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.
Much of RenewLV’s work focuses on the revitalization of the cities in the Lehigh Valley. In part, we examine the structural issues that are in place that prohibit the redevelopment of brownfields and vacant lots in the cities and we work toward solutions to the challenges. But lately we’ve been realizing that the problem is not just affecting the cities anymore. The so-called inner-suburbs have also suffered a decline over the past two decades. In fact, this is the very issue that the Southeast Pennsylvania First Suburbs project works on and a significant part of the Building One Pennsylvania movement.
Urbanophile writes about this issue in a recent post, mentioning the huge unfunded liabilities that one generation lays in place for the next one to pay. They write:
It is a huge incentive for politicians and residents to vote for immediate gratification with the bill – infrastructure costs, pensions, redevelopment costs, or what have you – pushed out 25-30 years. Then these people or their children simply move to a greenfield and start the process over again.
And here is where the realization comes in:
If you think about it, we spend virtually all of our time in the planning process thinking about the upfront side of the development. We charge impact fees to mitigate road needs from new development and such. We go through an extensive review process to make sure there are no adverse impacts on the surroundings. But we spent little time thinking about the back end of the project, of its end of life, and the types of negative externalities that occur there as people can simply abandon homes and malls and go elsewhere.
One suggestion for how to plan for this, as mentioned by Urbanophile, is to mandate redevelopment insurance on the developer. Sure, it might serve as a disincentive to develop if only certain municipalities or states did this, but if it was mandated uniformly across the nation, then we would all be in the same boat. Read more about this idea on the original Urbanophile post.
Could this be one way that we could ensure that our communities don’t die? Essentially, what the decline of the inner suburbs has shown us is that, given the way we’ve been planning and developing in this nation, no community is safe from falling into distress. It’s happening all across Pennsylvania. And we have to do something about it.
Dan Fink of York Counts tweeted this great story about the Berks County, PA experience in municipal consolidation. Apparently, the county’s planning office provides $25,000 to municipalities to help pay for merger studies. Here’s an excerpt from the story:
“We came up with this concept of developing a municipal merger program and paying for the study to help the municipal governments decide whether it was worthwhile or not,” said [Kenneth] Pick [Berks County community development director].
Three tiny boroughs have taken the county up on its offer.
They did the studies and merged with townships after their voters and the voters in the receiving townships approved.
- Temple became part of Muhlenberg Township in 1999.
- Wyomissing Hills became part of Wyomissing in 2002.
- West Lawn became part of Spring Township in 2006.
Richard A. Gould, former mayor of West Lawn, was a huge advocate for municipal merging, running on a pro-merger platform and effectively eliminating his own position after he won.
Before the merger, Gould said, small-town politics weren’t working for West Lawn and its residents. Property taxes were 77 percent higher than Spring’s, even though West Lawn was completely surrounded by the township and already using many of its services, including police protection.
Yes — someone actually ran on a platform that was completely selfless, purely for the good of the municipality and its residents.
The Twitterverse has been abuzz today with the news of the unanimous passage of Senate Bill 1429, which would streamline voluntary municipal consolidation with a home rule option. Now the bill moves from the Senate to the House. Read more about this latest news on Team Pennsylvania’s website.
With how the recession seems to affect every aspect of life, it seems almost trite to talk about economic stresses. But hey, one more time can’t hurt.
The WSJ published an article yesterday on the dilemmas faced by municipalities when considering bankruptcy. While deciding whether or not to file is already a complicated process for individuals or businesses, for local governments the outcome is almost entirely unknown. David Wessel writes:
There is no obvious mechanism for state and local governments to resolve the coming collision between competing claims of taxpayers, retirees (both current and future) and bondholders.
A bit of history: Amid collapsing municipal finances in the Depression—in Detroit, 36% of the taxes were delinquent in 1932 and 76% of tax revenue that arrived went to debt service—Congress allowed cities and towns, municipal utilities and the like (though not states) to go into bankruptcy.
Several Supreme Court decisions and congressional amendments later, the threshold for a municipal filing is much higher than for companies, judges’ role more limited and the process largely untested. Bridgeport, Conn., was blocked from filing under Chapter 9 in 1991 because a federal court said it wasn’t truly “insolvent,” a test companies don’t have to meet.
The author concedes that there are few instances of local governments filing for bankruptcy, and that most experts do not expect to see an increase. But this does raise the question of what options cash-strapped local governments have to effectively manage their debt while still continuing to provide services to their constituents.
Certainly bankruptcy isn’t a preferable option, but when a municipality has to pay off its debt burden for, say, a construction project that is years behind schedule and far over budget, what services can it afford to cut? How can it increase revenue without placing a massive tax burden on residents? Regional consolidation would be one step to help make local governments more financially secure and cut their expenditures.
The municipal consolidation bill, introduced by State Representative Tom Caltagirone earlier this year, has been fueling discussions recently within Harrisburg about how to best address the problems faced by fiscally-strapped municipalities. In the last few days, several legislators have considered the bill’s merits and its timeliness. After all, many of the Commonwealth’s municipalities are taking drastic measures to cut costs and avoid tax hikes. Municipal finance experts have warned us about the looming pension crisis for some time now, and the cost for maintenance and basic upkeep of our cities, boroughs and townships keeps rising.
Rep. Caltagirone’s bill (House Bill 2431) “calls for eliminating city, township and borough governments, and rolling them all into a county-run hybrid,” WFMZ reports. But the bill certainly has its critics:
Municipalities have lined up to denounce the bill, saying it would eliminate identities and create a government the likes of a big corporation. “I think local government works,” said David Sanko, Executive Director of the Pennsylvania Association Of Township Supervisors.
More than a dozen municipalities in Berks, and even more in surrounding counties have already adopted resolutions against House Bill 2431. “I think the larger the community becomes, the more difficult it is to stay in touch with your residents,” Sanko said, “just because of sheer volume.”
How should struggling municipalities deal with declining tax bases? What other solutions exist for this problem? Gerry Cross of the Pennsylvania Economy League, Central Division, will cover all of this and more in his informal talk on Municipal Finance at the upcoming RenewLV brown-bag session, held on Friday, August 27, 12pm (noon ) to 1:15. Come out to the Sigal Museum, new home of the Northampton County Historical & Genealogical Society [342 Northampton Street in Easton, map] and be a part of the discussion. For more information, visit our past blog post.
It is my pleasure to announce that the next Renew Lehigh Valley brown-bag session will be held on Friday, August 27th from 12pm (noon) to 1:15 at the Sigal Museum, new home of the Northampton County Historical & Genealogical Society [342 Northampton Street in Easton, map].
The topic for this session is Municipal Finance. Gerald Cross, Executive Director of the Pennsylvania Economy League, Central Division, will be discussing Pennsylvania’s current system of municipal finance and the major structural challenges that this system poses for older core communities, especially cities and boroughs. As this was a central topic of focus at the recent Building One PA Summit in Lancaster, we will make sure to provide a report from that event at this brown-bag session.
The session is FREE and OPEN TO THE PUBLIC. There will be NO FEE to enter the museum. It will be held in the 2nd Floor Conference Room at the museum. Upon checking in at the admissions desk, you will be directed upstairs. Metered street parking is available throughout Easton. A public parking garage is located on 27 South Third St. [map]
Bring a lunch (perhaps from one of the downtown dining establishments), come check out the Sigal Museum and join us for a lively discussion on the 27th. RenewLV will be recording this session and making the podcast available to listen on our website and on iTunes. Check out past brown-bag session recordings on RenewLV’s Multimedia page.
If you would like additional information, or have any questions about the event, feel free to contact me at email@example.com or 484.893.1062.
Hope to see you on the 27th.