February after a 14-year stay.

“For us, being in Act 47 for 14 years meant making difficult decisions to become financially solvent. It definitely had its costs,” Mayor Bill Peduto said in a recent interview. “Our workforce took it on the chin, going without pay raises, and our infrastructure suffered without our ability to borrow.”

Upon taking office in January 2014, Peduto veered from the approach of his predecessor, Luke Ravenstahl, and requested a longer stay in Act 47.

While in the program, Pittsburgh received numerous rating upgrades. Its annual revenue rose by 51% and fund balance increased 225%, to $114 million from $35 million. The city has realized operating surpluses in nine of the last 12 years and ended fiscal 2016 with a general fund balance at 20% of revenue.

Real estate tax revenue has risen close to 10% over the past decade, during which revenues from the earned income tax are up 38%. Both, said Moody’s, “speak to a robust economy” rather than a specific recovery plan directive.

The city has rebranded itself from steel manufacturing to “eds and meds,” or education and healthcare, with tech a rising component as well.

Overall, said Moody’s, the way cities languish in the program for decades while financial distress persists or worsens reflects the limits of Act 47.

Harrisburg’s City Council, for instance, filed for bankruptcy protection in 2011, one year after entering the program. A federal judge nullified the Chapter 9 filing later that year and the city in 2013, under a state-appointed receiver, finalized a recovery plan.

Scranton in 2012 defaulted on guaranteed Parking Authority bonds, 20 years after entering Act 47.

"The record for Act 47 demonstrates that as a policy it doesn't require municipalities to make the necessary adjustments to stave off financial turmoil," said Scranton taxpayer advocate Gary St. Fleur. "Municipalities believe that they can tax, sell off assets and borrow their way to financial solvency without making cuts to expenses, mainly pension obligations."

According to Moody’s, for the 14 municipalities that exited oversight, the average time in the program was nearly 11 years. Seventeen municipalities are now under supervision, with an average time in the program of 18 years.

“Cities don’t want to leave because they don’t want to give up the extra flexibility on taxes and labor,” said Schankel. “But then it becomes part of the operating structure rather than an emergency or one-time thing.

"That being said, it’s a positive program.”

Compared with other states, said Moody’s, Act 47 is more hands-off.

“States’ responses to municipal distress vary from nothing to strong, and recent examples of active state oversight provide a sharp contrast to Pennsylvania,” said Moody’s.

Connecticut’s financial assistance contract with capital city Hartford, under which the state committed to pay the annual debt service on the city's outstanding general obligation bonds, calls for the nascent Municipal Accountability Review Board to sign off on budgets and new city borrowing. The state and city signed off on the agreement in late March.

California’s management of distressed school districts, said Moody’s, has been “relatively hands-on” through direct loans for operations, with the loans an advance of state revenue with negotiable repayment terms.

That requires ceding local managerial control to a state-appointed trustee as part of a crisis team. That trustee assumes control of all powers of the district’s board. Only repaying the operating loan returns the district to full autonomy.

Like Act 47, Pennsylvania's school district oversight program, passed under Act 141 of 2012, has districts entering and remaining. Four — Chester Upland, Duquesne City, Harrisburg City and York City — have been in the program since its inception. Seven districts are on “financial watch.”

Philadelphia School District, which the state’s Department of Education deemed financially distressed in 2001, operates under a dedicated state governance structure outside Act 141, the School Reform Commission.

The commission maintained direct oversight of the district’s budgets. Support did not include direct loans. The panel will dissolve in June after 16 years, returning full control of the district to a mayor-appointed board.

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Budgets Bill Peduto Commonwealth of Pennsylvania City of Pittsburgh, PA City of Philadelphia, PA Moody's City of Scranton, PA Pennsylvania