Which PA City Could Be Next Detroit?

Detroit’s demise had several related causes. Matthew Brouillette of The Commonwealth Foundation notes the "fiscal cliff" caused by government unions in a commentary he wrote for Investor’s Business Daily. In the Philadelphia Inquirer, Joel Naroff blames the collapse on Detroit’s "failure to adapt" to a declining population. Mr. Naroff notes how population loss affects a city’s ability to serve the community in a cost effective manner. To some extent he is right but the problem is deeper than that.

The combination of a smaller tax base and ever increasing government salaries and pension costs results in a death spiral. As costs go up the city raises taxes; more people and businesses leave the city. The cost per person is now higher so taxes go up again and more people leave. This process continues until the city is hollowed out (or the city’s leaders address the underlying problems).

It is reasonable to wonder which cities in Pennsylvania might be on the same path as Detroit. To answer that question we compiled a few data points which paint a picture of the overall health of some of Pennsylvania’s cities. To keep the number of cities reasonable, we limited them to include only cities where the population peaked at more than 50,000.

Note: The pension liability is for municipal workers only and does not include school districts, state workers, etc. Harrisburg has a per capita pension surplus of approximately $530 dollars.

Note: Long term debt includes all debt were the city’s taxpayers are ultimately liable for the debt. In some instances, this includes redevelopment authorities, parking authorities and other quasi-government agencies. The City of Johnstown did not yet respond to a Right to Know request regarding its long term debt. The City of Harrisburg recently announced that an agreement had been reached which would remove $600 million in long term debt from its balance sheet; that would reduce per capita debt to approximately $5800.

Note: Allentown has experienced population growth vs decline.

Note: The labor force participation rate was retrieved from the Census Bureau’s American Community Survey and is an estimate. With the exception of Philadelphia, all other data sets are broken down by metropolitan area, and probably include people outside of each city’s boundaries. For example, Wilkes-Barre and Scranton are part of the same metropolitan area. However, the data does provide a rough estimate of what percentage of people in the overall population is part of the workforce.

Conclusions

It would be a challenge to say with certainty which Pennsylvania cities could go the way of Detroit. However, there are a couple of cities that have a higher probability than the others. The least likely to survive is Scranton, which has been a distressed city under Act 47 for over twenty years. Last year the city had significant liquidity problems and was forced to pay its workers minimum wage in order to manage its cash flow problems.

Johnstown would be next on the list of cities that are least likely to survive, even without information on the long-term debt of the city. Although it would not be as dramatic as Detroit, the population loss and low workforce participation rate bode poorly for Johnstown’s future.

Next up would be Harrisburg. If the city resolves $600 million of its long-term debt, Harrisburg’s per capita debt is still the highest in the state. One bright spot for Harrisburg is that the city’s population did not decrease between 2000 and 2010. While that certainly is not a trend, if the population stays steady or increases it could mean the city has a fighting chance over the long-term.

What about the Philadelphia and Pittsburgh?

Neither of Pennsylvania’s major cities are in particularly good shape. However, Philadelphia is arguably in worse financial shape than Pittsburgh.

Philadelphia’s unfunded pension obligations are incredible. That coupled with the low workforce participation rate will result in either a reduction in government services or higher taxes or both. If the city were to address its notoriously bad business environment it could increase its tax base by attracting new businesses (without having to bribe them with tax dollars), which would create opportunities for current residents.

Pittsburgh, on the other hand, is benefitting from the economic activity generated by the burgeoning natural gas industry. In 2011, the city was ranked as the number one most livable city in the US. Proximity to natural gas fields and the livability of the city could improve Pittsburgh’s financial health over the next decade. However, the long term prospects of the city are more closely tied to Pennsylvania’s over all business climate. If the legislature where to address the states uncompetitive business tax rate, hostile regulatory environment and poor labor environment then Pittsburgh would see an outsized benefit in terms of economic activity.

Citizens Alliance of Pennsylvania (CAP) is a non-profit organization founded to raise the standard of living of all Pennsylvanians by restoring limited government, economic freedom, and personal responsibility. By empowering the Commonwealth’s employers and taxpayers to break state government’s "Iron Triangle" of career politicians, bureaucrats, and Big Government lobbyists, this restoration will occur and Pennsylvania will prosper.