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PA: Scranton – out of money and running out of time

By   /   July 12, 2012  /   No Comments

By Eric Boehm  | PA Independent

The city of Scranton is broke.

HARRISBURG – The city of Scranton has bills and workers to pay, but no money.

It’s a cash-flow crisis that has hit national headlines in recent days after Mayor Chris Doherty last week slashed all city employee’s salaries, including his own, to minimum wage — $7.25 an hour —  in an effort to help the city make ends meet.  But the problems run much deeper for a city with more than $300 million in debt and a budget deficit of about $16 million this year alone, about 20 percent of the overall budget.

The Scranton City Council has blocked Doherty’s plan – which was endorsed by the state – to raise taxes 29 percent this year and 78 percent over the next three years so the city can keep paying its bills.  But the council’s plan – to borrow money on the bond market – also has hit a snag.

No one wants to lend the city any more money.

State Sen. John Blake, D-Lackawanna, who represents the embattled city, said the financial problems facing Scranton are “discouraging, but not insurmountable.”

“This is not something that came up overnight,” he told PA Independent on Thursday. “This is a cash-flow crisis, and they have to address the short term problem so we can begin to tackle the long term structural issues.”

In the short term, the city appears unable to even pay its employees.

In the long term, Scranton’s structural problems are a combination of $150 million in debt held either by the city itself or the Scranton Parking Authority, $90 million in unfunded pension obligations and another $15 million that is the result of a contested arbitration ruling by the state Supreme Court last year.

Further complicating matters is a state law that requires municipalities to pay those arbitration awards even when they are in fiscal straits and have no way to pony up.

In a letter sent Thursday, the state Department of Community and Economic Development, which oversees the state’s distressed municipalities program, pledged $2 million in loans and $250,000 in grants if the City Council and mayor agreed to a recovery plan by Aug. 1 and enacted it by Aug. 15.

The recovery plan would have to be approved by the state, as with all recovery plans under Act 47, the state’s program for distressed municipalities.

“This isn’t advocating for one plan or the other.  It advocates for the city leaders to come together and come to a consensus that will begin to bring some financial stability,” said Steve Kratz, spokesman for DCED.

Doherty and the City Council have been at odds for years, and they seem to rarely talk unless a judge is in the room.  There have been three lawsuits between them in the past two years.

Doherty sued the City Council in June for failing to enact his proposed budget for the year, which included a 29-percent tax increase this year and a 78-percent tax increase over three years.

That budget proposal was crafted with assistance from DCED, as required under Act 47.

The immediate cash crunch is hiding the more serious structural problems in the city, said Gary Lewis, a freelance financial consultant with an accounting degree and experience in managing distressed debt for failing banks.

“This isn’t a question of just getting some money and pulling through,” he said. “This is a matter of resolving the underlying issues, including grossly underfunded pension systems, unsustainable debt and excessive collective bargaining contracts.”

Lewis grew up in Scranton, attended Scranton University and moved back to the city last year.  He now writes a daily blog on the city’s finances, which is appropriately titled “Scranton is Broke.”  Lewis is openly advocating for the city to declare Chapter 9 bankruptcy as the only way for Scranton to sort out its financial problems.

And a toxic political environment between Doherty and the City Council makes any solution seem difficult.

Doherty has maintained that the tax hikes are necessary to keep the city solvent, but the City Council voted to amend that budget proposal by eliminating the tax increase and substituting borrowed money for tax revenue.  Doherty vetoed the plan, but the board overrode his veto 4-1 December.

Now, the city can’t find a bank willing to lend it any more money.

The one bank that was willing to negotiate a $16 million loan to the city pulled out in June amid more squabbling between the mayor and the City Council, according to court documents.

“I don’t blame the banks.  I wouldn’t lend us any money either,” Lewis said.

The city has a budget of about $86 million and is running a deficit of about $16 million, or roughly 20 percent.

Because it’s out of money, the city hasn’t been able to make payroll.  Doherty announced last Wednesday that the city would cut pay for all workers, including his own, to $7.25 an hour and use the savings to pay bills.

Normal payroll for the city’s roughly 400 employees would total $1.2 million.  By paying only minimum wage, the city will save $700,000.

According to the Scranton Times-Tribune, Doherty said workers would have the rest of their pay deferred until after the financial crisis is over. The city workers’ unions responded with a lawsuit seeking an immediate injunction last week.  A judge ruled in favor of the unions on Thursday, but Friday’s paychecks were not paid in full, prompting another lawsuit from the unions on Tuesday.

Doherty did not respond to calls for comment, but has repeatedly said on national television this week that the city is unable to make payroll and he has nothing to use to pay the workers, regardless of what is ordered by the courts.

In the offer of assistance Thursday, DCED Secretary C. Alan Walker acknowledged the “critical cash flow pressures” facing the city.