PA Cities Face Their Own Brand Of Financial Uncertainty

Jan 11, 2017

(Keystone Crossroads) More than 2,500 municipalities and 67 counties just released their budgets for the upcoming year. So what are the trends? What rises to the top? It's tough to say in any kind of comprehensive, precise way or because, well, Pa.'s governance is really fragmented. 

Credit Lindsey Lazarski, WHYY

Statewide data also tends to publish on a two-year lag and submissions are inconsistent in number, content and form.

That said, here’s what we found:

Gaming revenue impacts, explained

Casinos pay a fee to surrounding communities. But in late September, the Pa. Supreme Court struck down the law providing for the practice. The legislature blew its deadline to come up with a replacement formula, so casinos don't have to pay until something happens in Harrisburg.

Payments account for more than half of local government budgets in a couple host communities and less than one percent in a handful of others. The 1-to-5 percent range is most common.

Eleven local governments have commitments from gaming companies that they'll pay the standard amount this year if the legislature doesn't figure it out. The other 14 could see a budgetary hit.

Allentown's among them. The city's budget anticipates getting nearly $3.5 million from the Sands Resort Bethlehem even though the casino hasn't agreed to pay it. Sands hasn't reached agreements with any Lehigh Valley communities on the $17.5 million combined that they'd expect this year, if not for last fall's Supreme Court decision.

"Senator Browne has promised that there will be a solution that will keep the municipalities whole," said Allentown Mayor Ed Pawlowski in an emailed statement. "We trust that he will get it accomplished and reasonable minds will prevail."

Browne, R-Lehigh, has been in Harrisburg over a decade and heads the Senate Appropriations Committee.

But Browne's clout doesn't change the fact there are more than 250 other lawmakers (most representing districts without casinos) involved in the decision, a point to which Allentown spokesman Mike Moore responded by reiterated the city's reliance on Browne and his colleagues in Harrisburg.

Bethlehem's $9 million casino fee accounts for 10 percent of the city's flax-tax 2017 budget. The city plans on a 10-year loan, absent a deal with the Sands and/or action from lawmakers, The Morning Call Reports.

The Northampton County District Attorney plans on withholding services from the Sands, part of a redeveloped steel plant that was among the nation's largest in its hey day.

The casino fee situation won't affect Erie County immediately because the county has enough in its gaming fund to cover the $5 million or so typically received.

But after this year, it would "represent a serious hole for us," says county finance director James Sparber. "The county would have to find other ways to pay."

Right now, the county uses the money for debt service on capital projects and funding its public library system and grants to community groups.

"Everything from the (Erie) Metro Transit Authority, to the humane society, local conversation districts and others," Sparber says.

Some municipalities with deals in place to get their money in 2017 don't seem concerned about future years.

Meadows Racetrack & Casino struck a deal a couple weeks ago to pay the usual amounts to Washington County and North Strabane Township, a 13,000-person community about half an hour from Pittsburgh. Like Allentown, North Strabane has a lot of confidence in the legislature, according to assistant treasurer Frank Siffrinn.

"Under no circumstances, will we get less," Siffrinn insisted over the phone. "My understanding is when the legislature takes it up, we might actually get more than we received in the past."

MuniFi

Whether and how the casino fee issue is resolved remains to be seen.

But other changes are more certain, with wider-reaching effects.

We'll start with asset monetizations: local governments are broke, so they sell or lease public assets to a private operator.

The struggling city of Scranton made headlines at the end of 2016 for securing tens of millions of dollars to shore up its bankruptcy-bound pension funds by selling its parking and sewer systems.

Harrisburg and Allentown are just a couple other examples of municipalities trying to alleviate financial problems by selling or leasing public assets.

Private entities are, of course, critical to these deals. Part of the draw is the tax break they get on financing by partnering with public agencies that can issue municipal bonds. That's a cheaper way to borrow because interest is tax exempt, so bondholders can get their desired returns at a lower interest rate.

But shortly after the presidential election, experts predicted big changes given the much stronger possibility that tax rollbacks championed by Congressional Republicans would become reality.

A simpler tax code could, according to Government Finance Officers' Association Federal Liaison Center Director Emily Brock, mean an end to muni bond exemption. That would increase financing costs for local governments and complicate asset monetizations.

Recently, however, the U.S. Conference of Mayors' leadership told reporters that Trump promised to keep the bond exemption.

Eliminating state and local tax deductions seems more likely, which would pressure public officials to lower them, reports The Hill.

Whatever the result, new disclosure rules already taking effect will pile on.

The Government Accounting Standards Board is requiring local governments to document more of their liabilities; superficially, long-term unfunded obligations for pensions and other retiree benefits as well as guarantees of other entities' debts.

"Ratings agencies would know [about pension obligations] to begin with, even before GASB-68," says Pennsylvania Municipal League Executive Director Rick Schuettler, referring to one of the pensions rules (the other is 71).

The pensions rules, which have elicited mixed reviews, won't start affecting disclosures until this year.

Schuettler thinks guarantees, which started showing up in borrowing documents last year as per new requirements, will be more impactful.

When providing a guarantee, a municipality is essentially cosigning for another, promising to pay if the borrower cannot. This practice caused calamity in Harrisburg, driving the city to the brink of bankruptcy and a state receivership in 2010.

Promised legislative reform hasn't happened in Pennsylvania (a package passed the Senate last year, but stalled in the House), so officials can and do continue to turn to guaranties to boost credit ratings and lower borrowing costs under the same loose rules that failed to flag Harrisburg's snowballing financial problems.

The commonwealth's pattern of using municipal guaranties is one of the nation's most recognizable, along with Illinois and New Jersey, according to Greg LeRoy, executive director of Good Jobs First.

Nationally, LeRoy estimates, "it's tens of billions of dollars of obligations [that haven't been disclosed before]. It's a big deal."

As for 2017, the city of York seems most likely to cash in on its public assets.

Money from a long-contemplated sewer system sale could permanently fix two major drains on the budget: pensions, with a payment up by $1.5 million this year to nearly $7 million, and an ice rink debt costing the city $600,000 per year), according to York's EIP report form 2015. York officials haven't solved these problems since the document was published, but did improve its pension funding ratio. The city also struck a rink rental agreement last summer, but probably won't get much money from the deal until years down the line.

Distress, etc.

Also next year, a few cities are on track to be financially stable enough to get out of the state's Act 47 program for distressed communities.

Altoona is one to watch, says Pennsylvania Economy League Central Office Executive Director Gerry Cross.

Cross's office oversees recovery on behalf of the state in several Act 47 communities and advises those looking to avoid financial crisis through Pennsylvania's Early Intervention Program.

Scranton is now a possibility as well due to its sewer and parking deals, along with Pittsburgh, says Cross.

He says he's unaware of any municipalities poised to enter the program, but "you don't always realize if something is below the surface and blows up."

Sanctuary cities

York, Pittsburgh and other communities (financially distressed and stable alike) could soon see federal funding cut due to their policies on working with federal Immigration and Customs Enforcement.

U.S. Sen. Pat Toomey, R-Pa., has pledged to reintroduce a bill targeting communities that don't hold inmates longer than they otherwise would for ICE unless there's a warrant.

Many Pennsylvania counties need to see a warrant, a policy that often stems from liability concerns, according to a report from Temple University.

These counties — and municipalities therein — stand to lose Community Development Block Grant and Economic Development Agency funding provided both directly from the federal government and passed through the state Department of Community and Economic Development, according to the bill.

That amounted more than $130 million, according to a Keystone Crossroads analysis of 2014 data (the most recent year for which both CDBG awards and statewide municipal budget information was available).

Most officials say they don't expect to be affected this year, if Toomey's proposal (which failed the first time around) becomes law.

The impact could be as much as 14 percent of a local budget, but it's typically much less, according to the Keystone Crossroads analysis.

State College, the most recent city to get vocal about its commitment to maintaining sanctuary city status, got about half a million dollars through CDBG in 2014, less than one percent of its budget that year.

Similar stances have been taken by Philadelphia and Pittsburgh — by far, the biggest CDBG grant recipients in terms of sheer dollars, about 2 percent of their respective budgets.

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