At a time when municipalities face historic fiscal challenges, the Commonwealth budget for fiscal year 2012 temporarily deprives Pennsylvania’s third-class cities of a useful tool for negotiating with creditors.

The budget, signed last week by Gov. Tom Corbett, amended the Pennsylvania Municipalities Financial Recovery Act (Act 47) to impose a one-year moratorium on petitioning for relief under Chapter 9 of the U.S. Bankruptcy Code by third-class cities found to be “distressed” under Act 47. These cities will not be able to seek the automatic stay available under Chapter 9, reject certain burdensome contracts, or impose a plan of adjustment on a dissenting class of creditors. (On the bright side, the changes scuttled an 11th-hour Senate bill that would have limited options under Act 47 even more severely.)

Third-class cities are among the most financially troubled municipalities in the Commonwealth, which is among the roughly half of all states that authorize political subdivisions to file for municipal bankruptcy under Chapter 9. Pennsylvania’s third-class cities are struggling to reconcile increased public demand for local government services with declining revenue bases, reduced state funding, escalating labor and pension costs, a restrictive regulatory environment, and limited access to capital.

The new amendment to Act 47 means that municipalities must be even shrewder when accessing capital markets, maximizing taxing authorities, negotiating and arbitrating labor contracts, expanding tax bases via economic development and renewal, and identifying opportunities for cost efficiencies and shared services. This will be especially critical for Pennsylvania’s 53 third-class cities.