After years of financial distress, Detroit filed for Chapter 9 Municipal Bankruptcy late last week. It becomes the first major city in United States history to do so.
Detroit has debt totaling $18 million. The unemployment rate in the city recently peaked at 28 percent and while it is has been declining, it remains at over 16 percent. The rate of crime is high and the industrial plants that used to populate the city are folding or leaving the city. Detroit is also facing grossly underfunded pension obligations and they will argue that the court should relieve them of these pension obligations. Naturally, their retirees and unions are beginning to launch a fierce battle against this.
While Pennsylvanian cities and municipalities are not yet facing the degree of financial strife that plagues Detroit, its distressed areas are met with similar considerations. Should Detroit be relieved of their pension obligations, it will set a precedent relevant in Pennsylvania where municipalities are mandated to fulfill the pension promises they have made to police and firemen under PA Act 111. They can receive financially distressed status under PA Act 47, which allows them to restructure their debt and consolidate or merge with neighboring municipalities to ease their individual burden. There are many municipalities who are now realizing the enormity of their pension obligations, and have very few choices except bankruptcy. Twenty municipalities in the state, including its capital, already have Act 47 designation that has helped them stabilize their financial status, but hasn’t provided stable, long term solutions to their economic problems.
While Act 47 allows municipal consolidation, there needs to be better understanding of the benefits of merging. A financially failed municipality with heavy debt and pension obligations is not a promising merge partner for a healthy, neighboring municipality. However, the possibility of shared services and decreased cost in service provision to the stronger municipality should be used as a selling point in these consolidation discussions. Both municipalities can benefit from consolidation and eventually provide higher quality, lower cost services to their constituents while one emerges from Act 47, distressed status.
If these negotiations and state laws are your interest, keep your eyes open for more information on Renew Lehigh Valley’s smart growth conference coming this fall. One of the available workshops will focus exclusively on Act 47, Act 111 and municipal bankruptcy in Pennsylvania with an expert panel featuring Fred Reddig from Pennsylvania’s Local Government Commission and Tom Baldridge of the Lancaster Chamber of Commerce.