Federal Judge Paves the Way for a State Takeover of Harrisburg's Finances
Harrisburg is $600 million in debt that it can never repay: owing $184 million to public sector retirees, $310 for its incinerator; $70 million for its sewage plant, and 10s of millions for Strawberry Square.
State House Sends Governor Corbett Harrisburg Recovery Bill
Bill would allow state takeover of HarrisburgThe bill would apply to any third class city, like Harrisburg, that failed or refused to adopt a recovery plan under the state's Act 47 program for economically distressed municipalities. The measure would allow the Governor to declare a state of fiscal emergency within the distressed city, which ensures that vital municipal services, such as police and fire protectin and trash collection are maintained. Following the declaration, the Governor, through the Department of Community and Economic Development would petition Commonwealth Court to appoint a Receiver for the city, who would be responsible for developing and implementing a financial recovery plan.
The bill prohibits the levying of a commuter tax on non-residents. Iit also creates an advisory committee made up of the Mayor, City Council President, an appointee of the County Commissioners and an Appointee of the Governor.
Even after a receivership petition is filed, elected officials in the municipality would be given a final opportunity to develop a plan of their own. If they fail to do, the Receiver, would then have control of all of the municipalities financial matters relating to the recovery plan. The Receiver would remain in place for at least two years.
Statement by Harrisburg City Council members Eugenia Smith, Susan Brown Wilson, Wanda Williams and Brad Koplinski:
"We are not surprised by the actions taken by the State Senate and House. The legislature, led by Senator Jeff Piccola, has changed the rules of how Act 47 works after Harrisburg entered the process. That is not right and it is un-American.The City Council lawfully filed a petition for bankruptcy last week to protect the taxpayers of Harrisburg. This was to allow all the parties to sit at the table, so that there can be a global solution with shared pain, with all the stakeholders providing a substantive, but fair contribution to solving Harrisburg's financial crisis. This process also stops all of the current lawsuits against the city and allows everyone to take a step back and reconsider their contributions to this solution. We ask that the Governor either not sign or not implement SB 1151, to allow time for the bankruptcy process to work through the system.
"First they attempted to restrict the city's ability to generate revenue and negotiate with its creditors, which were allowed in the Act 47 law, as well as penalize the city if it filed for bankruptcy. But that wasn't good enough. Now this takeover legislation gives a receiver unlimited power to sell any resource the city and its authorities have, without allowing Harrisburg an alternate source of revenue.
"Wall Street can get paid 100 cents on the dollar and the people of Harrisburg will be subjected to exorbitant property tax and other increases so that we can pay our operating budget. And after all the city's assets are sold and the city is on its knees, the receiver has the ability to file for bankruptcy to pick the bones of our city clean. But by then, all the creditors have been paid, so the bankruptcy would go after our employees and pensioners. And according to the House Committee on Appropriations, the receiver will cost over $2 million a year to provide these services."
Harrisburg, Pa. Receiver Converting Worried Critics
Harrisburg's city council filed for Chapter 9 bankruptcy protection earlier in the fall, but the case was dismissed by a federal judge, paving the way for a state takeover of the city's finances. The state capital is struggling under the weight of more than $300 million in debt from a revamp of its incinerator.ReutersDecember 20, 2011
If knee-jerk reactions could be taxed, Pennsylvania's capital city could be closer to escaping its $315 million financial hole.
David Unkovic, the man the state appointed three weeks ago to find a way out for debt-ridden Harrisburg, initially faced a barrage of criticism, particularly regarding his past relationships with large creditors of the city.
However, he appears to be converting critics while maintaining his pledge that everyone will feel pain when he unveils his recovery plan for the city.
Unkovic was applauded by 150 people who visited a city bookstore Monday evening to hear what he had to say about his work in developing that plan.
"I want to commend you on some of your comments last week, especially concerning the fact that any credible workout to this issue is going to have to have some clawbacks in relation to the outstanding debt and our creditors," Harrisburg resident Bruce Webber told Unkovic.
Among the attendees were members of Occupy Harrisburg and Debt Watch Harrisburg, a group that has favored bankruptcy instead of a state takeover.
The 57-year-old receiver, who drew public scorn from some of the same people because of his ties to several of the creditors who are suing Harrisburg, garnered approval after the only resident to object to his appointment questioned his political ties to Republican Governor Tom Corbett.
"I'm not a Republican either, by the way. I am a Democrat but I am not a partisan person," Unkovic said.
Harrisburg's city council filed for Chapter 9 bankruptcy protection earlier in the fall, but the case was dismissed by a federal judge, paving the way for a state takeover of the city's finances. The state capital is struggling under the weight of more than $300 million in debt from a revamp of its incinerator.
"Fortunately, you don't have a political agenda. Your (concern) is the 48,500 people of the City of Harrisburg," said a city employee and member of AFSCME, one of the unions that's been asked to accept concessions in budget talks for 2012.
A member of Occupy Harrisburg, an offshoot of Occupy Wall Street, even appeared to sympathize with Unkovic's task ahead when he asked,
"Why did you take this job?"
Unkovic said he's met with every elected official involved in Harrisburg's debt crisis and talked with many groups, including Occupy Harrisburg and the host of Monday evening's forum, Harrisburg Hope.
He said he created a website, www.pa.gov/harrisburgreceiver, to give people a chance to share ideas about how to get the city out of debt.
Unkovic has petitioned Commonwealth Court to give him an additional 30 days to submit his recovery plan for Harrisburg, which would give him until early February, if approved.
He said he plans to stay on as receiver only as long as it takes to turn around the city.
"I'm going to go away as soon as I can. That's my plan," said Unkovic.
Group Files Lawsuit Against State Takeover of Harrisburg
The lawsuit claims the takeover violates the 14th Amendment rights of the residents of HarrisburgFox 43 WPMT
December 5, 2011
Another battle is brewing for the state takeover of the City of Harrisburg. This time, a group of city residents are filing a civil lawsuit in federal court. The suit claims the state should not be able to move forward with the takeover because it violates the citizens 14th Amendment rights.
The lawsuit claims the
state takeover and the legislation surrounding Act 47 is illegal. The group of citizens filing the suit are hoping for a federal judge to suspend the process because they say it violates their 14th amendment rights.The lawsuit was filed on Thursday and asks a federal court to consider the state takeover of Harrisburg's finances unconstitutional. The civil rights action says Senate Bill 1151, which amends the Act 47 process, takes away citizens federal rights to due process and equal protection under the 14th amendment.
There are two main sticking points the lawsuit calls into question.
1. First, the suit claims the state takeover law suspends representative democracy in Harrisburg by having the state run the city's finances.
2. Second, the lawsuit claims the state takeover bill is written specifically to target Harrisburg, which violates the 14th amendment's equal protection clause.
The three men responsible for the lawsuit are former mayoral candidate Nevin Mindlin, Harrisburg firefighter Eric Jenkins, and Reverend Earl Harris from Saint Paul Baptist Church. The group says they are looking for a "fair financial recovery plan for the Harrisburg community."
In the best case scenario for the filing group, the lawsuit would suspend the state takeover of the city. The group will hold a news conference later this morning to layout the civil action suit and talk about their intentions with the move. That news conference is scheduled for 9 am at the Que House at 2020 State Street.
As for the takeover process, a Commonwealth Court judge approved the appointment of David Unkovic as receiver on Friday. He now has 30 days from Friday to develop and implement fiscal recovery plan.
Pittsburgh and Harrisburg: A Tale of Two Deep-in-Debt Cities
StatelineOctober 20, 2011
Four hours apart on the Pennsylvania Turnpike, Pittsburgh and Harrisburg are linked not just by geography but also parallel financial woes that bring into view what happens when local governments fail to handle big bills and states get dragged into their mess.
The troubles in both Pennsylvania’s second largest city and its capital stem from mismanagement of debt by local leaders. Pittsburgh is having trouble covering its future public pension bills but escaped a state takeover last month after the city bolstered its retirement fund.
Harrisburg, however, may not be able to avoid state intervention. The city of 50,000 people cannot pay down $310 million it borrowed to renovate a failed trash incinerator. This week, state lawmakers and Republican Governor Tom Corbett may complete action allowing the state to appoint a receiver to rescue Harrisburg from its failing finances. Complicating matters, the city filed for bankruptcy protection last week; a federal judge is expected to hear the case on November 23.
Pennsylvania is not the only state struggling with debt-loaded local governments. Alabama, Michigan and Rhode Island all face similar questions about how far the state should go to intervene in the finances of distressed localities (see sidebar). Although the states have taken different approaches, all face the same reality that their financial fate is intertwined with the cities. So, too, is the image of the state, at least in the eyes of Wall Street.
| Cities and counties in fiscal trouble |
| Other states share Pennsylvania’s distress with debt-loaded local governments: |
Yet these states, facing their own financial pressure from the recession and coming federal budget cuts, are in no position to give cash to distressed cities. Pennsylvania’s budget for the current fiscal year spends nearly $1 billion less than last year’s — a drop of more than 3 percent. So the story of Pittsburgh and Harrisburg is more than a tale of two struggling cities; it’s a story of what tools a stressed state does and doesn’t have to help.
Trash trouble in Harrisburg
Harrisburg’s debt crisis centers on a doomed public works project. The city opened an incinerator in 1972 to burn trash, produce steam and eventually generate electricity. The idea was to serve not only city residents but also surrounding counties and private companies who paid fees for their use of energy.
The first blow came in 1990, when Dauphin County, which includes Harrisburg, started sending its trash to cheaper landfills instead of the incinerator. The burner “went from a profit generator to a deficit generator,” former mayor Stephen Reed told a local newspaper, The Patriot-News. Dauphin County resumed hauling trash to the incinerator in 1995. But by then, Harrisburg already had begun borrowing money to repair the aging plant.
The federal government shut down the dioxin-polluting incinerator in 2003; by that time, the obsolete furnace had piled up about $100 million in debt, without revenue coming in to pay off the bonds. City leaders decided to borrow another $125 million to upgrade the incinerator to meet federal clean air standards and repay the old and new debt from fees Harrisburg would charge Dauphin County and other governments to burn their trash. The retrofit project was a disaster: The city borrowed additional money when the upgrade fell behind schedule, costs increased and the contractor was accused of mismanaging the project.
Harrisburg residents have paid a steep price for the botched project in higher property taxes and trash fees, as well as reduced city services because of staff cuts. Now city officials, struggling to meet the payroll — let alone the $310 million that has accumulated from the incinerator borrowings — have filed for bankruptcy protection.
The bankruptcy action follows two failed attempts by the city council to accept a state rescue plan developed by the state legislature and Governor Corbett. Lawmakers responded to the rejection by approving legislation allowing the governor to appoint a receiver and financial control panel to run the city. The spectacle in Harrisburg grows almost daily. The city council and Mayor Linda Thompson are not only split about the decision to file for bankruptcy but are even divided over whether it was legal to hire the attorney who is handling it.
Underfunding pensions in Pittsburgh
Pittsburgh escaped a state takeover last month but still is in a precarious position because of years of neglecting its public pension fund covering police officers, firefighters and other city employees. The city’s troubles began as far back as 1984. That’s when state lawmakers approved legislation requiring Pennsylvania cities, including Pittsburgh, to replace their pay-as-you-go pension financing with a system in which they would make higher annual payments determined by actuaries. The change was intended to fully fund city pension liabilities over 40 years.
The financing change could not have come at a worse time for Pittsburgh. During the 1980s, Pittsburgh was reeling from the loss of jobs, people and tax revenue associated with the collapse of the steel industry. Initially, city officials set up a schedule of gradually increasing pension payments to keep the city’s contribution low until Pittsburgh recovered from its industrial decline. But by 1996, the unfunded pension liability swelled to $519 million, with only $118 million in assets. By contrast, the entire city budget was $322 million.
City leaders thought they would solve the problem by selling pension bonds — essentially, borrowing from investors to reduce debts to retirees. The temporary injection of cash into the retirement fund allowed Pittsburgh to cover 67 percent of its pension bill by 2000, up from 18 percent in 1996. But the bonds were “noncallable,” which meant that when interest rates subsequently dropped, the city could not refinance them to save money.
Pittsburgh — and Pennsylvania — made another big mistake. The city got permission from the state to calculate its annual pension payment assuming a 10 percent rate of return on investments, compared to a 6.5 percent rate assumed by other Pennsylvania municipalities. That had the effect of setting Pittsburgh’s pension payments lower than they should have been: Between 1998 and 2002, the actual rate of return averaged about 2 percent. The city has since lowered the assumed discount rate to 8 percent.
Despite Pittsburgh’s successful efforts to diversify its economy by attracting institutional employers in health care, education and financial services, the city could not boost revenue enough to keep up with its growing expenses, including public pensions. Nearing insolvency in 2003, the city laid off hundreds of employees and curtailed services. The credit rating agencies downgraded Pittsburgh’s debt to junk bond status, the lowest rating among big cities. In 2004, the state said the city qualified for “financial distress,” a legal distinction that paved the way for the city to appoint an outside manager to develop a fiscal recovery plan.
Under the plan, Pittsburgh had to fund at least half of its pension system by 2011, or else the state retirement system would take over the city plan and require larger pension payments. The city avoided the takeover in part by pledging to pump parking tax revenue into the pension fund, which helped bring its funding ratio up to 62 percent, according to Mayor Luke Ravenstahl. But that does not mean Pittsburgh’s pension crisis is over. Pittsburgh’s 62 percent is well below the 80 percent funding ratio that most analysts recommend to sustain a healthy public pension plan. Ravenstahl’s 2012 budget proposes to pay the pension fund 6 percent less than it paid this year, prompting critics to question his commitment to shoring up the fund.
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Analysts who have followed the debt crises in Pittsburgh and Harrisburg say there are lessons that can be learned from each. In Pittsburgh’s case, there are two morals for cities, and they are pretty straightforward.
The first is to make your full pension payment each year and tie it to a reasonable rate of return. James L. McAneny, executive director of the Pennsylvania Public Employee Retirement Commission — the system that decided against taking over Pittsburgh’s pension fund last month — says the city should not have used the 10 percent rate of return.
“Unless they change the way they do things,” McAneny says, “Pittsburgh will be right back to where they were: under 50 percent funding.”The second moral from Pittsburgh is to carefully consider the pros and cons of pension bonds. Issuing pension bonds made sense at the time, says Chris Briem, a University of Pittsburgh economist.
“Without the pension bond, the city would have been broke,” he says.But the terms and size of the borrowing doomed the city. Moreover, stresses Duquesne University professor James Burnham, Pittsburgh started from a weaker financial position than many issuers of pension bonds have.
“Pensions are a long-term problem,” Briem concludes. If Pittsburgh “had just put in a little more money over the last 20 years, it would be a far better situation.”Harrisburg’s debt woes are more layered. Through no fault of the city’s, the incinerator was snake bit from breakdowns and federal Clean Air legislation that forced its shutdown. But the decision to borrow money to ask a dubious contractor to retrofit the plant and count on fees from neighboring counties to finance it proved to be the incinerator’s unraveling.
“They just got far too ambitious for the size of the city,” says G. Terry Madonna, a professor at Franklin and Marshall College.The dysfunction among elected officials has only made the situation worse. Seven in 10 Harrisburg residents view Mayor Thompson unfavorably and the same number view the council’s performance as fair or poor, according to a public opinion survey of 400 residents that Madonna conducted.
“The city just suffers from erratic, inconsistent leadership,” he says.
Pennsylvania’s Municipal Crisis: Time for Action
IssuesPAFebruary 7, 2011
A new governor and a new legislature bring hope that Pennsylvania will deal with the financial crisis facing its cities, townships, and boroughs.
And it is a crisis. The City of Harrisburg teeters on the edge of what looks like an inevitable bankruptcy. The City of Reading is not far behind, as even Act 47 protection has proven to be an inadequate tool to staunch its financial tailspin. Deep financial distress, growing poverty, failing infrastructure, and a declining employment base plague nearly all of Pennsylvania’s cities.
The crisis imposes real costs on citizens outside of the cities as well. At least one municipality recently found its costs to borrow money had increased simply because it was in the “same county as Harrisburg.” It’s a difficult issue because while Pennsylvanians may understand the difference between, say, the City of Bethlehem and the Township of Bethlehem, outsiders—including businesses thinking about moving here—will just see a state that can’t pay its bills. And that will cost us jobs.
Pennsylvania’s cities have entered a death spiral and there appears to be no mechanism available to pull them out of it. It’s time for all of us – the legislature, the business community, the labor unions, and the residents – to stop ignoring the problem and deal with it head on.
For years, business groups have blocked almost every legislative attempt to find new sources of revenue, arguing that reforming pensions and contract arbitration rules have to come first—though these acts alone won’t come close to solving the problem. Such intonations as “cut the fat” (which doesn’t exist in city budgets) and “run city government more like a business” are nonsensical in our current environment and don’t substitute for thoughtful policy.
Municipal union leaders defend the mathematically unsustainable—insisting on the preservation of state-mandated antiquated work rules and benefit packages that cities can no longer afford. As painful as those realities may be to hard working city employees—they are still realities.
The cities themselves engage in a series of convoluted—and often bizarre—financial transactions to temporarily stave off the day of reckoning. Much of the borrowing we’ve seen these cities do can only be described as reckless.
While that’s going on, Pennsylvania’s legislature has simply averted its gaze, believing that hard choices aren’t popular and that somehow “this will all go away.”
Well it’s not going away. And somebody must break the stalemate.
The fact is that most cities studied in a recent Pennsylvania Economy League report did not generate enough tax money (from all sources of taxation) to pay for their fire department and their police department, let alone any other services.
Most people find that statistic staggering, but it’s true. Easton, Lancaster, Reading, and York don’t generate enough tax revenues to cover the cost of their public safety departments, let alone provide parks, libraries or snowplowing.
That’s the kind of impossible position our cities are in.
So, what is a city to do? Cutting police and fire aren’t really options. I suspect that even the most fervent anti-government folks wouldn’t think that Reading has too many police officers on duty at any time (in fact, most experts think the 161-officer force is short by about ninety officers for a city this size). And I don’t see a huge groundswell in York or Lancaster for letting fires burn out of control.
And does anyone think it makes sense to require state arbitrators to interpret labor agreements without any regard for a city’s ability to pay the costs associated with their rulings?
It is clear that the current rules don’t allow Pennsylvania’s cities to look forward to a future of anything except rapid decline.
It’s time to change the rules.
The new state legislature must quickly enact a comprehensive package of reforms to stabilize our cities and return them to prosperity.
The reforms must include removing burdensome state-imposed pension and arbitration requirements. They must include giving cities the ability to generate new revenue at the regional level to support city services. But that alone won’t solve the problem.
A package of reforms must include serious incentives for regional cooperation so that cities don’t bear a disproportionate share of the cost of regional services.
It’s time for cities and their employees to adjust to the new normal. The business community must recognize that this is a time for action, not ideology. And the legislature and the governor must realize that we can’t put real municipal reform off any longer.
Q&A: Why Is It Unlikely That Harrisburg Gets Bankruptcy Protection? What Happens Next?
The Patriot-NewsOctober 13, 2011
Q: DID HARRISBURG REALLY 'DECLARE BANKRUPTCY'?
A: No. Harrisburg City Council voted 4-3 to file a petition requesting Chapter 9 bankruptcy protection in U.S. Bankruptcy Court.
Q. Does this mean the city gets bankruptcy protection?
A: Not so fast. Unlike a person or a company, a city can’t simply choose bankruptcy protection — it can only request it. And a bankruptcy judge will only grant that protection if the city has satisfied certain conditions.
Q: Can Harrisburg satisfy those conditions to qualify for bankruptcy protection?
A: It’s possible, but very unlikely, experts say, because:
- Council would have to get a majority of one class of creditors to approve bankruptcy, which will not happen, OR
- Council would have to convince a judge that it had negotiated in good faith or was unable to negotiate with its creditors. But council rejected recovery plans from both the state and Mayor Linda Thompson, and never proposed a plan of its own.
- Federal law prohibits a city from filing for bankruptcy without the state’s consent. Gov. Tom Corbett has already gone on record as opposing the bankruptcy option for Harrisburg.
A: The Dauphin County commissioners likely will file a motion to dismiss council’s bankruptcy petition.
Q: Does this affect the state takeover plan?
A: No. Sen. Jeffrey Piccola, R-Dauphin County, said lawmakers will continue city takeover efforts when the Senate reconvenes Monday. Attorney Mark Schwartz, working for City Council, has already called that move illegal and vowed to fight it in court.
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