A state overseer has recommended that Harrisburg spend another three years in the Act 47 program for financially distressed municipalities, according to a report submitted to City Hall on Thursday.
The report, authored by Harrisburg’s Act 47 coordinator Marita Kelley, is the first part of a months-long process before Harrisburg’s Act 47 status expires in September. As coordinator, Kelley is charged with monitoring the city’s finances and signing off on its annual budgets.
Kelley praised the city’s leadership for limiting spending and accruing a healthy cash balance through budget surpluses. But she said that Harrisburg’s financial obligations — including debt service, healthcare, pensions and costs for collective bargaining contracts – are too great for the city to exit the oversight program and surrender some of its taxing authority.
Nonetheless, Kelley said that Harrisburg has made noteworthy progress in many aspects of its budget. She noted that conservative spending allowed Harrisburg to end 2017 with a $2.9 million surplus, bringing its total fund balance to almost $40 million.
That cash balance has allowed the city to resume capital improvement projects. Harrisburg’s approved 2018 budget includes $7.4 million in updates for infrastructure, equipment and technology.
Even so, Kelley noted that none of the city’s victories would have been possible without the extraordinary taxing authority granted by Act 47. Cities and townships under Act 47 are given special provisions for consolidating debt and setting tax rates. Once a city leaves the oversight program, it must once again comply with state tax codes.
Harrisburg has flexed its Act 47 privileges to triple its Local Services Tax, which is levied on anyone who works within city limits. That action alone has generated more than $11 million of revenue for the city. It also doubled its earned income tax from 1 percent to 2 percent in 2012.
Losing that additional taxing revenue would make it impossible for Harrisburg to balance its budget. As it is, Kelley’s report projects small budget deficits for Harrisburg from 2018-2021, as anticipated expenditures outpace revenues. Since the city could use cash from its $39 million general fund to plug the gaps, the deficits shouldn’t create any debt.
Kelley’s recommended three-year extension didn’t come as a surprise to Harrisburg officials, who have long known that exiting the program would subject the city to an antiquated tax code.
Harrisburg Mayor Eric Papenfuse agreed with Kelley’s recommendation but said that the city’s calculations actually project budget surpluses in 2019 and 2020.
“The state’s revenue and expense projections differ from ours,” Papenfuse said. “But that’s not really a surprise – they’re only projections, after all.”
City Council budget and finance chair Ben Allatt said on Friday that Kelley’s report was “exactly” what he’d expected. He pointed out that extending Act 47 is a less dire action than entering the program in the first place.
“What I want the community to know is that we’re not in the same predicament we were when we were part of a mandated state takeover,” Allatt said. “We have control over our budgeting process. We just have to have it approved by our Act 47 coordinator.”
Allatt said that the city’s most immediate priority for financial recovery is to negotiate more favorable interest rates on some of its general obligation debt. The city was invited last year to enter negotiations with one of its lenders, AMBAC Insurance Corp., and recently hired a financial advisor as counsel.
If AMBAC does offer the city a lower interest rate, Harrisburg could direct those savings to another expenditure category. Papenfuse said today that talks with AMBAC are already underway, but any potential savings will likely come after 2022.
Harrisburg officials are also hopeful that legislative change in Pennsylvania’s statehouse could improve taxing conditions for third class cities, including Harrisburg. The city is currently in a one-year contract with Maverick Strategies, a Harrisburg-based lobbying shop that helps local officials monitor legislative activity and communicate with lawmakers about decisions that impact Harrisburg.
Allatt said that he doesn’t think Harrisburg will exit Act 47 until Pennsylvania’s legislature creates more favorable taxing conditions for cities.
“We’ve been in financial distress because the typical expenditures expected to maintain services and put resources into the city do create a natural deficit.” Allatt said. “What do we need out of this? We need legislative change and other options to draw revenue from. The logical answer for us is to stay in Act 47.”
Papenfuse said today that lobbying efforts are “actively underway.” City Council is expected to receive a presentation from Maverick lobbyists in March or April.
Read the full financial condition report here.