Some lawmakers want to fine-tune Pennsylvania’s program for distressed communities, commonly known as Act 47, after it took a serious blow last fall from a state Supreme Court ruling about public employee arbitration.
The court, in a case involving the firefighters union in Scranton, ruled last fall that a law requiring binding arbitration to settle police and firefighter contract disputes supersedes the city’s Act 47 financial recovery plan.
Additionally, the state’s takeover of capital city Harrisburg in 2011 after the city rejected an Act 47 workout in the face of $310 million of incinerator-related bond debt cast a further spotlight on the program, created in 1987.
The Scranton ruling essentially means cities can no longer use their distressed status to hold off collective bargaining awards and limit wages for public sector employees. The city had argued the arbitrators lacked the legal authority to award relief that encroaches upon the recovery plan.
“If Act 47 were allowed to eliminate meaningful arbitration, unilaterally and permanently eviscerating the ability of workers to adjudicate legitimate issues, the consequences on many levels would not be acceptable,” the state’s top court ruled in upholding Act 111, a 1968 law that authorized collective bargaining for police and firefighters.
The Scranton and Harrisburg developments have injected a sense of urgency into the movement to amend Act 47, named after the program’s enabling legislation in 1987.
“Act 47 was passed long before the proliferation of these arbitration cases,” said Bill Brandt, chief executive of Development Specialists Inc. and chairman of the Illinois Finance Authority.
“Changes to Act 47 must first take place if the legislature is going to tackle the larger issue of pension and binding arbitration reform. Make no mistake, these issues are intertwined,” said Scranton Mayor Chris Doherty. His city, which has been in the Act 47 program for 20 years, faces $4 million in legal fees and a payout of more than $20 million to its police and firefighter unions.
The state Department of Community and Economic Development coordinates the program, which includes a recovery coordinator, emergency grants and no-interest loans, the ability to enhance revenue through such means as a non-resident wage tax, collective bargaining assistance, and a priority position for economic and community development programs.
“It’s been in existence for several decades and needs to be brought up to date,” said Sen. Jane Earll, R-Erie, who sponsored legislation to shore up Act 47 that sits before the Senate Appropriations Committee. The House sponsor is Rep. Chris Ross, R-Kennett Square.
The bill would require arbitration awards and settlements to apply to Act 47 plans, clarifying language to avoid added costs to distressed municipalities.
David Fiorenza agrees that Act 47 needs updating.
“We need to look at its funding arms, and see what’s working and what isn’t,” said Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township, outside Philadelphia. “And if it’s working, then there’s too much government and maybe we need to consolidate some cities and towns. I don’t want to see anyone lose their jobs, but we need to streamline.”
Altoona, a city of 46,000 between Harrisburg and Pittsburgh in west central Pennsylvania, stands to become the 27th community in Act 47. Next week, the DCED will present its recommendations to Mayor William Schirf and the City Council. Officials there began considering Act 47 last fall after learning the 2012 budget projected a $1.6 million operational deficit that would deplete the unreserved fund balance. The council appears divided over the merits of Act 47.
Fiorenza said Altoona’s problems parallel those in many other Pennsylvania cities.
“It’s a lovely area with lot of beautiful recreation,” he said. “There’s a great fabric of a community there, easy to get around and with good schools, but industry has just moved away, little by little. There’s not much there to attract industry.”
In the most headlined Act 47 case recently, Harrisburg last year became the first Act 47 community to reject a financial recovery plan. Three times the City Council, all by 4-to-3 votes that epitomized the political division there, rejected a workout proposed by the DCED’s chosen coordinator, Novak Consulting Group Inc. That prompted lawmakers to pass legislation that restricted cities of Harrisburg’s size from filing for bankruptcy protection if they have rejected an Act 47 plan.
Judge Mary France of the U.S. Bankruptcy Court for the District of Pennsylvania in Harrisburg invoked the state law in November when she nullified the City Council’s Chapter 9 filing. The bankruptcy provision expires July 1, though some talk of extending it has bounced around the state capitol.
Mark Schwartz, the Bryn Mawr, Pa., attorney representing the City Council in that case, which is under appeal, said Act 47 helps Wall Street, not the intended communities.
“I think it’s flawed for a lot of reasons. All it’s about is process and funding for consultants. I’ve called it the 'Full Employment Act for Consultants,’ ” said Schwartz, a former bond banker and investment banker. “This is the only assistance, such as it is, being more about political patronage payments and less about substantive help.”
After Harrisburg rejected the Act 47 workout, Gov. Tom Corbett in November appointed DCED chief counsel David Unkovic as the city’s receiver.
Natalie Cohen, a senior analyst at Wells Fargo Securities, said oversight programs vary by state and region.
“What seems to be shaking out is that some states are more investor-friendly in terms of oversight, while in California, for instance, there’s less of a structure and more of a cooling-off period,” Cohen said. “Stockton can take time out and decide whom to pay.”
Some say communities stay too long in Act 47. The state Supreme Court said as much in its Scranton ruling: “The crutch-like aid of Act 47 can understandably lead to dependence, and extrication from a state of dependence can be difficult.”
A leading critic in Harrisburg, City Council member Brad Koplinski called the program “a roach motel” because cities that enter the Act 47 program have a hard time leaving. Of the 26 communities that have entered the Act 47 program, only six have ever left. Six governments have been in Act 47 since the 1980s, according to the DCED.
“It’s like my daughter,” Fiorenza said. “Why would you want to leave home when you have all the amenities? The same in Act 47. Why leave when you have fallbacks such as funding? A mayor or city council can blame others such as consultants.”
Others tout the benefits. A Janney Capital Markets report called the program a credit-positive from bondholders’ perspectives because cities with outstanding bonds can reestablish policies and consolidate debts.
Dean Kaplan, a managing director at Philadelphia consulting firm PFM Group, sees Act 47 as beneficial, though he understands the reasoning behind those who want to tweak it.
“There’s been a bad rep on 47, people saying you can get in but you can’t get out,” Kaplan said. “But it’s not a short process. By the time people ask for help, it’s pretty late in the game. We develop a five-year plan to look out ahead a few years. The goal is to see light at the end of the tunnel.”
Kaplan, a former Philadelphia city budget director, has served as the Act 47 coordinator for Reading, Pittsburgh and New Castle. The latter, a 23,000-population city near the Ohio border, entered Act 47 through a citizens petition. Pittsburgh, which enrolled in 2003, has paid down $240 million of debt and two months ago received improved outlooks to stable from negative from Moody’s Investors Service and Standard & Poor’s, which rate the city A1 and BBB, respectively.
Reading Mayor Thomas McMahon touted the benefits of Act 47 in testimony last December before a state legislative committee.
“It’s my opinion that Act 47, after 24 years, has done a moderately good job of forestalling bankruptcy in many municipalities, and it was the right thing to do for the city,” said McMahon, whose city has lost nearly 10,000 manufacturing jobs over 20 years.
PFM in recent years has placed more emphasis on long-term economic development plans. For instance, the firm required 88,000-population Reading to draft an economic development plan and integrate it with surrounding Berks County, of which Reading is the seat.
“One point of emphasis is the size of government you can afford. The flip side is whether your economy is robust for your size and location,” Kaplan said. “That’s harder to deal with when your priority is keeping the doors open.”