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Moody’s warns of bankruptcy in Scranton as city faces $20 million budget gap

By   /   November 11, 2013  /   No Comments

By Eric Boehm | PA Independent

Scranton could be headed towards another fiscal crisis like the one that resulted in city workers having their pay cut to minimum wage in 2012, according to a major credit ratings agency.

GOING BUST: Scranton could default or face bankruptcy before the end of the year, if the city doesn't close a $20 million budget gap, Moody's warned Friday.

GOING BUST: Scranton could default or face bankruptcy before the end of the year, if the city doesn’t close a $20 million budget gap, Moody’s warned Friday.

In a weekly publication, Moody’s warned investors that Scranton could be facing the threat of default or bankruptcy thanks to a $20 million budget gap for the fiscal year that begins Jan. 1. The city is supposed to approve a new budget by Nov. 15, which would have to close that deficit to balance the budget.

Without a balanced budget, the ratings agency warned that two financial institutions could withdraw from scheduled debt financing for the beleaguered northeastern Pennsylvania city.

The resulting liquidity squeeze would leave the city with few options to meet its financial obligations, raising the threat of default or bankruptcy,” warned Moody’s analysts.

A similar crisis hit the city in July 2012, which lead to Mayor Chris Doherty cutting all city workers’ pay to minimum wage for several weeks, a move that made national headlines.

“A second liquidity crisis could have more severe effects, including additional defaults,” Moody’s warned.

Doherty is the current mayor of Scranton, but didn’t seek re-election this year and will step down from the post at the end of the year.  City tax collector Bill Cortwright, a Democrat, was elected mayor Tuesday with 55 percent of the vote, beating Republican nominee Jim Mulligan.

Neither Doherty nor Cortwright returned calls Friday.

Scranton has more than $195 million in outstanding debt, according to Moody’s.

The city has been enrolled in the state’s Act 47 program for financially-struggling municipalities since 1992. A new state-approved recovery plan was put in effect in August 2012, following the last fiscal crisis.

To generate revenue necessary to address its debt, Scranton has considered taxing commuters and alcoholic drinks, though neither has been approved by the city council.

The Pennsylvania Economy League, which is overseeing Scranton’s Act 47 recovery plan, warned last month the city would have to raise taxes to avoid a default at the beginning of the 2014 fiscal year.

The ability to provide sufficient revenue for the 2014 budget is crucial to meet employee, vendor and creditor obligations, to avoid a repeat of the 2012 cash flow crisis and to provide necessary and vital services to Scranton residents and businesses,” wrote Gerald Cross, executive director of the PEL, in a letter to Doherty and Janet Evans, city council president.

Moody’s said the state’s Act 47 recovery plan hasn’t done enough to help cities like Scranton escape their financial troubles.  Lawmakers in Harrisburg have been eyeing changes to Act 47 for some time, but have been unable to reach consensus on what changes are needed.

Adding to Scranton’s financial woes is the need to borrow another $28 million to pay a court-mandated settlement with the city’s police and firefighter unions.

Scranton also faces more than $100 million in unfunded pension debt, on top of the $195 million in other debt owed.

Boehm can be reached at Eric@PAIndependent.com and follow @PAIndependent on Twitter for more.

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Eric is a reporter for Watchdog.org and former bureau chief for Pennsylvania Independent. He lives in Minneapolis, Minnesota, where he enjoys great weather and low taxes while writing about state governments, pensions, labor issues and economic/civil liberty. Previously, he worked for more than three years in Harrisburg, Pennsylvania, covering Pennsylvania state politics and occasionally sneaking across the border to Delaware to buy six-packs of beer. He has also lived (in order of desirability) in Brussels, Belgium, Pennsburg, Pa., Fairfield, Conn., and Rochester, N.Y. His work has appeared in Reason Magazine, National Review Online, The Freeman Magazine, The Philadelphia Inquirer, The Washington Examiner and elsewhere. He received a bachelor's degree from Fairfield University in 2009, but he refuses to hang on his wall until his student loans are fully paid off sometime in the mid-2020s. When he steps away from the computer, he enjoys drinking craft beers in classy bars, cheering for an eclectic mix of favorite sports teams (mostly based in Philadelphia) and traveling to new places.

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