Harrisburg’s City Council and its lawyer are discussing whether to appeal a state court ruling that requires it to double the earned income tax in Pennsylvania’s capital city as part of a receiver’s proposed financial recovery plan.
Justice Bonnie Brigance Leadbetter of the Commonwealth Court of Pennsylvania ruled late Monday that state-appointed receiver William Lynch was within his powers to compel the City Council to increase the tax to 2% from 1%.
“The enactment of the earned income tax is a crucial component of the recovery plan,” Leadbetter wrote, citing its importance to other recovery components, including negotiations with major creditors and unions.
Lynch expects the tax to bring in roughly $6 million to a city whose structural debt is about $13 million. Harrisburg’s bond debt alone from an incinerator retrofit project, which it cannot pay, exceeds $320 million. The city may skip two general obligation bond payments totaling $3.4 million, due Sept. 15. It missed $5.4 million of GO payments in March.
Neil Grover, the City’s Council’s attorney, said Tuesday he would discuss appeal options with members of the council, which is scheduled to meet Tuesday night. Leadbetter gave the council 15 days — half of the customary 30 for such a case — to comply, so the council could do so at Tuesday’s meeting and another one on Sept. 11.
The council risks a contempt charge if it doesn’t pass the tax increase, unless it can get an injunction against the ruling, pending appeal.
“I don’t know yet whether we’ll appeal. I’m just the lawyer and they make the decisions. But the statute in question is untested,” Grover said in an interview, referring to the hastily drawn state law last fall that created the receivership and banned Harrisburg from filing for bankruptcy protection. That ban remains in effect until Nov. 30.
Leadbetter invoked the receivership law in her ruling. She also said money from the tax increase should pay only for “the services essential to the public health, safety or welfare,” and not go toward incinerator debt.
According to Anthony Valeri, a senior vice president for research at LPL Financial, the ruling is good for the bond market. “It’s an interesting one. I’d say it’s a positive one for bondholder rights,” he said. “Unlike Jefferson County, [Ala.], where you see reluctance to raise the sewer rates, you finally get a receiver to rise above this and say this is what we need to deal with the debt problem.
“At the end of the day, Pennsylvania is a low-tax state, so raising the earned income tax on local residents by 1% should not be that great a problem.”
Lynch spokesman Cory Angell applauded Leadbetter’s ruling. “We believe the court has the best interests of Harrisburg in mind and realizes the serious situation the city is in,” he said. “Although not everything in the original recovery plan will be implemented, this is a step in helping to reduce the operating deficit that is crucial in providing essential services.”
Anthony Sabino of Mineola, N.Y., expects the legal tussle to continue. “This is far from over,” said Sabino, a law professor at St. John’s University. “The bottom line legally is that this is a troubling point to be at. It shows that the whole separation of powers is out of balance. It goes to show you the depths of the troubles in Harrisburg.”
City Controller Dan Miller, who has maintained Harrisburg would be better off filing for bankruptcy, called Leadbetter’s decision unfair. “I think it’s unfortunate from many aspects. Why is she forcing this tax on us? The fallacy of her ruling is that there still is no comprehensive plan for the city, and she knows it.”
Council member Brad Koplinski said Leadbetter made innocent victims of Harrisburg taxpayers. “In increasing the EIT, I believe the Commonwealth Court made a bad decision for the people of Harrisburg — people who did nothing to get our city into our fiscal crisis,” he said.
Grover’s predecessor, Mark Schwartz, said the wrong people are getting punished. “The thing that bothers me is that a lot of people are paying for the mess Harrisburg is in, but not the people who profited from the bond deals,” he said.
Schwartz, who resigned two months ago citing nonpayment, and some council members have asked federal authorities to investigate the incinerator bond financings that has left Harrisburg deep in a hole.
“This is all based on fraudulent documents by many parties who testified that the incinerator was self-liquidating,” Miller added in reference to the spike in incinerator debt. “It wasn’t the taxpayers of Harrisburg who testified to that.”
Leadbetter struck down Lynch’s motion to reinstate the $75,500 annual salary of Mayor Linda Thompson’s communications director, Robert Philbin, citing “no immediate compelling necessity” for such a position. Philbin has worked as a volunteer since the City Council deleted the funds from the budget.
Thompson, speaking at a City Hall press conference, disagreed with the ruling. “I’m the most sought-after elected official in the state of Pennsylvania, good, bad and indifferent,” she said.