The Pennsylvania 2015-2016 Budget Impasse may be (technically) over, but it just claimed another victim.  From The Bond Buyer:

Standard & Poor’s has discontinued its underlying rating for credit enhancement programs on rated Pennsylvania school districts.

S&P announced the policy change Tuesday afternoon as an additional step to its December withdrawal of ratings based on Pennsylvania’s state aid intercept program for school districts and community colleges due to a lengthy budget impasse from lawmakers. The state aid intercept program ratings had been A or A-plus depending on bond provisions and were placed on credit watch negative in September.

For readers not familiar with this program, some background: Pennsylvania’s state government every years provides billions of dollars to local school districts to supplement the districts’ local property tax collections.  The Pennsylvania School Code provides an “intercept” program in which the state funding due to a school district is intercepted by the state to pay debt service on the district’s bonds in the event of a defaulted payment on the debt.  Depending on the exact structure, this form of credit enhancement previously ensured an A rating or an A+ rating by Standard & Poor’s for almost all districts in PA.

The 2015-2016 Budget Impasse, however, resulted in severe delays in the receipt of state funds by school districts (the state could not legally release the funds until a budget was passed) – as well as called into question the effectiveness of the intercept program as a credit enhancement, as the program also relied on the state funding that was delayed.

S&P’s ratings change means many school districts will face higher interest rate costs the next time they wish to issue bonds.  For some marginal districts that relied heavily on the intercept program to sell their bonds, the loss of the underlying rating could possibly shut them out from the markets.

For government employers, disciplining and terminating employees can be especially difficult. Not only does the public employer face the same challenges in complying with the standard alphabet soup of employment laws that private employers do, including the ADA, ADEA, FMLA, Title VII, etc., they also have the complicated task of considering the application of an employee’s Constitutional rights in making employment decisions. Unfortunately, the protections provided by the constitution to government employees don’t rely on the kinds of “immutable” traits often in issue in the alphabet soup context…which means that determining when constitutional rights could be violated by a government employer’s actions is particularly troublesome.

However, in the recent Supreme Court decision in Heffernan v. City of Paterson, issued on April 26, 2016, the Court brought the analysis applicable to First Amendment retaliation claims closer to your typical alphabet soup case in one small way – focusing on the employer’s intent. In a typical discrimination context, the employer’s intent is key when examining the reason given for the action and the circumstantial evidence that may call that stated reason into question. In short, the question is: was it the employer’s intent to discriminate in disciplining an employee, or was it really the employee’s violation of an employer policy?

In the First Amendment context, employer intent is usually irrelevant or assumed; the focus instead is on whether the speech or activity is personal or on a matter of public interest, whether the employee acted as a citizen or an employee, and how the speech or activity could harm the government’s interests. Heffernan, however, presented the unique situation where the employee contended he didn’t intend to speak or act at all, but the employer punished him for its perception that he had. The Court therefore faced the following question: whose intent is more significant in the constitutional rights context? As in the alphabet soup discrimination case, the Heffernan Court found that it is the employer’s intentions that create the cause of action and violation of the employee’s rights.

In reaching this decision, the Court considered the following facts: Jeffrey Heffernan was employed as a police officer for the City of Paterson in 2005 under Chief of Police James Wittig. Both the Chief and Heffernan’s direct supervisor had been appointed to their positions by the Mayor, who was running for reelection. During the campaign, Heffernan’s colleagues spotted him at campaign headquarters talking with campaign workers and holding a campaign sign for the Mayor’s opponent, who was a known friend of Heffernan. When word reached his supervisors, Heffernan was demoted from a detective position to a patrol officer position, and given an undesirable patrol post, to punish his involvement in the opposition’s campaign. Heffernan denied being involved in the campaign, and denied supporting the candidate, stating that he was only picking the sign up for his mother, who was bedridden and could not do it for herself.

In response to his demotion, Heffernan filed a lawsuit against the City contending that he had been demoted because the City believed he engaged in conduct that constituted protected activity, even though he denied that he had intended to speak or act.

Prior case law is very clear that government employers are prohibited from making an employment decision because an employee supports a particular political candidate. However, Heffernan was contending that he didn’t actually support the oppositional candidate, but the City mistakenly believed he did. The City’s position in the litigation was that, since he hadn’t intended to engage in protected activity, his activity wasn’t protected…and its demotion decision could therefore only violate his rights if in fact he actively supported the candidate.

Ultimately, the Court concluded that “the government’s reason for demoting Heffernan is what counts…When an employer demotes an employee out of a desire to prevent the employee from engaging in political activity that the First Amendment protects (even if the employee did not intend to engage in that activity), the employee is entitled to challenge that unlawful action under the First Amendment…” Whether the employer has correctly or incorrectly deduced the employee’s motives in engaging in particular behavior, the Court opined that the same constitutional harm would result – an employee would be demoted or terminated for appearing to engage in protected activity, thereby discouraging other employees from engaging in what should be protected activity. Because the harm would result regardless of the accuracy of the employer’s belief, the employer’s reason for the employment action must govern in determining if a First Amendment cause of action and violation exists.

Unfortunately for Heffernan, his fight with the City will continue on, as the Supreme Court did not reach the ultimate question of whether his rights had been violated. To the contrary, the Court’s decision remanded the case back to the trial court to determine whether or not Heffernan’s demotion occurred pursuant to an existing neutral policy prohibiting police officers from overt involvement in any political campaign, and whether such a policy complies with constitutional standards generally.

The immediate take-away for government employers and elected officials (and the HR personnel who love them), in light of the Heffernan decision should be on the reinforcement of what we know already from the alphabet soup cases: we must examine the reason for an employment decision before it is made to ensure there is no protected classification or protected activity motivating the decision. Even if the employer is wrong about what the employee intended by his actions, a decision motivated by an intent to punish what would otherwise be protected activity could violate the constitution.

We previously reported on Mayor Eric Papenfuse’s controversial plan to triple the local services tax in the City of Harrisburg (a tax that overwhelmingly affects commuters, not residents). After securing the needed sign-off from the Commonwealth Court in January, Papenfuse’s plan was stalled by City Council as it worked through numerous other changes proposed to the City’s Financial Recovery Plan.

But now the plan has finally been approved.  Workers paying the tax should expect to see the higher tax on their paystubs soon.  Perhaps worst of all, the tax was approved retroactively back to January 1 – meaning that taxpayers will either have to make up the difference going forward, or pay a larger, lump sum bill from their first paycheck for the January-April period when the new, higher tax is collected.

I recently published in The Legal Intelligencer a timely article on cybersecurity threats to local governments. The failure of local governments to adequately address data security is causing huge costs to taxpayers and exposing municipalities to significant legal risks.

While private companies have become increasingly attentive to the risks of data breaches, attention to information security has lagged in the public sector. A survey by the New York Stock Exchange found that data security is addressed at most or all board meetings of publicly traded companies. By contrast, a 2015 poll of local government employees revealed that almost half were unaware of their employer’s IT security practices.

What should local governments do to address this growing problem?  Read the full article here.

DEP is in the process of finalizing changes to individual and general permits for municipal storm sewer systems  that would result in stringent and costly requirements on municipalities throughout the Commonwealth. I recently co-authored an article for publication in The Legal Intelligencer on these changes, and how municipalities can address them.

DEP’s proposed changes modify major components of the permitting scheme, and it is expected that many municipalities that have so far avoided these rules will now become subject to them.  DEP expects to finalize the changes in late 2016, with applications for amended permits due in the fall of 2017. Municipalities should start planning immediately to address the new rules.

For more information, a complete copy of the article can be read here.

Large privately held, publicly regulated utility companies with a focus on rapid growth and expansion throughout the Commonwealth have a new target – municipally owned water and wastewater systems.  Pennsylvania legislation over the last few years has provided considerable financial and regulatory incentives for this unprecedented growth. These companies are no longer waiting for municipalities to announce interest in exploration of system monetization opportunities, but instead are now aggressively marketing their interest in acquiring such systems through privately negotiated sales.

Municipal representatives contacted by these companies should carefully and comprehensively do their due diligence before entering into any agreement to dispose of their system. In particular, municipalities must be wary of entering into agreements to sell system assets without the opportunity for public bidding.  The municipal governance statutes in Pennsylvania require public bidding in almost all cases in which public assets are sold.  Selling a water or wastewater system without the opportunity for public bidding may result in challenges to the sale by citizens of the municipality, or other utility companies that did not have the opportunity to present a bid, or believe they were promised an opportunity to compete in an open and fair bidding process.

In addition, municipalities should know that selling their system assets pursuant to a privately negotiated sale, without the benefit of public bidding, often will result in the municipality “leaving money on the table” and not achieving the best and optimal value for their systems. Selling water and wastewater assets through a public bidding process produces greater value to the municipality, as interested companies will compete to acquire the assets, thereby driving up the price.  In some municipal system transactions, as many as five or six interested entities actively participate in a competitive process to acquire system assets.

Municipalities should also know that a sale is not the only option available to them.  Indeed, McNees attorneys have worked on several high-profile transactions over the last three years, all of which involved long-term leases of systems. Such leases can produce equivalent or greater value to the municipality, through a three-fold compensation system; an up-front payment, annual payments, and an annual capital expenditure commitment. The municipality also retains a level of control over the operation of the system and rate levels not found in an outright sale.

If you are contacted by a private utility company with a proposal to sell your water or wastewater (or electric or natural gas) system, remember that a private sale may not be the best option for you and your constituents.

The Municipal Securities Rulemaking Board (MSRB) recently published the agenda for the January 27-28, 2016 meeting of its Board of Directors.  Among the items noted for discussion is the following:

Bank Loans
The Board will discuss direct purchases of municipal securities by financial institutions and bank loans to municipal entities to consider whether the MSRB should engage in further activities related to disclosure of material information.

In a press release accompanying the agenda, the MSRB stated that the purpose for the inclusion of this discussion item is to “explore possible regulatory action in this area to promote disclosures about bank loans affecting the overall indebtedness of an issuer.”

Currently, information about bank loans is not required to be posted on EMMA, the MSRB’s online repository for municipal securities data.  While the MSRB has encouraged municipalities to voluntarily report data on bank loans, few municipalities have chosen to do so, as voluntarily reporting such information brings with it a number of risks to the municipality (a topic we have discussed in the past).

Municipalities should continue to pay close attention to this issue, and await further information as to what the MSRB intends to do with respect to the reporting of bank loans.

As 2015 winds down and we prepare to welcome 2016, many smaller municipalities, municipal authorities, and other public entities may be putting the final touches on last-minute financings, or preparing for new financings in early 2016. In many of these issuances, the term “bank-qualified” will be used.

For such issuers, bank qualification is a means to enhance the attractiveness of the entity’s tax-exempt debt when placed with a bank or other financial institution, regardless of whether the debt is to be publicly offered or placed privately.

Tax-exempt debt is bank-qualified if it meets the requirements for such debt under Section 265 of the Internal Revenue Code. Because certain of the requirements under Section 265 reset each calendar year, there is often a rush to close transactions by Dec. 31, or as soon as possible after the first of the year.

Interested to know more about bank-qualified tax-exempt obligations?  I recently wrote an overview of the topic, which was published in the December 15, 2015 edition of The Legal Intelligencer. Read more here.

Municipalities, school districts and other governmental entities in Pennsylvania may want to sell or lease their assets for a variety of reasons. Governmental entities facing financial distress may sell or lease assets to generate a substantial upfront payment that can be used for a variety of purposes, including paying down debts resulting from labor and personnel costs, pension and other retirement benefits, or a costly litigation judgment.

A governmental entity may also sell assets if it owns unused or underused public buildings that were constructed at a time of rosy growth projections that failed to materialize. Or, it may simply have no further need of an asset and wish to remove the insurance, maintenance and other costs associated with it.

If a governmental entity intends to sell or lease its assets, one of the first steps that should be taken is to evaluate the proposed transaction from a federal income tax perspective.  I recently authored an article about the issues that often arise in such transactions, which was published in the September 22nd edition of The Legal Intelligencer.  Read more here.

Harrisburg Mayor Eric Papenfuse announced today that he would seek to raise the Local Services Tax (LST) for workers in Harrisburg from $52 to $156 per year.  The move would affect both City residents and the tens of thousands of people that commute into the City every day to go to work.  The preliminary revenue estimate for the increase is $4 million.

The LST is a tax with which most readers are familiar – it is imposed by a municipality pursuant to the Local Tax Enabling Act and in the jurisdiction where the person is employed. Under the Local Tax Enabling Act, the local services tax may actually be imposed at any rate, up to a maximum of $52, so long as the rate is uniform for all individuals. If the municipality charges a local services tax at a rate in excess of $10, it must exempt from the tax any person whose income is less than $12,000.

As we noted in an article that was published in The Legal Intelligencer in March, the ability to increase the LST beyond the usual maximum limit of $52/year is limited to municipalities enrolled in the Commonwealth’s program for financially distressed municipalities, known as Act 47, and was added to Act 47 by the enactment of Act 199 of 2014, which contained a larger package of reforms of the Act 47 recovery process.

Under Act 199, the option of raising the LST beyond $52/yr is only available to those municipalities that were authorized at the time Act 199 was enacted to request the court for the imposition of an earned income tax on nonresidents. And, in seeking an increase in the LST above $52/year, the municipality must also raise the income exemption threshold from $12,000 to $15,600.