Wednesday, June 25, 2014

Can Anyone Spare a Dime, or a Municipal Bond?

Harrisburg city government faces a challenging financial future. If there are lessons to be learned from studying how other cities emerged from the brink, or reality, of being bankrupt, one lesson stands out: No city ever solved its financial crisis on its own.

Some cities that turned around their economic misfortunes did so by merging services with their suburbs or even incorporating suburbs, with their stronger tax bases, into city boundaries. Other did so with assistance from state and / or Federal governments. In rare cases the city government was able to act to save itself, yet it did so by attracting a major private employer or investor whose resources pulled it to solvency.

Harrisburg city government is functionally bankrupt, in that it can not pay all that it owes. It is not legally allowed to be bankrupt. The laws protect the bond holders from bankruptcy action. Harrisburg appears to be drifting into an uncertain long term future while hoping that a way to survive will be found.

There are short term solutions. It is ironic, though, that items that produce long term revenues, such as parking and even the incinerator, which began showing signs of being able to be operated profitably, are traded for short term revenues. In the long run, these revenues to Harrisburg will likely be reduced.

There are also serious concerns that the new higher parking rates may drive customers and even residents away from Harrisburg. This is the opposite of what is needed for a city’s economy to grow.

New York City was saved from near bankruptcy in the 1970s to 1980s due primarily to assistance from the state and Federal governments. (Link to “The Year the Big Apple Went Bust”, a book by Fred Feretti). Congress, and President Ford approved loaning New York City $2.4 billion. The Ford Administration, despite the famous misquote that President Ford supposed told New York City to “drop dead””, provided New York City with critically needed loans. The Carter Administration continued this assistance,

New York’s Governor and the state legislature advanced New York City $400 million. The Governor personally helped convinced bankers and union pension funds to invest in bonds that balanced the city’s budget. (Link to “The Man Who Saved New York” by Seymour Lachman.)

As in 1933 when New York City also faced bankruptcy, a state government assistance agency was created. This agency purchased New York City’s short term debt which helped save the city government financially.

Others cities were saved from the path of financial ruin by large infusions of Federal government funds. These include Philadelphia and Boston. It should be to noted that many of these Federal government programs no longer exist. Thus, this option is extremely limited.

Cities such as Indianapolis and Denver survived financially by annexing their suburbs. That is not an option as Pennsylvania law prohibits annexations. The state law could be changed.

At this time, there are few leading the way for this state law change. Such a proposal would likely be resisted by suburbs who wish to keep their wealthier tax bases within their own communities. Passage of a law allowing annexation will probably require a realization from suburbanites that their communities’ financial futures are directly linked to the futures of their cities’ finances. Today, such recognition does not appear to be widespread.

Another possible change in the law could allow Harrisburg to declare bankruptcy. While this is not what bond holders want to hear, Harrisburg needs to become a city that grows economically. If constantly paying for debt halts improving the city, it may be better that the city defaults.

In an historic analogy, both France and Great Britain had large debts in the mid-18th  century. France defaulted on two thirds of its debt in 1797. Free from this debt, France engaged in an era of more rapid economic development.

Great Britain, on the other hand, let its debt grow to twice its Gross Domestic Product. It took a century for Great Britain to pay that debt. This drained its ability to grow its economy. Paying the debt benefited the wealthy British bond holders. This contributed towards national wealth inequities that helped slow economic growth even more. Money in the hands of the middle class and poor is spent more quickly and increases demand leading to the creation of more goods. (Link to “Capital in the Twenty-first Century” by Thomas Piketty)

Once a city averts a financial crisis, it then needs to improve its economic situation. Cities do this by improving their infrastructures and creating quality mass transit systems. This attracts new investors and residents, according to a study at The Brookings Institution. (Link to “The Metropolitan Revolution” by Bruce Katz.)

It seems highly questionable that Harrisburg has the resources within its tax base to accomplish what is needed to economically improve itself. The amount of tax free property within Harrisburg and the relative lower incomes that Harrisburg residents have compared to other municipalities makes it difficult to raise the required revenues.

The relative advanced age of the Harrisburg’s infrastructure makes repairing it an expensive item. Sadly, the lack of a good infrastructure can prevent growth and even contribute to an exodus from the city,

Some cities have had an outside venture help save its city government. Cleveland saw tourism help its economy when the Rock and Roll Hall of Fame Museum, three new sports stadiums, and a Science Center located there.

Other cities have had their business, community, and government leaders work together to find ways to attract new investors. Boston, Seattle, and New York have taken different paths to attract entrepreneurs, engineering ventures, residential investors, etc.

There is no one set plan that guarantees urban economic growth. Each city founds its own process that helped its’ own city.. Yet each city did plan and act. Again, it was important that certain things were in place to attract this growth, such as a strong infrastructure, good schools, solid mass transit options, etc.

Perhaps Harrisburg will develop a strategy that will attract a financial savior.

Or, maybe the Federal and / or state government will create new programs that will pull Harrisburg out of its economic troubles and push it towards economic growth.

Or, perhaps the suburban residents will realize that the life of Harrisburg determines their continued economic vitality?

Harrisburg supplies the region with much of the region’s arts, museums, professional athletics, etc. It is where major employers such as state government, hospitals, and numerous businesses are. The suburbs resulted from government investments in highway systems that allowed more affluent urban residents to flee urban areas and create suburban communities. The suburbs have fewer per capita social needs and operating costs compared to cities The social needs and costs of cities increased.. It is time for urbanites and suburbanites to work together on regional economic planning and actions.

Or, will the state government leaders realize they rely upon Harrisburg for their very functioning? While state government makes payments in lieu of taxes, those payments are much less than what would be paid if the properties required city taxes payments.

A declining infrastructure makes it more difficult for state government to operate. If the state government continues to ignore Harrisburg, the alternative may be that the Commonwealth finds itself forced to accept Harrisburg as its financial ward. It would be less expensive, as well as allowing Harrisburg residents to better determine their own policies, if Harrisburg is allowed to continue operating on its own with the state government’s help.

Will an outsider rescue Harrisburg? That depends upon an outsider. What Harrisburg can do is create the conditions to attract an outsider.

Harrisburg requires help. Let’s see who answers its’ call.


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