While particulars vary, distressed Pennsylvania communities Harrisburg, Scranton and Altoona struggle for solutions amid what their leaders describe as common concerns of state indifference -- and in some cases hindrance -- amid rising pension obligations and potentially crippling arbitration awards.
“It’s not just those three cities. It’s every single municipality,” said Harrisburg city Controller Dan Miller, citing feedback from a recent Pennsylvania League of Cities and Towns conference in Pittsburgh. “The legislature just doesn’t want to do anything for the urban areas. We can’t expand revenue and we can’t control costs. We have the unions and arbitration laws working against us, so we’re stuck in this tight squeeze.”
The lawyer who sued in federal court last week challenging the appointment of a receiver in Harrisburg -- the latest litigation in that city’s debt crisis -- has a new take on how to clear the mess that has left the state’s capital city with roughly $310 million of incinerator-related bond debt.
While critics of the law say corporate lobbyists orchestrated the receivership to protect the interests of creditors, Paul Rossi, the Kennett Square, Pa., attorney who filed the action on behalf of five of seven City Council members, said bondholders should be the first to complain about receivership.
“Bondholders need to be paid off. This receivership does not do enough for bondholders,” Rossi said in an interview.
Rossi filed the suit last week in U.S. District Court last week, looking to invalidate the state receivership law passed that year that was aimed at Harrisburg. According to Rossi, the law violated the equal protection clause of the 14th Amendment to the U.S. Constitution because it singled out Harrisburg.
The law paved the way for a state-appointed receiver for Pennsylvania’s capital city.
“In this case he chose Harrisburg. In the future he might not choose Scranton or Altoona or any other city that is suffering from a financial crisis. That is not equal protection,” Rossi said.
But Rossi, who said “the powers at the capitol are protected by moneyed interests,” still sees a solution he feels is amenable to bondholders and local citizens alike.
“The state could have created a dedicated revenue stream but hell, they didn’t,” he said in an interview. “Twenty-six other communities have these kinds of revenue streams. Harrisburg bondholders should be in an uproar because they will get only a fraction of what they’re entitled to. They ought to be made whole.”
An example, he said, is the so-called Johnstown Flood Tax, which no longer goes to flood victims, but instead to the general fund for discretionary use.
Harrisburg could run out of money altogether in October, the city’s new receiver, William Lynch, wrote in a status report last week to the Commonwealth Court of Pennsylvania. The city ended May with a cash balance of $5.6 million, but the total is artificially high. The city receives the bulk of its tax revenues early in the year and additionally, it missed two general obligation bond payments in March totaling $5.3 million.
The city will have to draw down on its balance over the summer and, according to Lynch, deficits will kick in. It will owe another GO payment in mid-September and “a decision will be made closer to that time as to the city’s ability to make that payment,” said Lynch, who succeeded David Unkovic in May.
In another Harrisburg development last week, a federal judge issued a $19.3 million settlement in favor of CIT Group Inc., one of several major incinerator creditors, against the Harrisburg Authority, the public works agency that owns the incinerator, and Dauphin County, both of which had argued that the deal lacked proper approvals from the City Council.
Positive news came to Harrisburg on Friday, when Denver-based Greenwood Hospitality Group agreed to buy the Harrisburg Hilton, across the street from City Hall. The sale retired nearly $17 million in city-guaranteed mortgage debt on the hotel. "Although the hotel has always paid this debt as scheduled, this transaction is an important outcome benefiting the city," Mayor Linda Thompson said.
While Harrisburg has become the poster child of Pennsylvania local distress, it is far from alone. Scranton and Altoona, the latter having just become the 27th community in Pennsylvania’s Act 47 program for municipalities in fiscal distress, are beginning to draw national attention.
Scranton, Pa., a 77,000-population city and the seat of Lackawanna County, is down to about its last $360,000, and can’t get a bank to backstop a $16 million loan it needs to meet payroll and pay past-due bills. Antsy vendors include Blue Cross of Northern Pennsylvania and Dunmore Oil, which fuels police, fire and public works trucks.
Mayor Chris Doherty last week ordered all city employees, including himself, to work at the federal minimum-wage $7.25 per hour starting July 6, until the city gets the loan. Doherty has promised back pay when the loan comes in. The municipal unions have vowed to fight the measure in court.
The northeast Pennsylvania city faces a new Catch-22 pickle. Its police and fire unions and Doherty on Thursday announced a compromise agreement on last fall’s landmark state Supreme Court arbitration award, estimated at $20 million to $30 million, but the state Department of Community and Economic Development, which oversees distressed communities in the Act 47 program, won’t sign off of the award until the city approves a revised recovery plan.
The mayor and city council, meanwhile, are at a logjam over that plan, with Doherty last week asking a Lackawanna County judge to force the council to approve the plan.
The council passed a budget that assumed the city obtained the $16 million financing, which now is unfunded.
“The banking community said they need certain things to be done, and council has been unwilling to do it. Therefore we have not received that $16 million,” Doherty said.
Scranton is also experiencing fallout over its late $1 million payment earlier this month to its parking authority to cover a coupon payment on a city guaranteed bond.
Moody’s Investors Service called the delay a credit negative. “It raises doubts about the city’s willingness to make timely payments on the debt that it guarantees,” the rating agency wrote.
City officials said the delay led at least one lender, M&T Bank, to shy away from backing the $16 million sale of short-term cash flow notes.
Moody’s said Scranton’s delayed payment on the guaranteed GO debt was tantamount to a GO default.
“Because GO guaranteed debt is legally equivalent to direct GO debt, we consider a default on guaranteed debt as a default on the issuer’s general obligation pledge,” Moody’s wrote.
According to Moody’s, Scranton’s plight epitomizes the difficult tradeoffs distressed communities face amid unrelenting financial pressures.
The latest tradeoff could involve Scranton using the award settlement as a selling point to pitch banks for the $16 million loan, essentially swapping the award for more debt. “I think it [would] hurt us, since the debt is interest bearing and the award was capped,” said Gary Lewis, a downtown Scranton resident and private-sector financial consultant.
In 46,000-population Altoona, about halfway between Harrisburg and Pittsburgh, law firm Stevens & Lee is working on a recovery plan, which it will recommend to city officials by late August or early September. The city’s deficits the past four years have ranged from 11% to 19% of revenue for all governmental funds, and could widen without intervention.