HARRISBURG — This city may be grabbing headlines as it teeters on the edge of financial disaster, but Pennsylvania’s cities are facing economic problems beyond those in the capital.
Dwindling populations, underfunded public pension systems and an over-reliance on property taxes are driving expenses up and keeping tax revenue down in the Keystone State’s metropolitan centers.
The Great Recession has laid bare poor fiscal decisions from the past few decades, and tighter strings that limit state-level spending leave little hope of government bailouts.
Because the mayor and City Council cannot agree on an economic recovery plan, Harrisburg is on the brink of a fiscal emergency.
If the capital’s fiscal situation does not improve in the next 30 days, the state government is poised to take control of Harrisburg.
Gov. Tom Corbett on Thursday signed into law a plan that would allow him to appoint a “receiver” through the court system to take the reins on Harrisburg’s fiscal direction for a maximum of four years.
But while the capital city finds itself in a worse situation than most, state government must face the structural problems of cities statewide, said Jack Garner, executive director of the Pennsylvania League of Cities and Municipalities, a special interest group representing local governments.
“Sooner or later those issues are going to have to be addressed by the state,” said Garner. “This is really a Band-Aid solution specifically for the unique issues facing Harrisburg.”
According to Act 47, municipalities that fall into “financially distressed” status, which occurs when debt can no longer be paid off on time or in full, can restructure their debt by adopting a state-supervised economic recovery plan through the state Department of Community and Economic Development.
The state has declared 26 cities and towns financially distressed since Act 47 went into effect in 1987. Of those, six have recovered and were removed the program, but those were smaller towns, not cities.
Pittsburgh, the state’s second largest city, is the largest one on the list, having been declared distressed in 2003. Chester, Harrisburg, Johnstown, Reading and Scranton also fall under Act 47.
Fred Reddig, executive director of the Governor’s Center for Local Governments, a resource center for local governments, developers and resident, said Act 47 has helped get rid of corrupt or inept politicians, but there is no “stick” in the law to require municipalities to make difficult financial decisions — such as taking on collective-bargaining agreements that are unfavorable to the city's finances.
“Act 47 has had success in addressing managerial distress, but has had a more difficult time addressing structural distress,” Reddig said.
Ultimately, it comes down to math.
Revenue shifts with population
As population moves from the core community to the suburbs, the tax base exits, but service needs remain and property values decline, resulting in lower revenue from property taxes, Reddig said. Raising taxes to generate needed revenue only makes the cycle spin faster.
Johnstown, for example, lost 12 percent of its population between 2000 and 2010. Chester lost more than 7 percent of its population in the past decade, both according to the U.S. Census.
But it’s not only about the number of residents. Scranton’s population has held steady and Reading’s has grown by 8 percent, yet both find themselves in dire straits, too.
Pension plans financial burden
James McAneny, executive director of the state Public Employers Retirement Commission, or PERC, which monitors state and local pension systems, said unfunded pension plans are sinking many cities’ fiscal ships.
Pittsburgh, Johnstown, Chester and Scranton are facing massive pension deficits.
Most cities divide pension plans among firefighters, police officers and non-uniformed employees, with each at a different level of funding.
But each troubled city is troubled in its own way.
Scranton, in particular, has one of the most generous pension systems in the nation with a higher rate of return than most plans, said McAneny.
In other places, like Johnstown and Chester, economic deterioration has eroded the tax base as industry has left the state, causing higher unemployment and higher taxes. In the past, industries paid high levels of property taxes that now fall on small businesses and homeowners, he said.
“When municipalities have the revenue coming in, paying the pensions wasn’t a big deal, but now that the revenues are not coming in, they are going to have a hard time paying the pensions,” McAneny said.
For all its troubles, Harrisburg has been funding its pension obligations. Two of the city’s three main pension plans are funded above 100 percent and the third is funded at 97 percent. Reading is in a similar situation, despite recently being named the poorest city in America by the Wall Street Journal.
Even with the bad news, there are still success stories.
On Friday, construction will begin on a new national operations center for TMG Health Services at a business park outside of Scranton, which promises 1,500 jobs, according to the Scranton Chamber of Commerce. It should be noted, however, that the company is moving from Scranton.
Andrew Skrips, vice president of the Scranton Chamber of Commerce, said the company relocated because it is expanding.
“It was either relocating here or to Texas,” Skrips said. “So I think we won.”
In Johnstown, Celinee Bourgoine, owner of Basic PSA, which manufactures parts for pipelines and nuclear power stations, said her business is doing well.
“The rest of the area seems to pretty much stay the same. Businesses move out and another moves in,” she said.
State lawmakers are beginning to look into the situation, perhaps as a result of the dramatic action taken this week in Harrisburg.
State Sen. Judy Schwank, D-Berks, who represents Reading, said economic development in Pennsylvania will be hindered if the state’s cities are struggling.
“We have to turn this around and begin to seriously deal with these issues as a state. The problems are enormously complex, and some of the answers have the potential to be tremendously challenging politically,” Schwank said.
If lawmakers do not address the structural problems, cities will continue to accumulate debt and even more will face financial distress, Garner said.