HARRISBURG -- Pittsburgh will receive the second half of a double shot today that could help the cash-strapped city find new revenue, including a wage tax on suburbanites who work in the city.

John Beale, Post-Gazette Pittsburgh Councilman Sala Udin pauses before making a phone call after the state announced that the city meets the criteria for distressed status under Pennsylvania?s Municipalities Financial Recovery Act. Click photo for larger image. Related articles Murphy proposes big increases in wage, property, parking taxes Act 47 doesn't fit city needs, experts say Act 47 information

Gov. Ed Rendell said yesterday he'll carry out his promise to veto a bill that bans deficit-ridden Pittsburgh from using Act 47, the state law designed to help financially distressed municipalities.

Rendell's veto today will follow an announcement yesterday by state Community and Economic Development Secretary Dennis Yablonsky granting Mayor Tom Murphy's petition to place Pittsburgh under Act 47.

Yablonsky determined that Pittsburgh meets three of the law's criteria for "distressed'' status -- the most important being a budget deficit of at least 1 percent for three straight years. From 1998 to 2002, he said, the city actually had deficits ranging from 9 percent to 12 percent.

"The evidence for Pittsburgh's need to be under Act 47 was overwhelming,'' said Rendell. "The case was made as strongly as any Act 47 case I've seen.'' Act 47, has been used by 19 smaller communities and provides several types of state aid, including, with court permission, a commuter wage tax.

Murphy applauded the decision.

"Pittsburghers can be relieved that Secretary Yablonsky has taken decisive action on Pittsburgh's petition for distressed status," he said in a statement.

"This has been a difficult year for Pittsburgh, but things will get better. Today's declaration is a first step on our path back to a healthy and vibrant future for our city."

		What happens now The city continues to operate under its home rule charter, adopting a budget and implementing any tax or fee changes City Council deems necessary. All city contracts, including union contracts, remain in place. What could happen later The only additional tax a recovery coordinator can recommend is a tax on non-residents who work in the city. Such a tax would require approval by City Council and Common Pleas Court. The recovery coordinator can set maximum costs for new union contracts. Even if negotiations are submitted to an arbitrator, the arbitrator is not allowed to grant raises higher than those set by the coordinator.

As Act 47 proceeds, Murphy said, he will continue calling for the state to approve tax reform for Pittsburgh, as he did unsuccessfully all this year. He also proposed a new $407 million city budget yesterday that will starkly increase wage, property and parking taxes on June 1 if some new state aid is not approved.

The reaction from city council members was morosely hopeful.

"It's a historic day for Pittsburgh but not a great day. It's an opportunity to start anew," said Councilman William Peduto, the first city official to call for Act 47, more than a year ago. "We can leave an antiquated system of government in place or actually take advantage of it. There will be a lot of challenges."

"We finally hit rock bottom here, unfortunately," said Councilman Jim Motznik. "This may be the first step at crawling out."

Recovery plan

Yablonsky now has 30 days to choose a "recovery plan coordinator,'' an individual or firm who will devise a plan for cutting city costs and possibly adding new revenues to balance Pittsburgh's budget.

Rendell added a twist to the situation yesterday, saying that he actually would prefer to see a five-member financial oversight board created for Pittsburgh rather than having just a single coordinator.

The board would do one-year budgets as well as five-year fiscal planning for Pittsburgh, as has been done in Philadelphia for the past 11 years. An oversight board was contained in the legislation that Rendell is vetoing, a bill whose prime sponsor was state Sen. Jane Orie, R-McCandless.

But that bill didn't contain a provision for Pittsburgh to obtain additional revenue, either through a commuter wage tax or any other way, such as an increase in the $10 annual occupation tax or a new $100-per-employee tax on for-profit businesses in the city.

"There's no question Pittsburgh needs new revenue sources,'' Rendell said. "With its loss of population and so much property being nontaxable, some revenue enhancements are necessary.''

When Rendell was mayor of Philadelphia in 1992, the Legislature gave his city both a 1 percent sales tax and a fiscal oversight board to deal with serious financial problems.

Yablonsky's decision to grant Act 47 status for Pittsburgh was based in part on findings by a Philadelphia financial adviser hired by the state, Public Financial Management. Also, several city officials, including Murphy, had testified at a Dec. 9 hearing that Pittsburgh needed the distressed designation to get help for recovery.

"Based on the testimony presented at the public hearing, written testimony and evidence gathered through the review of the city's finances by Public Financial Management, Pittsburgh meets the criteria for a determination of distress under Act 47,'' Yablonsky said.

The Orie bill would have clouded the situation by banning Pittsburgh from using Act 47, but Rendell's veto will remove that cloud.

It isn't known yet whether the prime sponsors, Orie and state Rep. Mike Turzai, R-Bradford Woods, will try to override the veto when the Legislature reconvenes in January. The bill passed the Senate by a veto-proof majority of 41-8, but it passed the House only 116-79, which isn't enough to override a veto.

House Democratic Leader H. William DeWeese of Waynesburg praised Yablonsky's decision, while blaming Republican legislators for not giving Pittsburgh more tools, including new taxes, to help itself out of the hole. DeWeese said city officials already have taken "painful steps,'' including hundreds of layoffs of employees, but need additional revenue.

"The city is the one thing all of us in Western Pennsylvania have in common, whether we are Democrats, Republicans or something else,'' he said. "It's how we announce ourselves to the rest of the world. It defines a large part of our identity. We must not stand by and do nothing while Pittsburgh needs our help.''

But Sen. Sean Logan, D-Monroeville, who had supported the Orie bill, said he was "very disappointed'' by Yablonsky's action.

Logan, who opposes a commuter tax, said that even if one is enacted, "It's only a short-term solution for Pittsburgh. It would only be in effect for a year or maybe a few years. ... What Pittsburgh needs is a long-term solution, such as removing the exemptions to its business privilege tax. About 45 percent of city businesses don't pay the business privilege tax now.''

Logan said Pittsburgh still has existing revenue-raising options, such as increasing its property tax and resident wage tax, or creating a new garbage pickup fee. He said legislators will continue talks over the coming weeks, trying to find solutions to Pittsburgh's problems that would make a commuter tax unnecessary.

Commuter tax?

Yablonsky said that Act 47 provides several forms of aid to a city. All future labor union contracts must conform with its spending limitations. In other words, if the state-appointed recovery plan coordinator determines the city can afford a raise of no more than 1 percent a year, an arbitrator can't award raises higher than that.

It gives the city the expertise of the state-paid outside expert in fashioning a recovery plan. It also gives it first call on state programs such as loans for economic development and expansion of industrial site.

The major facet of the law, of course, is that it opens up the possibility of a wage tax on the thousands of commuters. But the answer to the commuter wage tax question for Pittsburgh won't be known for about five months, after the state names a recovery coordinator and a plan is approved.

In the past, such fiscal experts have come from universities, nonprofit organizations such as the Pennsylvania Economy League or for-profit companies such as Public Financial Management. Yablonsky said PFM, the firm that did the original assessment, won't be banned from submitting a bid. He said there are about half a dozen private firms that do such fiscal work.

"It'll be someone who has experience in municipal financial management,'' he said. "We want someone who can hit the ground running, who doesn't need a lot of startup time.''

If a city refuses to approve a plan, Yablonsky said his department can impose financial sanctions, such as canceling state development grants. That happened in Scranton, where a squabble between the mayor and city council delayed approval of the recovery coordinator's plan. Scranton has been under Act 47 since 1992 and had a commuter tax for three years in the mid-1990s.

	Martha Rial, Post-Gazette Community and Economic Development Secretary Dennis Yablonsky, center, listens to Mayor Tom Murphy testify during an Act 47 hearing earlier this month. Click photo for larger image.

If the recovery coordinator's plan calls for a commuter wage tax for Pittsburgh, the proposal must go before a Common Pleas judge for approval; opponents would be given a chance to argue against it. The judge would use the 11 criteria contained in Act 47 to help determine if a commuter wage tax was justified in helping Pittsburgh clear away its red ink. The tax would have to be approved by the court yearly.

Union leaders expressed concern that city workers would bear the brunt of budget changes.

As state investigators found earlier this month, city spending on contracts, health care and pension agreements with employees are adding to its "near-term budgetary pressures" and keep going up.

Under Act 47, future contract awards -- not current ones -- would have to comply with the city's recovery plan, possibly affecting job levels and compensation. Jack Shea, president of the Allegheny County Labor Council, called on legislators to approve tax reform to hold off those changes.

"We're not going to get ourselves out of the problems in the city by eliminating jobs or laying off more people," Shea said. "It's about time legislators began looking at their responsibility [to the city] and go beyond their little fiefdoms."

One of the unions that could be affected relatively soon is Firefighters Local No. 1, which is due to reopen contract talks on health care benefits in June.

The firefighters are protected from layoffs through 2005 under language Murphy agreed to on the eve of his 2001 election, and union President Joseph King has rejected repeated Murphy calls for job cuts and concessions.

"I've never seen an Act 47 plan that reduced the size of government or the number of elected officials. It's always on backs of workers," King said yesterday.