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The city is running an annual deficit of $1 million to $2 million that has been covered with asset sales and other quick-fixes, Mayor Michael Cherepko told council Tuesday night.

Cherepko is asking council tonight to approve, in principle, a "cooperation agreement" with the Municipal Authority of the City of McKeesport that would provide a $1 million annual payment in lieu of taxes.

Without passage of the agreement, the mayor warned, McKeesport faces a state takeover under Pennsylvania Act 47 --- for all intents and purposes, municipal receivership. "The deficit is that bad," Cherepko said.

It's not the first time Cherepko or previous mayors have discussed the city's deficits. But it was his bluntest warning yet about McKeesport's financial problems.

In addition, to meet obligations before the end of this year, Cherepko is asking council to release $1.4 million from a $14 million fund created when the sewerage authority prepaid $24 million in debt.

The mayor's blunt message to city council echoes a warning issued to the city in 2011 by Delta Development Group Inc. in the so-called "Delta report," which said McKeesport faced a million-dollar structural deficit caused by a shrinking tax base and rising expenses.

City Controller Ray Malinchak has raised similar alarms.

. . .

Cherepko, who served as a city councilman and council president before being elected mayor, said Tuesday he knew that McKeesport's finances were bad, but didn't realize the extent.

The mayor, who took office in January, said that he and new City Administrator Matt Gergely have found hundreds of thousands of dollars in old invoices that were left unpaid to help provide the appearance of a balanced budget.

"I didn't know the budgets were incorrect," he said. Revenues in the past several budgets, including those for which Cherepko voted, were overestimated "across the board."

Gergely found $500,000 in unpaid bills, Cherepko said, and learned that city hall employees were told in the past to delay paying invoices, beginning in October of each year, to make the shortfalls appear less serious.

The practice has ended and all bills are being brought current, Cherepko said. Next year's budget will reflect more realistic estimates of city revenue and will likely be considerably smaller than the current $17.9 million spending plan, Cherepko and Gergely vowed.

. . .

Cuts are not going to be enough to close the gap, Cherepko said.

"You're not going to do it through layoffs," he said. The city is self-insured for unemployment. "If we lay people off, we pay the unemployment, and they still get health care."

McKeesport would not be the first Mon Valley community to face Act 47. Braddock, Clairton and Duquesne are currently under Act 47. Tghe borough of East Pittsburgh was under Act 47 from 1992 to 1999, Homestead from 1993 to 2007, North Braddock from 1995 to 2003 and Wilkinsburg from 1988 to 1998.

The city of Pittsburgh has been under Act 47 since 2003.

. . .

Communities try to avoid Act 47 status because they lose a measure of local control to a state-appointed recovery board. Some observers have criticized Act 47, saying it doesn't provide a path out of financial distress, and doesn't address the fundamental problems caused by population decline and a shrinking tax base.

Unlike federal bankruptcy, cities are not able to discharge debts or contractual obligations under Act 47.

"Act 47 was intended to give the appearance of solving problems and creating political dependency," Robert Strauss, a professor at Carnegie Mellon University, told the Scranton Times-Tribune in April.

Scranton has spent more than a decade in Act 47 with no exit strategy in sight. Of 26 Pennsylvania cities and boroughs declared financially distressed, only six have ever left the program, according to the newspaper.

. . .

The cooperation agreement with the Municipal Authority of the City of McKeesport would be tantamount to a "host fee," which has been proposed in the past --- and was included in the city's budget --- but never enacted.

Such "host fees" are paid to communities by tax-exempt entities in lieu of taxes and are intended to compensate the communities where those facilities are located. One of the recommendations from the Delta report was that MACM pay such a host fee.

Under federal mandates, McKeesport taxpayers are required to provide the sewerage authority with a growing list of services, Cherepko said. The host fee is intended to offset those increased costs, he said.

In addition, the authority is expanding its plant in the lower 10th Ward to add communities such as Duquesne and Elizabeth Township. The ongoing construction and odors are an inconvenience to city residents, for which taxpayers should be reimbursed, Cherepko said.

. . .

The cooperation agreement would have to be approved by the sewerage authority, but its board has agreed in principle to making the annual payments, the mayor told reporters last night.

The sewerage authority also has assured the city that sewerage rates will not go up as a result of the host fee, Cherepko said.

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