How Pennsylvania shrank Act 47 program for distressed municipalities

There was a time when it seemed like a Pennsylvania city or town could stay distressed forever.

Clairton, a city on the outskirts of Pittsburgh, entered the commonwealth’s distressed municipalities program in 1988, and didn’t leave until 2015. 

The city of Aliquippa adopted its “distressed” designation in 1987, and held onto it for 36 years. 

These extended stays were not outliers — by 2014, 27 municipalities had entered the program, commonly known as known as Act 47. All but six of them were still in it. One city councilman called Act 47 a “roach motel.”

But ten years later, only three municipalities remain. 

What happened? Amendments to the law, a culture change within the program, and economic tailwinds gave Pennsylvania’s “roach motel” a renovation. 

When Pennsylvania passed Act 47, formally titled the Municipalities Financial Recovery Act, the commonwealth was badly bruised by the loss of manufacturing jobs. The state hoped the program could avert Chapter 9 bankruptcies. 

Seven municipalities joined the program within a year of its inception in 1987. The Department of Community and Economic Development assigned each of them a coordinator, who provided guidance and a “recovery plan.”

An Act 47 designation also unlocked resources for the municipalities. They had spending caps, permission to impose different types of taxes, priority for DCED grants, and more power with pension negotiations, although the pension powers were scaled back after a 2011 State Supreme Court decision. 

Throughout the nineties, a few municipalities had briefer stays — one, the borough of Ambridge, was only in the program from 1990 to 1993. But many municipalities appeared stuck. 

Part of the problem, according to a report from the Pennsylvania Economy League in 2017, was the state’s laws governing municipalities. 

Pennsylvania’s tax code hasn’t been significantly updated since the 1960s, according to Gerald Cross, a senior research fellow at the Pennsylvania Economy League who has served as a coordinator for Act 47 municipalities. The state limits the type and amount of taxes a municipality can impose, and those limits are based on a 1960’s-era assumption that most residents live in cities. 

Pennsylvania’s distressed municipalities had a dwindling tax base and a high need for public services, so they became dependent on the special tax revenue that they could access through Act 47. The program got a bad name, Cross argued, and a perception emerged that the municipalities were not helping themselves. 

“I think if legislators had realized the problem with the tax base and financing local government, they wouldn’t have been so quick to say [Act 47] was a mistake,” Cross said. 

Nevertheless, the legislature created a task force to propose changes to the program in 2012. Cross served on that task force. One change it recommended drastically reshaped the program.  

The amendment to Act 47, passed in 2014, put a five-year time limit on a municipality’s time in the program. After five years, the coordinator can recommend an additional three-year stint with an “exit plan.” 

If the municipality isn’t prepared to exit by the deadline, it will be subject to state-appointed receivership or disincorporation.

At the time, some worried the five-to-eight-year deadline was arbitrary and extreme. 

The 2017 Pennsylvania Economy League report said coordinators were bracing for the arrival of the first deadlines. 

“To meet the deadline, a municipality may be forced to take draconian actions that will extract large amounts of wealth from its small purse. Those measures could include forced asset sales, required privatization of municipal services, deep service cuts and/or stiff tax increases,” the report said. “The municipalities will then return to the local government system without the Act 47 safety net – and potentially with an even smaller purse.”

But in the meantime, Act 47 was already seeing favorable results. Between 2014 and 2019, nine municipalities exited the program. Two of those municipalities had entered the program in the ’80s. One had entered the program in 2012. 

In 2020, 16 municipalities remained under Act 47, but the COVID-19 pandemic disrupted their scheduled deadlines. The legislature offered a one-time, 18-month extension on their recovery plans; just about every municipality took it. But the Act 47 municipalities may have fared better than their supposedly not-distressed counterparts, the Economy League reported; it surveyed 430 municipalities in 2020, and 23 of them reported that they were considering applying for Act 47 status. 

Meanwhile, some Act 47 municipalities reported a much smoother journey through the roughest parts of the pandemic. The extra tax revenue helped them keep their local economies afloat, their leaders told SpotlightPA. 

But in 2022, the deadlines finally kicked in. Three municipalities left, and ten more followed in 2023. 

Imposing a time limit forced municipalities, towns and coordinators to change their approach to fiscal recovery, Cross said. 

“There was a presumption that the town would stay in Act 47. It was a bureaucratic presumption. It was a coordinator’s presumption,” Cross said. “We were coordinators for 30 years in Scranton, because it was just assumed that the issues that are there were going to take a while to resolve, if at all.”

Now, coordinators deliberately design plans that can be accomplished in five to seven years, said Cross, who guided the city’s departure from the program in 2022. 

The overarching principles — raising taxes, cutting service — are mostly intact from before 2014, Cross said. The deadline has encouraged elected officials to be more cooperative with coordinators. 

Some municipalities might have accomplished more if they’d had a longer time in the program. When Franklin’s distressed status was terminated in 2023, the borough was still filing its balance sheets behind schedule and its audits were technically delinquent, according to its Act 47 Termination Order. 

So far, only one city, Chester, has been put under state receivership; Chester’s receiver has since filed for bankruptcy. 

Marcia Goodman-Hinnershitz served on the Reading City Council for the duration of the city’s time in Act 47. Reading was in the program from 2009 until 2022, but if there had been a time limit when the city entered, the city probably could have met it, Goodman-Hinnershitz said. 

“I think that in order to avoid going into receivership, we would have made the changes when we needed to,” Goodman-Hinnershitz said. On the other hand, receiving the extra tax revenue for more than five years had benefits. “The longer we were in, the more money that we were able to save for our capital projects,” she said.

The biggest benefit from Act 47, besides expanded taxing powers, was the guidance from DCED and Reading’s coordinator, PFM, Goodman-Hinnershitz said.

“The people that can get elected are elected based on personality,” Goodman-Hinnershitz said, “and aren’t necessarily people that have the financial background to be able to make these decisions.”

Goodman-Hinnershitz said she learned a lot throughout the Act 47 process, and worries that the new members of the city council won’t get the knowledge she received. But she noted DCED and the Act 47 coordinator can continue to offer guidance on a less formal basis.

The mass exodus from the Act 47 program coincided with huge federal grants to municipalities through the American Rescue Plan Act. In Reading and the municipalities where Cross was a coordinator, ARPA funds provided a cushion when municipalities left the program and lost their special taxing abilities. 

“It didn’t change what we would have done. It made it easier to say, ‘We can get out of Act 47,’ because they did have some other resources,” Cross said. 

It’s hard to say whether the deadlines encouraged short-term measures like asset sales or service cuts, Cross said, because some would likely have happened either way. Of the municipalities that have exited the program since 2014 and owned their water or sewer authorities, roughly half sold their utilities. 

The 2014 amendment does encourage selling assets — Cross doesn’t usually recommend it when he’s a coordinator unless managing the utility is a financial burden. 

Of the three municipalities still in Act 47, one, Newville, entered the program last year due to financial mismanagement. Chester is bankrupt, and Harrisburg has a long, messy fiscal history and relationship with the state government it hosts as capital.

There’s one other factor that’s tightened Act 47’s ranks: the state has a “reluctance” to allow a distressed designation, Cross said. 

Only four municipalities have entered the program since 2014. Municipalities must first go through DCED’s Strategic Management Planning Program, which was created in the 2014 amendments. 

The changes to Act 47 have not yet been tested by an extended financial crisis, Cross said. But he thinks any problems lie with the wider state policy that has dogged the program from its inception. 

“I think Act 47 would be an environmentally caused disease,” Cross said. “I think the overall financial structure for local governments is a chronic wasting disease.”