Last week, Wells Fargo’s Natalie Cohen, was prompted to take a look into Scranton’s financials. Her interest was due to Save Scranton’s recent campaign to put Scranton bankruptcy on the ballot for public vote. An initiative that has never been attempted but nevertheless is making waves throughout the municipal debt community.
Scranton’s Fiscal Woes
The paper details how Scranton’s fiscal issues are due to a legacy of increased cost of government. The report explains that Scranton’s total debt is approximately $519 million dollars! This includes a total liability of $375 million dollars as well as a estimated unfunded liability for non-pension post retirement benefits of $184 million. The report recommends the same thing that Save Scranton has been championing since its inception- taking advantage of advances in innovation, sensible tax policies and a renegotiation of the city’s pensions.
It is clear that the recommendation for the city is to move forward with sound policy. This includes a complete overhaul to the status quo that has existed in Scranton. It is amazing to see that Scranton has now caught the eye of others(outside). We now have allies aboard Save Scranton’s mission to revitalize Scranton. When I first started Save Scranton, I promised that I would make Scranton’s fiscal situation national news. I have yet to fail to deliver on my promises.
Populism, Pensions and Municipal Distress
An activist in Scranton, Pa. is circulating a petition that the city should file for bankruptcy. This is the first time we have seen a ballot measure tied to bankruptcy. While the petition may not make it to the ballot, its existence is perhaps a reflection of frustration with the city’s chronic fiscal problems as well as the general trend to greater populism in government. We present a discussion of Scranton’s problems as a case study of similar issues facing other municipalities such as underfunded pensions, lagging economic growth and stretched taxpayers. Scranton’s new administration has embarked on several significant positive changes, however, which should provide some relief (and perhaps opportunities for adventurous investors) and which we discuss below.
(We note at the outset that only Scranton and Allentown in Pennsylvania have permission to pass an ordinance through the citizen initiative process. Certain “third class” cities in Pennsylvania have this right as well, but qualifying a petition is a tough process (15 days to achieve 20% of the last election’s eligible voters’ signatures, on site at the municipal clerk’s office).
A Changing Economic Profile
Once a thriving city of 140,000, now pushing 75,000, Scranton was a hub for coal and steel production and home of Lackawanna Iron and Steel at the turn of the 19th century. The city and region produced rail track for the budding U.S. railroad system at that time. As the steel industry modernized, moved West and found its way to other countries, communities in Pennsylvania (and Ohio and West Virginia) suffered economic loss. The state created Act 47 in 1987 to help former steel towns deal with economic loss and, in particular, manage labor arbitration awards in a strongly unionized political culture. Scranton entered Act 47 in 1992.
A key part of the program is a requirement for a distressed city to write a Recovery Plan (not unlike a similar requirement in bankruptcy). When negotiating collective bargaining contracts, a plan could offer protection by capping raises and benefits to fit within the plan. This approach worked for some years for Scranton, until the firefighters’ union sued. After many years and many appeals, the Pennsylvania Supreme Court decided in 2011 that Act 47 does not, in fact, provide protection for arbitration awards under Act 111 for police and fire. The city was faced with a requirement to pay $16 million of back pay and $7.6 million retirement benefits. The court also ordered interest at 6% for each day that passed without repayment. The city council attempted to file bankruptcy in 2011 but was unsuccessful. Unfortunately, years of disagreement among the elected officials and lack of funds to meet the back pay decision resulted in substantially higher amounts owed.
Report can be viewed here: populism-pensions-and-municipal-distress-102516
Article by SaveScranton