How Pa.'s 'distressed' program helps towns; and why it's hard to leave it

Years after the city nearly went bankrupt and fell under state control, Harrisburg is finally in a good place financially, state and local officials agree.

With balanced books, the commonwealth's capital thus is primed to exit the state's program for financially distressed municipalities — commonly known as Act 47.

Only it doesn't want to, if that means giving up the program's special taxing power.

"I'm telling you point blank we can't have a balanced budget without it," said Mayor Eric Papenfuse. The city is due to leave Act 47 in September, when its five-year deadline expires. But "there is only one way out of Act 47 for Harrisburg," the mayor said: That would be by keeping its authority to raise taxes beyond the normal limits set by the state.

Harrisburg is now lobbying the legislature to extend its taxing privileges, which it did for Pittsburgh. That city exited Act 47 last month.

Seventeen municipalities across the state, including Chester and Colwyn in Delaware County, Reading, and Scranton, remain in Act 47.

They and the state-appointed firms hired to guide them to solvency must decide within the next two years whether the communities are strong enough to leave Act 47 by the five-year deadline or whether they should seek a one-time, three-year extension. Before the legislature amended Act 47 in 2014 to include deadlines, municipalities such as the city of Clairton, outside Pittsburgh, lingered in the program. Clairton spent nearly three decades in Act 47 before getting out in 2015.

But exiting by the deadlines and staying solvent will be a challenge for "quite a few" of them, said Gerald Cross, executive director of Pennsylvania Economy League Central Division.

Harrisburg, which has one of the state's highest poverty rates, appears to be back on its feet financially. "If you look at our balance sheet," Papenfuse said, "you'd say, 'Fiscally healthy, has no business being in Act 47.' "

The mayor said the city has pulled in an extra $11 million in revenue from higher rates on the local services tax on commuters and earned-income taxes on residents — increases allowed because of authority granted by Act 47, formally known as the Municipalities Financial Recovery Act.

Harrisburg is burdened by the fact that a majority of its real estate is owned by the state or is tax-exempt.

Most Act 47 communities share common problems: flat tax bases, creative bookkeeping to get by, imprudent budgeting, neglected finance departments. Some, such as Harrisburg and Reading, are hubs of employment where a substantial share of daily workers are commuters who use resources but don't pay taxes.

Unfunded pension liabilities are "one of the largest weights on their shoulders," which is why the state is considering municipal pension reform, said State Sen. John Blake (D., Luzerne), minority chair of the Senate's Local Government Committee.

"The problems for a lot of these communities won't go away in eight years, because they've been decades in the making," said Gordon Mann, director of the Philadelphia-based financial firm PFM, which helped Pittsburgh out of Act 47 and is assisting Reading.

"A lot of places will have a hard time, because what they are relying on is the thing they have to give up to get out," Mann said. "The question will be how they'll do once they're out."

None of the 14 municipalities that have left the program have been in danger of reentering it, according to the state's Department of Community and Economic Development, which administers the program. But none so far have been forced to leave before they thought they were ready.

Marita Kelley, deputy executive director of the Governor's Center for Local Government Services in the department, said the communities in the program are "all a little nervous" about standing alone post-Act 47.

"We anticipate there will be some challenges once they get out, and we'll just have to see how those challenges play out," Kelley said, adding that communities that continue to struggle after leaving are eligible for other state assistance.

Pittsburgh and Altoona, which exited the program in September after five years, are two cities worth tracking, according to PFM.

Cross of the Pennsylvania Economy League said that municipalities need more taxing flexibility and that an overarching issue is "the failure of the local government financing system in Pennsylvania to adapt to modern times."

Altoona, Blair County, was able to expand its taxing authority and shed other limitations from the state by asking voters to approve a change in the town's status from a third-class city to a home-rule municipality, said Omar Strohm, deputy city manager.

Over the last several years, Altoona has moved from a deficit to a cash surplus of nearly $10 million last year, said Mayor Matthew Pacifico. The city's budget is roughly $32 million.

"I know there's a certain stigma attached to being named a financially distressed community," Strohm said. "We look at it as a challenge to remain financially viable and to keep [a] frugal mentality with the finances of the city."

Pittsburgh left the program last month after 14 years. A big reason why the city was able to leave was the state's decision to diversify the tax structure for cities of the second class, of which Pittsburgh is the only one.

PFM, the state-appointed financial helper for Reading, is weaning the city off a reliance on its increased Act 47 tax authority, Mann said. Reading is "rightfully concerned" about its fate post-Act 47, because of its high concentration of poverty, Mann said, but he is "cautiously optimistic" the city will be able to leave next year.

"The biggest challenge is going to be staying out," said Linda Kelleher, Reading's city clerk. "Because we still have the problem with the legacy costs that aren't going to be solved at all."

Public safety is often a municipality's largest cost.

Millbourne Borough, Delaware County, left Act 47 in 2014 after two decades primarily because it made its police part time. The borough no longer pays into pensions or health insurance for officers. Millbourne also began aggressively going after grants, said Nancy Baulis, assistant manager.

Colwyn, which entered Act 47 in 2015, is on track to leave in 2019, just ahead of the five-year deadline, according to borough officials. On the path to solvency, the borough has hired a full-time experienced manager, hired a treasurer, outsourced code enforcement and engineering services, and developed a "realistic" budget, according to EConsult Solutions, the firm the state hired to help Colwyn.

Chester's five-year deadline is up in two months, but the city is not yet ready to leave. Officials hope the state will grant a three-year extension.

"There are benefits to being financially distressed but also constraints," said Nafis Nichols, Chester's chief financial officer. "We're going to make sure we here in Chester do everything needed to capitalize off of the next three years."