(This May 2 story was corrected to remove erroneous reference to Senator Rob Teplitz as a co-sponsor of the legislation in the fourth paragraph)
By David DeKok
HARRISBURG, Pennsylvania (Reuters) - Shamokin, Pennsylvania, tucked away in the coal country about 120 miles northwest of Philadelphia, has $800,000 of unpaid bills and can't get a loan from a bank. It's so broke, the gas service to city hall was temporarily cut off last month.
So the council for the city of 7,000 residents has agreed to seek entry to a state financial oversight program dating from 1987 that facilitates access to credit and permits the levying of certain taxes. Now, though, some lawmakers say the program is more like a trap than a benefit: municipalities get into it, and few get out.
Just seven of the 27 local governments to enter state oversight under the program, known as Act 47, have ever been released from it. As a result, legislators want to cap how long cities can stay under state oversight and, in the hardest cases, impose a municipal death penalty that amounts to disincorporation and a state takeover. The law was passed in a bid to help Pennsylvania cities battered by the decline of the American steel industry in the 1970s and '80s.
"We want to hopefully prevent them from going in, but if they do, there needs to be an exit strategy," said Senator Rob Teplitz, a Democrat who represents the state capital of Harrisburg, which last year sold some of its assets and restructured debt. Teplitz sits on a committee that is reviewing legislation to cap the amount of time a municipality can stay in the program.
A handful of high-profile failings, such as Detroit's bankruptcy filing last July, has focused attention on the role states should play in helping their struggling cities.
About half of U.S. states have some kind of intervention program, according to James Spiotto, a partner at the law firm Chapman and Cutler in Chicago.
In Pennsylvania, 20 local governments are operating under state oversight, and six have been in the program for a quarter century or more, according to the state Department of Community and Economic Development, which administers the program.
The bill now moving through the legislature would codify the state's early-intervention options and improve financial reporting to allow the state to spot and help troubled municipalities earlier.
State oversight under the amended Act 47 would be capped initially at five years, and the absolute limit, with extensions, would be eight.
Imposing a hard deadline could force elected officials to make unpopular decisions such raising taxes, cutting jobs or eliminating services to balance budgets, said John H. Eichelberger, a Republican state senator from Hollidaysburg and a prime sponsor of the bill. He hopes to have legislation ready for Governor Tom Corbett by June.
Under the "death penalty," municipalities would be disincorporated and converted into "municipal service districts" run indefinitely by court-appointed administrators, not local elected officials.
"This would almost never happen," Eichelberger said. "But if something must happen, this is an option."
Opponents of the bill include Harrisburg City Councilman Brad Koplinski, who pushed for his city for file for bankruptcy in 2011. The filing was thrown out later that year after state lawmakers temporarily banned it. Koplinski said the eight-year deadline is "onerous" given the magnitude of the problems some cities face.
But weaning these towns from assistance while their local economies still languish has proven to be too tall an order for most of them.
One of those cities, Aliquippa, the Pittsburgh suburb where former Chicago Bears tight end and coach Mike Ditka grew up, entered Act 47 the same year the law was implemented.
Since taking office in 2012, Aliquippa Mayor Dwan B. Walker has focused on getting the city off what he called the "crutch" of Act 47. The city hired a software management company to improve accounting systems, for example.
This year marked the first budget in ten years that Aliquippa did not have to take out a tax anticipation loan. The city typically borrowed between $250,000 and $350,000 a year, Walker said.
But after decades of distress, there's no set date for the city to exit the program, which Walker called "a stigma."
"It took forty years to drive this bus into the ditch," he said.
(Editing by Hilary Russ and John Pickering)