Seeking a better understanding of Pennsylvania's issues and proposed solutions? Sometimes, complicated jargon and concepts can get in the way. That's why we started Explainers, a series that tries to lay out key facts, clarify concepts and demystify jargon. Today's topic: Pennsylvania's distressed communities law (Act 47).

Pennsylvania's Act 47 – the Municipal Financial Recovery Act guides how the state intervenes when a local government can't pay its bills or debts.

The goal is "recovery" – pursued through a plan developed jointly by state and local players.

The law says a municipality has reached "recovery" when it can meet its financial obligations while still providing vital services1 like police, fire, road repair and water.

Once a local government feels it has achieved recovery, it can petition the state to step out of its affairs.

The law doesn't mention effectiveness standards or analysis of recovery outcomes.

So far, 28 Pennsylvania municipalities (see map) representing nearly 6 percent of the state's population have had Act 47 intervention.

Additionally, about 15 percent of Pennsylvanians live in a town that's on the state's watch list for potential Act 47 intervention.

The Act 47 success rate – in other words, the percentage of communities that demonstrate recovery – is 25 percent (seven of 28).

Two communities have been struggling to solve their financial problems through the Act 47 process since its inception in 1987.

Critics say these – and other – examples of mediocre results prove the need for reforms.

So lawmakers have proposed amendments, including more tax options, time limits and guidelines for dissolving a municipality if it doesn't recover fast enough.

So how does a town end up in Act 47?

Local government leaders can reach out to the state. That's the most common path.

The state can, under the law, also intervene in response to a petition. If at least 10 percent of voters in a municipality petition the state, the state Department of Community and Economic Development can step in, whether town fathers like it or not.

Under certain scenarios, other stakeholders can trigger intervention; e.g., creditors, pension fund beneficiaries, auditors, the controller or employees.

DCED also can initiate action under Act 47 if warranted by its Early Warning System2 analysis of fiscal data submitted by towns each year.

What happens once a town is slated for intervention?

The state starts with a deeper analysis of the municipality's financial position. Act 47 lists 11 possible distress indicators. The law requires the presence of five to warrant a distress determination.

Red flags include:

  • A Chapter 9 bankruptcy filing 3

  • Missed payrolls

  • Skipped pension contributions

  • Consistent, consecutive deficits and overspending

  • Service cuts forced by the municipality maxing out its taxing powers

If just four or fewer such conditions exist, the state still offers guidance through its Early Intervention Program.

If my town gets declared distressed, how long will that last?

The state will appoint a recovery coordinator to analyze the situation and help draft a recovery plan.

And the state can put some money on the table.

DCED typically considers grants to an Act 47 town only if recommended by a recovery plan, and not in emergency situations.

The state will give money to distressed municipality facing default or other dire circumstances – but it has to be repaid.

Loans come from the same revolving fund that pays coordinators' salaries, consultants' contracts and other Act 47 intervention costs.

Under Act 47, local governments are sometimes allowed to raise new revenue through tax increases that exceed the state's cap. But such a waiver must be approved by the Commonwealth Court, as does the entire recovery plan.

You might be wondering: Why isn't Philadelphia on that list of distressed cities?

Back in 1991, during a time when the city flirted with bankruptcy, it was exempted from Act 47, and given its very own personal fiscal watchdog, the Pennsylvania Intergovernmental Cooperation Authority, which exists to this day.


 

Footnotes

1. Vital services: Police, fire, ambulance and rescue, snow removal, water supply and distribution, refuse and wastewater collection and treatment, and financial obligations (payroll, pension, debt, etc.).

2. Early Warning System: DCED’s Act 47-mandated assessment of financial data collected through an annual self-reported survey of Pennsylvania’s municipalities and their authorities.

3. Chapter 9 (municipal bankruptcy)

 

Did this article answer all your questions about Pennsylvania’s distressed communities law? If not, you can reach Emily Previti via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or through social media @emily_previti. Have a topic on which you'd like us to do an Explainer?  Let us know in the comment section below, or on Twitter @PaCrossroads.