Pennsylvania Court Rules Against Distressed Munis

A Pennsylvania Supreme Court ruling, in a case dating back eight years, recently found that the city of Scranton, Pa., a distressed municipality under Pennsylvania law, must pay millions of dollars in back pay, benefits and interest to roughly 300 police and firefighters that the city had been denying as part of a financial recovery plan.

The ruling is a major loss for the city—costing $10 million to $30 million, according to Reuters— and could affect other distressed Pennsylvania municipalities by potentially limiting a city’s ability to develop a financial recovery plan that limits salary and benefits gained through arbitration awards.

Scranton Mayor Chris Doherty said after the decision, “We’re committed to moving the city forward, but there is a real question to whether Act 47 is a valid program,” the Scranton Times-Tribune reported. Act 47 is a special provision in Pennsylvania under which distressed municipalities can develop a financial recovery plan to get out of debt—essentially a way to avoid bankruptcy.

In the case, Scranton argued that the unions’ collective-bargaining agreement conflicted with Scranton’s adopted recovery plan and that the recovery plan held more weight. The court disagreed, stating that it was uncomfortable with the idea that collective-bargaining policies “intuitively must be subordinated to those of Act 47.”

The case hinged on the fact that the law specified “arbitration settlements” couldn’t violate an adopted recovery plan but didn’t specify for “arbitration awards.”

The “opinion was to me signaling that the Supreme Court is not going to construe Act 47 broadly,” University of Pennsylvania law professor and bankruptcy expert David Skeel said in an interview Monday. If the state wants arbitration awards to be covered under the law, he said, they’re going to have to rewrite the language.

But the decision shouldn’t be catastrophic for distressed municipalities in Pennsylvania, he said, which include Pittsburgh, Harrisburg and 18 others. “I didn’t read it as gutting Act 47 or anything like that,” he said.

The court’s decision is narrow enough that the state “can draft around it” if it creates a financial plan for Harrisburg, Skeel said. The capital city of Pennsylvania has declared bankruptcy, but Gov. Tom Corbett has said the filing is illegal. Corbett passed legislation giving the state the power to take over the city’s finances and appoint a receiver in two weeks to develop a recovery plan to deal with the city’s debt.

To avoid state involvement in their budget, the Harrisburg City Council is trying to pass an Act 47 plan before Nov. 14, Reuters reported, which would include renegotiated union contracts.

Scranton’s mayor said the ruling will result in higher taxes and layoffs for Scranton, but the city council wants to take out bank loans instead. The unions representing police and firefighters are willing to accept a payment plan, according to Reuters. “We want to help resolve this. We’re not here to bankrupt the city,” police union representative Bob Martin said.

Scranton, which has a population of 76,000, was already facing a $6 million deficit.