For Immediate Release
April 14, 2010
Contact: Nathan Flood
717-787-4420
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A Conversation with Senator Brubaker

Distressed Municipalities Law May Require Reform

In 1987, the state established a program to help municipalities that are struggling financially. The Financially Distressed Municipalities Act gave the state Department of Community and Economic Development the authority to help municipalities by restructuring their debts, providing a repayment and recovery plan, and issuing grant and loan funds to meet local government obligations. While the program has helped six municipalities emerge from serious financial problems and saved a number of others from severe financial difficulties, 19 municipalities still retain financially distressed status.

A municipality must meet one of 11 criteria to qualify for state oversight and assistance through the Financially Distressed Municipalities Act, including:

• maintaining a budget deficit over a three-year period, with a deficit of at least 1 percent in each of the previous fiscal years,

• expenditures that exceeded revenues for a period of at least three years,

• a default in payment of principal or interest on a bond or note, or in payment of rentals due an authority,

• missing payroll for at least 30 days,

• failure to make required payments to judgment creditors for 30 days beyond the date of the recording of the judgment,

• failure to forward taxes withheld on the income of employees or failure to transfer employer or employee contributions for Social Security for a period of at least 30 days beyond the due date,

• accumulating and operating for each of two successive years with a deficit equal to at least 5 percent of its revenues,

• failure to make the budgeted payment of its minimum municipal obligation with respect to a pension fund during the fiscal year for which the payment was budgeted, and failure to take action within that time period to make required payments,

• seeking to negotiate resolution or adjustment of a claim in excess of 30 percent against a fund or budget, and failing to reach an agreement with creditors,

• filing a Municipal Debt Readjustment Plan, or

• experiencing a decrease in a quantified level of municipal service from the preceding fiscal year, which has resulted from the municipality reaching its legal limit in levying real estate taxes for general purposes.

In order to enter the state's program for fiscally distressed municipalities, a determination must also be initiated by the Department of Community and Economic Development, a municipality's creditor, elected auditors or controllers of the municipality, 10 percent of the municipality's voters, 10 percent of employees who were not paid due to missed payroll or a trustee of a municipal pension fund or bond indenture.

In the 23 years since the Financially Distressed Municipalities Act was created, 25 municipalities have been deemed distressed. However, the recession, coupled with rising pension, health care and personnel costs, could force more townships, boroughs and cities to require state assistance in the near future.

It is important to ensure that the recovery plans for distressed municipalities provide an exit strategy so they can get back on the road to financial independence. A number of municipal officials have expressed a desire to improve the current program for distressed municipalities, and I am hopeful that we can address some of these issues in the General Assembly in the near future.

For more information on issues of importance to Lancaster and Chester County residents, please visit my website at senatorbrubaker.com.