The Revised Recovery Plan can be viewed here.

Today, two out of every five Pennsylvanians live in a municipality in fiscal distress.  As this number continues to grow, it is slowly and steadily undermining the commonwealth’s reputation as a stable place to raise a family or build a business.

A common response to this trend has been to say, “its the bigger governments – places like Pittsburgh, Philadelphia, Harrisburg, and Reading – that are in real financial trouble.” This point has also been used to fight against local government consolidation (even sharing of services or resources) noting that if bigger government is better why then are city governments in financial distress?  Older cities are pitted against newer suburbs, with the leadership of urban communities painted as poster children for poor fiscal discipline.  This politically favorable, if self-forgiving, narrative has replaced reality in our public discourse on this issue.

With Harrisburg cornering the market on financial crisis headlines, it seems to many that newly suburbanized townships are immune to the financial challenges facing our older core communities.  As each budget grows modestly to meet the needs of a burgeoning community, next year’s revenue miraculously outpaces spending, and all is well.   Even if township leaders prudently halt their budget growth for a few years, the trend of budgeted expenses will always be upward.

The hard truth is that any local government that begins to provide a significant level of services starts a slow and steady march toward a financial tipping point.   Poor management or an errant incinerator may accelerate this decline, but the fact remains that if you are lucky enough to have your tax base grow, so do your costs – and in the current system these costs will always outpace growth.  Particularly challenging to this budget trend are the projected costs of healthcare and pensions that rise dramatically as community populations grow.

Then comes the tipping point.

A recession hits, a significant employer leaves town, or people just begin to move across the road to a neighboring tax-base.  If this tipping point is not brought on by a loss in revenue, it’s brought on by increased costs.  An aging municipal facility needs to be renovated, energy or insurance rates jump, residents decide they want local police protection, or a new wave of retirees spike pension obligations promised during former heady growth periods.  A municipality responds with a reduction in services, a tax increase, or often both.  Either choice elicits slowed growth and further decline in revenue.

This downward spiral that has nearly all our older core communities in its grip is beginning to affect townships.  A map of financially distressed communities shows an even distribution of distress across our entire commonwealth, and the recent Survey of Financial Conditions submitted annually by each municipality demonstrates a growing number of townships experiencing or approaching this tipping point.

Research by the Pennsylvania Economy League shows that local taxes produced 58% of total municipal revenues in 1970 (excluding Pittsburgh and Philadelphia) and that by 2006 that share had fallen to a mere 39%.  Since 2006, with the recession’s onset and a corresponding rapid decline in revenue sources, municipalities have been hit with an extraordinarily tough period of fiscal pressure.

As Pennsylvania’s 50,194 elected or appointed municipal officials wrestle with these challenges, they are often surprised by the limited tools available to them.  The laws governing our municipalities, most of them unchanged since the 1950s, discourage innovation and collaboration, the two essential ingredients to a sustainable local government system.

So where do we go from here?

First, a little sunshine is always good to promote healing.  We need to better publicize the debt burdens and legacy costs most municipalities now carry.   Informed citizens are a powerful weapon for improving government.

Second, state government must allow local governments to be more nimble and flexible.  Tax base and revenue-sharing agreements should be as common as those citizens who daily cross municipal boundaries.  Significant long-term costs, such as personnel-related obligations must be negotiated in a more fair, open, and relevant process that takes into account both benefits promised and the municipality’s financial condition and ability to pay expenses.

Third, creative inter-municipal collaboration should be encouraged both by the electorate and state government.  Joint purchasing and inter-municipal sharing of services have proven to be very successful for those municipalities that have jumped through the hurdles to implementation. These process hurdles also have killed nearly every locally-driven attempt at consolidation or merger.

Taken together, these outmoded processes strip power from the hands of those very citizens most intent on improving their community’s future.  With the prosperity of our communities hinging on everyday citizens being empowered to build relevant and sustainable local governments, all of us should demand better.

(View the presentation here)

The topic of the discussion was Act 47 (the Pennsylvania Municipalities Financial Distress statute) and the impact of Act 47 on the credit perception of Pennsylvania municipalities.  The topic was particularly timely in view of the Harrisburg situation, but also because Reading and Scranton are Act 47 cities as well. PEL and PFM reviewed the Act’s role and purpose, described the Act 47 process, and discussed what the Act 47 process can and, more important, cannot do with respect to our ability as a Recovery Plan Coordinator to “oversee” or ‘control” a municipality in Act 47.

The MAGNY members asked pertinent and penetrating questions, particularly about Harrisburg, and were answered in a forthright manner.  Both PEL and PFM stressed the importance of the Act 47 Recovery Plan to the fiscal stability of a municipality and that a stated aim of Act 47 is to make certain that municipalities pay interest and principal when due.  Pennsylvania Act 47 municipalities have always paid debt service when due on public debt issues.

PEL and PFM also reminded the MAGNY members that they too have a role in educating municipal officials about the expectations that they and their respective firms and clients have for municipal capital market participants.  Most municipal officials have never talked with the analyst community, and the analysts should become more active in seeking out municipal officials.

New Jersey has instituted widespread changes to the funding of local governments and their services with an eye toward consolidation of municipal service.

While New Jersey’s municipal structure is not exactly the same as Pennsylvania, many lessons can be learned as New Jersey struggles with state budget problems that may soon be experienced in Pennsylvania.

A non-profit group called Courage to Connect New Jersey has prepared a video explaining the consolidation of municipal services that serves as a guide to what might happen in Pennsylvania in the future.

The video may not be entirely applicable for a Pennsylvania solution, but it does highlight citizens’ understanding of municipal service levels and their costs.  PEL research has also highlighted similar attitudes of PA citizens regarding their local municipal services delivery.

Courage to Connect New Jersey

Follow the link below to read further about proposals to improve status of financially struggling local governments.

insidePOLICY: Volume 5, Issue 5 – September 2010