Municipal Time Bomb

The fear was real last spring as local taxes—the lifeblood of boroughs, townships and cities—were trickling in. The COVID-19 pandemic was closing or impairing businesses in southwestern Pennsylvania, the state and nation. The U.S. unemployment rate soared to nearly 15 percent.

“We worried that our revenues would collapse,” said Scott Andrejchak, the municipal manager of Penn Hills, an Allegheny County suburb of nearly 41,000 residents. His worst fear never came to pass. And by winter, Penn Hills managed to deliver a balanced budget for this year without having to raise taxes.

The list of southwestern Pennsylvania municipalities that did the same is long, including the City of Pittsburgh, Allegheny County and McKeesport, a city still dealing with the financial strain of having lost the U.S. Steel National Tube Works and much of its tax base some 35 years ago.

But balancing their budgets came with a price. Municipalities trimmed spending, expecting greater revenue losses this year. Some laid off workers. Some deferred maintenance, banking on the local economy bouncing back before the work they put off catches up with them.

Many, if not most, dug into the reserve funds they had saved as a backstop against temporary financial shortfalls.

“I can’t think of a better time to tap into a rainy-day fund,” said James Turner, a University of Pittsburgh adjunct professor, who had served as finance director of the City of Pittsburgh and as director of the Pennsylvania Economy League. “If it’s not raining now, I’m not sure when it ever will be.”

Having survived one year under a pandemic, the region’s municipalities are bracing for a second, uncertain how long the recession will last and how badly it will damage their finances before it runs its course. “It’s going to be incredibly difficult to govern on all levels until we see how this whole thing plays out,” Turner said.

Not out of the woods

Balancing a budget without raising taxes should not be mistaken as a sign that municipalities have escaped the perils of the pandemic and recession, experts say.

“The first thing that tells us is that local governments that have reserve funds would prefer to spend those now rather than raise taxes,” said George W. Dougherty Jr., a local government expert at the University of Pittsburgh. “That’s not bad policy as long as you guess correctly about how long [the pandemic] will last.”

Municipal budget officials were forced to make such projections having never dealt with a pandemic’s impact before. And the tax revenues that came in last year were a deceptively poor barometer of what to expect this year. For most, tax revenue collected last year wasn’t as bad as anticipated. But their property taxes largely came in early in the year, before the pandemic. And the business taxes they collected reflected pre-pandemic 2019 gross receipts.

The moment of reckoning will arrive this year, when local taxes that reflect a full 12 months of pandemic recession come in and budget officials see how accurate their forecasts are. They will also learn whether more federal aid will be offered to help them deal with their losses.

The City of Pittsburgh adopted a “stop gap” budget good through June. It forecasts steep revenue losses, but avoids raising taxes. The budget eliminates unfilled city jobs, but doesn’t call for layoffs. It was balanced by drawing down the city’s reserve balance to below the minimum threshold set by ordinance, which required council’s approval to do.

But laying off hundreds of city workers and other cost-cutting measures are likely by summer without federal relief or other outside help, the budget states. Several sources of revenue have been badly damaged. With commerce restricted, offices emptied of workers and sports stadiums barren of fans, city officials expect parking tax earnings to be cut in half and amusement taxes by more than that. Overall, the city projects $130 million in tax losses spanning 2020 and 2021.

Already stressed

A large swath of the region’s municipalities were in financial trouble before the pandemic. In Allegheny County alone, 32 were found to be financially stressed in an analysis by University of Pittsburgh researchers. Using a different measure of stress, the Pennsylvania Economy League placed 56 among its list of the most-financially-at-risk municipalities in the county.

For this group, taxes tend to be high, making it more difficult to attract businesses and new residents. And the revenue those taxes earn depends on household income and property values, which are lower than in more financially healthy municipalities. Under such constraints, municipalities struggle to cover basic services and fund aspirations to improve their communities.

Although those municipalities face the greatest peril in the pandemic, the outlook for their survival has improved.

Early in the pandemic, Pitt’s Center for Metropolitan Studies estimated that more than 100 southwestern Pennsylvania municipalities could lose 16 percent or more of their revenues, rendering them insolvent and eligible for the state’s Act 47 distressed municipality recovery program. But recent data convinced researchers to brighten their forecast. Losses for most municipalities are now expected in the 4-to-6-percent range. Still, at least 12 are expected to be driven into insolvency.

Regardless of their financial health, the pandemic is forcing municipalities to depart from doing business as usual.

Making ends meet

Penn Hills encountered the pandemic “at a slight disadvantage,” Andrejchak said. Several years of deficit spending had consumed more than half of its reserve. “We didn’t have the luxury of doing nothing and just weathering the storm because we already had a declining fund balance. There wasn’t a lot of road to kick the can down.”

The municipality expects general fund revenue losses of just under $1 million this year—not the collapse officials feared, but still a hole to fill. “We had to lay people off. That’s where we had to take our expense reductions,” he said. “No one was happy about that.”

More than 50 employees were laid off, most of them part-time workers. The library and senior center were hit hard by the layoffs. When the senior center reopens, patrons will find its hours reduced. And the municipality is exploring the idea of hiring a local nonprofit to manage it. The pandemic, Andrejchak said, has “accelerated the tendency to look at places where there might be savings that we hadn’t aggressively pursued up to this point.”

In Monroeville, local tax revenues are expected to fall about $3 million short of what they were last year. The municipality used about $4 million of its $12 million reserve to fill the gap and pay some capital expenses, including a new roof on the municipal building and two of the four new police vehicles it had hoped to buy.

Monroeville is one of the financially healthiest municipalities in Allegheny County, according to financial stress tests done by Pitt researchers. The municipality’s large commercial district provides it with a bounty of revenue from taxes on gross business receipts.

But business tax revenues are expected to take a beating when taxes are filed in April. Those taxes will be based on 2020 gross receipts. And municipal officials will learn the extent of damage done to businesses during the pandemic. Their budgeted projections are grim. On average, business taxes have earned Monroeville nearly $8.4 million a year since 2017. This year, officials expect to take in only $4.6 million.

The budget doesn’t require laying off any municipal workers this year. The belt was tightened elsewhere. Money for road maintenance and improvement was cut in half. “It’s a balancing act,” said Timothy Little, Monroeville’s municipal manager. “You can cut back a little. But you still have to run a community and do the upkeep.”

And he expects the pain to linger. “This will easily carry into 2022. How much, we don’t know. But I don’t think you can go through a pandemic like this with the businesses being decimated as much as they have and not have it affect you for more than year.”

Forging ahead

McKeesport had been trimming payroll for years, eliminating more than a quarter of city jobs, mostly through attrition. Some departments lost half of their staff. Some had been eliminated altogether to prevent the city from falling to a level of distress that would qualify it for Act 47 intervention.

More layoffs was an option the city refused, deciding instead to tap its reserve fund to balance the 2021 budget.

The reserve fund it leaned on was made possible by the sale of the city’s sewage treatment plant to a private company a few years earlier to help stabilize city finances. What money officials didn’t put in reserve was used to seed the McKeesport Rising revitalization initiative to improve city amenities, infrastructure and stimulate badly needed development.

“We’ve learned to do more with less,” said Mayor Michael Cherepko. “But we’re about at the point where if we reduce it much more, we’ll truly affect the level of services we provide. And the minute you start doing that, it’s extremely difficult to attract new residents and businesses.”

For municipalities hoping to climb out of financial distress, “it’s really all about expanding and strengthening their tax base,” said Dougherty, who is the state-appointed Act 47 coordinator for recovery efforts in the former Mon Valley mill towns of Duquesne and Braddock.

McKeesport was starting to turn that corner before the pandemic arrived, the mayor said. Empty downtown buildings had begun to attract developers willing to rehab them, including the former offices of the Daily News, the city’s defunct newspaper. A few new businesses chose to make the city their home.

“For the first time in years, we had people knocking on our doors,” Cherepko said. “Then, the pandemic hit. We still have development, but it put the brakes on a few projects and slowed some down.”

In the meantime, officials will draw from the reserve fund to continue the city’s revitalization initiative throughout the pandemic. “It would be irresponsible for us to just maintain the status quo and watch our population drop and not put money into our city,” the mayor said. “If we don’t keep things moving in the right direction, we’ll be staring Act 47 in the eye, again.”