Reforming Pennsylvania’s distressed municipalities

I met a muniland superstar, Pennsylvania State Senator John Eichelberger, in Philadelphia while taping a final segment on distressed municipalities for Pennsylvania Cable News (PCN). The series, hosted by PCN’s Corinna Vecsey Wilson, brought together municipal officials, state legislators and policy experts to examine the condition of the state’s distressed communities and look at what solutions might be available.

State Senator Eichelberger, a Republican, chairs the Local Government Committee. He has dived into some of the most vital areas of state oversight. A state law, Act 47, takes distressed municipalities under partial state control. The law is over 20 years old, however, and has lost its effectiveness. Of 27 municipal units that have entered the program, only seven have exited. Pittsburgh, for example, has remained under Act 47 supervision for over 20 years. Eichelberger has legislation to reform and strengthen Act 47. From the Altoona Mirror:

‘A major change that we hope will happen would be a five-year limit on a community staying in Act 47. This was never intended for communities to stay in it for decades. We are stressing an early intervention program to help them to get in and out,’ Sen. John H. Eichelberger Jr., R-Blair, told members of the Blair County Chamber of Commerce Breakfast Club Thursday at The Casino at Lakemont Park.

Eichelberger, who co-chairs a task force studying reforms to Act 47, which Altoona joined last year, said some municipalities might be dissolved.

‘We will have a couple of municipalities – not Altoona – that are not viable any more. They will be disincorporated, and DCED will work with them and try to merge them with another community,’ Eichelberger said.

Pennsylvania’s worthy debate over swaps

It was a mixed picture as Pennsylvania Senate Local Government Committee took testimony today about how local PA governments issue debt and enter into interest rate swaps. Has every local government in Pennsylvania made as big a mess issuing debt as Harrisburg? Was every school district bamboozled into multiple layers of expensive and unnecessary interest rate swaps like the Bethlehem School District?

Philadelphia Treasurer Nancy Winkler assured Committee Chairman John Eichelberger that the city had reined in its swaps portfolio and was mostly assuring members of the committee that Philadelphia would not suffer substantial losses from swaps. She was fighting off legislation that would have banned Philadelphia from entering swap agreement. The Philadelphia City Council passed a resolution asking the General Assembly to ban the city from the practice.

Meanwhile the former Auditor General of Pennsylvania Jack Wagner, in standout testimony, used former government official Larry Summers as an example of how risky interest rate swaps are:

Harrisburg deserves a bright future

A debt recovery plan for Harrisburg, Pennsylvania was filed on Monday after a year of negotiations with creditors, unions and other stakeholders. The plan’s most important attribute is that it saves Pennsylvania’s capital city from declaring bankruptcy and it may fiscally stabilize the municipality for years to come.

The plan includes an extension of maturity of general obligation bonds and a reduction in labor costs through 2016. The city will still be responsible for substantial payments on its general obligation bonds. In 2013, the debt payment is set at $5,970,000 and at $7,670,000 for every year from 2014 through 2016.

The receiver has estimated that the city will also pay $3 million per year from 2013 through 2016 on existing loans or leases for equipment and short-term borrowings. This equals about 17 percent of the estimated general fund revenues of $60 million for 2014. This is a crushing debt burden for any municipality, but projections show it is sustainable through 2016 (page 73).

Free speech or securities fraud?

Mark Funkhouser, the director of the Governing Institute and a former mayor and auditor of Kansas City, took a few swings at the SEC for its securities fraud prosecution of Harrisburg, Pennsylvania. Funkhouser has three concerns with the SEC’s case.

First, he correctly points out, as the SEC case contends, that the city of Harrisburg did not issue any financial statements between January 2009 and March 2011. The SEC says that because of this, investors had to seek out other statements made by public officials that included material misstatements. Funkhouser blames it on investors for poor diligence. He says:

You’d think it would be obvious to potential investors that if there’s not much current information available about a city’s finances they might want to think twice about buying its securities. But investors don’t always exercise proper diligence, and it wouldn’t have hurt for the SEC to have driven home that point.

The rule of law prevails for the Pennsylvania lottery

In the media appearance above, Pennsylvania Attorney General Kathleen Kane announces that the contract drawn up by Governor Tom Corbett to privatize the state’s lottery management “contravenes the Pennsylvania Constitution and is not statutory authorized.” Translation: Pop- Bam- Take that, governor – You don’t have the power that you think you have.

This is one of democracy’s more glorious moments.

I wrote in early December around when Corbett’s deal to privatize the lottery became public:

There is a lot of darkness and a web of connections around the efforts to privatize the Pennsylvania state lottery. Tom Corbett, the governor of Pennsylvania, is attempting to force through the privatization before the legislature comes back into session in January and has a chance to review the terms of the 20-30 year deal. Democrats are howling.

Pennsylvania bets on $70 billion in cash flows


A big brawl is going on in Pennsylvania over the way that Republican Governor Tom Corbett has been maneuvering to privatize the state’s successful public lottery. The governor held negotiations in secret for months before announcing in November, 2012 that he had chosen a single bidder, the UK’s Camelot Global Services, to be awarded a 20-25 year contract to operate the lottery.

This announcement, made while the Pennsylvania legislature was in recess, was intended to move the governor’s process to conclusion before the legislature came back into session. Public outrage caused Corbett to initially delay the contract, but in a move that seemed to show contempt for the state’s legislators, his office gave Camelot a “Notice of Award” late last Friday; just before the Senate Finance Committee was to hold a hearing on the details of the contract.

The effort to privatize Pennsylvania lottery hits a roadblock

Nothing makes me happier than to see law as the weapon of choice in a fight between public officials. There is a big battle underway in the Commonwealth of Pennsylvania over the efforts of the governor to privatize the lottery, currently a big source of revenue for the state’s senior citizen programs. I wrote last week about Pennsylvania’s sweetheart lottery privatization deal:

There is a lot of darkness and a web of connections around the efforts to privatize the Pennsylvania state lottery. Tom Corbett, the governor of Pennsylvania, is attempting to force through the privatization before the legislature comes back into session in January and has a chance to review the terms of the 20-30 year deal. Democrats are howling.

One Democrat with a lot of legal authority is howling away, and he has essentially blocked the governor’s efforts to sell the highly profitable lottery to a British firm. The Patriot News writes:

Pennsylvania’s sweetheart lottery privatization deal

There is a lot of darkness and a web of connections around the efforts to privatize the Pennsylvania state lottery. Tom Corbett, the governor of Pennsylvania, is attempting to force through the privatization before the legislature comes back into session in January and has a chance to review the terms of the 20-30 year deal. Democrats are howling.

The Patriot News tells one side of the story:

Calling the administration’s pursuit of this potential deal “too secretive,” House Democratic Leader Frank Dermody, D-Allegheny, urged Corbett to be more transparent about his plan for privatizing the lottery that he said would cost older Pennsylvanians hundreds of millions of dollars in lost funding for services over the life of the 20-year contract.

“Now, when there is no General Assembly in session, he is trying to hand-deliver a lucrative contract to the lone bidder with no hearings, no legislative approval and no public scrutiny. This whole thing stinks,” Dermody said.

States hold sway over their cities in bankruptcy matters

Bloomberg View’s Josh Barro wrote an interesting piece Thursday urging Scranton, Pennsylvania to declare Chapter 9 bankruptcy. Scranton has achieved national attention after the mayor reduced all city workers’ pay to minimum wage last week because the city could no longer afford paying their full salaries, a powerful image of how little cash Scranton has left.

The problem with Barro’s proposal is that Scranton cannot file for Chapter 9 without the consent of Pennsylvania’s state government. Chapter 9 bankruptcy is a part of the federal bankruptcy code, and it gives individual states the authority to decide whether their cities can go bankrupt:

States play a key role as gatekeepers or guardians in that, by virtue of [bankruptcy code] amendments codified in 1994, they have to specifically authorize their municipalities to file for Chapter 9. Silence on the matter is taken as a prohibition on filing.

The promise and peril of energy tax revenues

Of the $763 billion in tax revenues that states collected in 2011, only $14.6 billion – less than 2 percent – came from severance taxes on coal, gas and oil. Energy production is very concentrated in the United States: Just nine states receive over 5 percent of their tax revenues from energy producers. Currently, the bulk of severance revenues comes from oil production. Alaska, a state floating on an ocean of oil, gets 76 percent of its revenues from a handful of big oil companies that have drilling rights on the North Slope of the state.

Although there has always been natural gas production in America, hydraulic fracking has given rise to substantial drilling activity in several Northeastern states along the Marcellus and Utica shale formations. Pennsylvania, West Virginia and Ohio have substantial reservoirs of natural gas, but the impact this boom will have on state finances is not yet known. These new supplies have come to market when demand is down and have swamped the nation’s usage and storage capacity, driving gas prices down to record lows. States that rely on, or plan for, revenues from energy severance taxes will face a lot of volatility from demand and price changes. Natalie Cohen, head of municipal research at Wells Fargo, sketched it out in a recent report:

Wyoming, for example, collects severance tax based on the taxable value of current-year production. With the drop in natural gas prices, it has had to reduce its forecast on severance tax revenue. The state is now looking to cut 4% out of next year’s budget, despite a current-year budget surplus. According to the state’s Economic Analysis Division, each dollar drop in natural gas prices costs the state about $226 million in revenue.

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