SCRANTON, Pennsylvania (Reuters) - Scranton, Pennsylvania, was nearly broke on July 6. Despite the mayor's dramatic decision to cut civic employee pay to minimum wage levels, the city had just $5,000 left in its coffers after making payroll.
Scranton, like dozens of other Pennsylvania municipalities, has been operating under state supervision for years. That it could reach such a desperate financial state proves to some that the 25-year-old law governing state oversight needs repair.
After three California cities filed for bankruptcy in recent weeks, there is a new urgency in the debate over what kind of state intervention - if any - will actually help local governments.
"This is part of a call for this generation. We have to make sure that we make government sustainable and affordable," said James Spiotto, a partner at the law firm Chapman and Cutler in Chicago. He said that at least 23 states had some kind of intervention program, while about half the 50 states do not allow municipalities to file for protection from creditors in court under Chapter 9.
The struggle to balance budgets is likely to reshape municipal governments across the United States, as well as the laws that determine whether cities can file for bankruptcy and how much control a state can take when a local government is failing, experts said.
"These are all painful choices. There's no simple answer, there's no simple solution," said John Rapisardi, co-chair of the financial restructuring department at the law firm Cadwalader, Wickersham & Taft in New York.
Pennsylvania lawmakers in early July tweaked the state's Act 47 law, which governs financially distressed municipalities, in response to the problems in Scranton. But some say the law, approved in 1987 to help towns after the collapse of the state's steel industry, remains broken.
"The law never had any teeth," Scranton Mayor Christopher Doherty said. The mayor and city council have been fighting with each other over a recovery plan required under Act 47.
Pennsylvania, which has offered to pay for a mediator, will give an interest-free loan of $2 million to pay expenses, and an additional $250,000 grant if local leaders can implement a plan by August 15.
City Councilman Pat Rogan agrees with the mayor on at least one thing. "Act 47 is a great idea in concept, but it doesn't work," he said.
City Council members in Harrisburg, Pennsylvania's financially distressed capital, echoed similar concerns when they sued the state on June 26 in an attempt to block a receivership imposed by the state.
Harrisburg's local leaders don't want receiver William Lynch to sell off parking garages and other assets that generate revenue, which the city needs because it owes about $320 million for expenses involving its trash incinerator. City council members also complained in the lawsuit that state lawmakers unfairly singled out their city when they amended Act 47 last year. They claim that as a result Harrisburg is the only city that is prevented from filing for bankruptcy.
Altogether, 27 of the state's municipalities have fallen under state supervision, but only six, all of them small entities, have exited. Pittsburgh has been under state oversight since 2003, and Reading since 2009.
The law "had a lot of great intentions at the time," said State Senator John Blake, who represents Lackawanna County, in which Scranton sits.
Among other issues, there is no time limit for how long cities have to implement recovery plans, he said.
"At the state level we are beginning to go through the process of looking at Act 47," said Steven Kratz, a spokesman for the Department of Community & Economic Development (DCED), which oversees distressed municipalities in the program.
Scranton went under state oversight in 1992. It was the first city to have its battle over labor contracts taken to the state's highest court.
Doherty, a Democrat who was elected in 2001, revised the city's recovery plan. But under another Pennsylvania law, Act 111, passed in 1968, police and fire unions cannot strike when they disagree on changes to labor contracts.
Instead they must take their disputes to binding arbitration - which they did with Doherty's recovery plan, according to Clifford Levine, of the law firm Cohen & Grigsby, who represents the DCED.
Back then the unions won an arbitration award worth about $30 million, so the city and state appealed in local court. There, the unions lost, appealed, and lost again, but the state Supreme Court ruled in their favor in October - nearly a decade after the dispute began.
"It's been a toll on the citizens, it's a toll on us, it's a toll on the council, and I'm sure a toll on the mayor and his administration," said Bob Martin, president of Scranton's police union, at a June 28 city council meeting. "I want to avoid that at any cost."
For many of those years, Scranton's police officers and firefighters received no pay raises. They're now getting the state's minimum wage of $7.25 an hour, as are all other city employees, including the mayor.
The endless arbitration and subsequent court actions prove that Act 47 is "a weak law," Doherty said. To have meaningful impact, Act 47 should force cities to implement a recovery plan within 18 to 24 months and should give greater power to the state to exert control if that doesn't happen, he said.
"Along the way, the state kept saying to me, OK mayor, you need to fight this, because you're our test case," Doherty said. "We ended up paying the price for it."
Reporting by Hilary Russ, Editing by Tiziana Barghini and Eric Walsh