2009-10-01 / Local & State

Act 47: For Insolvent Cities, PA’s Welfare State

By Don Spatz READING EAGLE

READING, Pa. (AP) – In early September, Reading became the latest Pennsylvania community to file for designation as a distressed city, under the terms of the state’s Act 47 law.

If approved, the designation will give the city 50 miles east of Harrisburg, and 50 miles northwest of Philadelphia, more options to deal with its growing financial problems.

But it’s far from the first municipality to do so – 24 other cities, boroughs and townships have gone into Act 47 since Gov. Robert P. Casey Sr. signed the “Financially Distressed Municipalities Act’’ in July 1987.

Although six of the 12 boroughs have since had their distressed designation withdrawn, all 10 of the cities and both townships that applied are still there, for various reasons.

Leaders in several of those cities said the program does help, though it has some pitfalls.

“Without it, we would not have been able to pay the bills,’’ said Holly M. Quinn, city administrator in Nanticoke, in Luzerne County about 75 miles northeast of Harrisburg and a few miles southwest of Wilkes- Barre.

Nanticoke filed for Act 47 protection in 2006 and received an immediate $700,000 emergency loan.

Nanticoke, like Reading and many other Pennsylvania cities, had a hefty structural deficit – regular tax revenues weren’t enough to cover the city’s bills.

Going into the program gave it several options – including the loan – that it wouldn’t have otherwise.

“We didn’t have much choice it was a matter of survival,’’ said Lavon Saternow, city manager of Farrell, in Mercer County along Pennsylvania’s border with Ohio, about 60 miles northwest of Pittsburgh and southwest of Erie.

Farrell, with fewer than 6,000 residents, is the smallest of the cities in the program, but it was the first one to enter it. Farrell sought protection in 1987 after its largest employer went bankrupt and laid off 2,000 employees.

Farrell received an emergency loan and, like the other cities, took advantage of the state-paid financial consultants, put a recovery plan in place, levied a nonresident tax and cut the budget, partly by layoffs.

It once had 14 paid firefighters; it now has two. It keeps two firefighters on duty around the clock, filling in with volunteers.

“It has worked well for us,’’ Saternow said of Act 47. “It has been a good solution for us, and we are certainly glad for it.’’

Act 47 “is a step in the right direction,’’ said Curt Davis, city administrator of Johnstown, in Cambria County less than 70 miles east of Pittsburgh and 110 miles west of Harrisburg.

Johnstown went downhill when it lost its major employer, Bethlehem Steel, and entered Act 47 in 1992. Its population has dropped to 20,000 from 62,000.

Davis said the community’s work force has been cut dramatically, and the city is hoping a massive master plan for economic development will save the town, especially since 50 percent of its land is tax exempt, compared with about 32 percent in Reading.

Cities need to meet at least one of the 11 criteria to get a distressed city designation. Davis said all 56 cities in Pennsylvania already meet at least two of those 11.

Why have all 10 cities that joined the Act 47 protection program – three of them more than 20 years ago – never left it?

For most, the answer is simple: They can’t afford to, and don’t have to.

“We’d love to get out. I don’t think we can,’’ Davis said.

The problem: Leaving Act 47 would mean giving up the wage tax the program allows Johnstown to levy on out-of-town residents working there. Most Act 47 cities assess that tax. Its nonresident tax is only 0.15 percent – compared with 3 percent for Duquesne, Allegheny County – but it generates $1 million of Johnstown’s $10 million to $12 million general budget.

Davis said he has no way to make up the difference if he loses the tax revenue.

State-paid consultants guide cities under Act 47. “People who oversee this program talk about getting out,’’ said Saternow of Farrell, under state protection for going on 22 years.

“To us, other than the stigma, there’s not a great incentive to get out,’’ she said. “The only consideration is that we would lose that nonresident tax. What we could replace it with I can’t imagine.’’ In Farrell, the tax is 0.4 percent.

Reading will need to make many austerity moves and redo its recovery plan every five years, said Tom Stoner, city administrator of Aliquippa in Beaver County, about 20 miles northwest of Pittsburgh.

And don’t even think about raises.

“Our recovery plan says no raises for unionized employees,’’ Stoner said, adding that managers have been forgoing pay increases as well. “Unless my people can get something, I won’t either.’’

As for drawbacks to Act 47, Stoner said there’s a stigma for those communities in the program and not enough money available in outright grants.

Despite the risk of losing some advantages, Aliquippa city administrator Tom Stoner wants to get out soon, and he has his City Council behind him.

“It’s sort of a personal thing to me, to see the city turn around and have an incentive to develop,’’ he said. “Maybe in another two years.’’

Aliquippa, like Farrell, has been in Act 47 since 1987. And Stoner, like Saternow, said the communities under protection have a stigma.

“It’s like a black cloud hanging over them,’’ he said. “People look down on them, wonder what they did. It’s a deterrent to business development coming in. We’ve found that to be the case.’’

It will be several years before Nanticoke can leave the program, said city administrator Quinn.

Nanticoke had tripled its earned-income tax on residents to 1.5 percent. But because it has no city charter like Reading’s that allows it to keep that rate, it will have to cut that tax back to 0.5 percent if it leaves the program.

Quinn said that would mean quadrupling property taxes to make up the difference, and citizens can’t afford that. Getting out, Quinn said, depends on what else the state does for communities with financial problems.

The real issue is systemic, and Act 47 provides only short-term solutions and doesn’t address the core problems, said Davis of Johnstown.

In a column that appeared Aug. 4 in The (Johnstown) Tribune Democrat, Davis said state legislation and codes leave municipal leaders with no money to run their governments.

On the one side, elected officials face state-imposed limits on tax rates, but on the other side they’re required to provide specific services and pay for arbitrated labor contracts.

“I think it is apparent that Act 47 is a Band-Aid where a transplant is needed,’’ he said.

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