How to Bankrupt a City: Lessons from Scranton, Pennsylvania

Jan. 17, 2014
by Bob Adelmann

Poor Mert Gavin. He’s the owner of Mert’s Piano Bar in downtown Scranton, Pennsylvania, and between the pending 10% “drinking” tax and the extension of parking meter hours in front of his bar to 6PM, he’s finding that his customers are going home after work instead of stopping by for a cold one.

I am one of the last two bars that’s still downtown. Tink’s is gone. Whistle’s is gone. Banshee’s is gone. Molly Brannigan’s is gone.

Do they expect I’m going to bail the city of Scranton out all by myself?

This is what happens when economic ignorance and union influence combine. It’s deadly.

Scranton has been under union influence for years, and, coupled with natural and economic forces (the decline and eventual elimination of coal mining in the area, hurricanes, and mine collapses), the city has finally run out of time. It has made extravagant promises to its union employees, and, in recent years, has been borrowing from a union-controlled bank just to pay its bills. There was a crisis in the summer of 2012 when the city ran out of money, to the extent that the mayor ordered all city employees to take a pay cut all the way down to the minimum wage, including himself.  That didn’t last long, as the unions filed suit immediately, and full wages were restored.

Amalgamated Bank came to the rescue with TRAN (tax and revenue financing note) financing, just enough to allow the city to pay most of its bills. Scranton got in trouble again, not unexpectedly, last year, and, once again Amalgamated came to the rescue.

But this was short-term financing that could never solve a long-term problem: underfunded pension plans and generous “legacy” benefits to retired city workers that exceed taxpayers’ ability to pay.

The city’s balance sheet is a mess. When all the bills accumulated over the years are added up, Moody’s showed a total of nearly $200 million. And this for a city with a budget of little over $100 million. But that’s not the last of it by a long shot. The pension plans are underfunded to the point where only 35% of the monies promised to those retirees are on hand. That totals another $100 million.

And then there’s the little matter of a lawsuit that unions filed against the city, which was settled under arbitration in 2011 to the tune of $21 million. That was due and payable last fall.

The mayor tried to raise taxes, but the council voted them down. He filed suit. He lost. He tried again. They sued him. He lost. One wag said that the only time the mayor ever talked to the city council is when he had an attorney present!

But there’s a new mayor in town, a Democrat, who got 55% of the vote last fall. He has just the answer on how to close the $20 million budget deficit: more taxes! The city had already raised property taxes and trash pickup fees by nearly 60%, tripled rental registration fees and upped school taxes. They extended parking meter hours to generate more income. And now comes the new guy with more of the same: a 57 percent increase in real estate millage rates and a 69 percent increase in garbage collection fees on top of the ones already raised, bringing total new taxes to a homeowner to $400 a year.

The trouble is that Economics Lesson Number One is kicking in: those who can get out of Dodge, are. Unfortunately, the rest are stuck. Many of those forced to remain are on fixed incomes with a third of them living below the poverty level. Those who are staying are getting mad. For instance, Richard Laytos, a Scranton native, wrote to the local paper: “The coffers are empty. Savings are gone. Our city is dying. File bankruptcy!”

There seemed to be but one solitary soul extant in Scranton who knew what had to happen, and he moved away. Before leaving, however, Gary Lewis ran a blog called “ScrantonIsBroke” and even ran for mayor with his plan: Chapter 9, just like Detroit. It worked for them, getting the unions off the backs of the taxpayers. Why couldn’t it work in Scranton?

He learned the hard way about trying to swim upstream. He became a leper. Following his decision to drop out of the race, he moved to Indiana, saving $2,500 a year just in taxes. Said Lewis:

I did the math. I realized how much it was costing me to live in the city. That’s the story of my generation. There are a lot of kids like me who grew up, went to college at Scranton, but they turn 22 and move out of the city. They don’t move back because it’s not a financially attractive proposition.

Chapter 9 for Scranton? Oh, no, says the president of the local union: “It’s a horrible idea. You take local control out of the hands of policymakers and put it in some judge’s hand.” Translation: we own those local policymakers. There’s a chance that we might not own the judge. He might just get the same idea the judge had in Detroit: cut the pensions. Out of the question.

Besides, there’s still some blood left in the turnip. This is from the former president of Scranton’s city council:

We are in a different situation than Detroit. We were willing and able to do everything within the scope of our authority to continue the recovery of the city of Scranton until it sits once again on sound financial ground.

She failed to explain just exactly how transferring taxes from citizens to union members, present and retired, would “continue the recovery.” That’s Economics Lesson Number Two. She apparently is ignorant of both of them.

Besides, Moody’s doesn’t think there’s much blood left:

Scranton faced a similar liquidity crisis in June 2012 after it defaulted on its guaranteed revenue bonds…. Although the city cured the default swiftly, it was unable to access the capital markets for several months and had to temporarily reduce city workers’ salaries.

A second liquidity crisis could have more severe effects, including additional defaults….

Scranton will begin fiscal 2014 with effectively a zero cash balance….

Economic ignorance and union influence create a deadly poison. As Mish Shedlock so eloquently put it:

Officials in city hall are either complete financial morons, beholden to the unions, or beholden to their own pension plans that would take a hit if the city declared bankruptcy….

The economic jackasses in Scranton are going to extract every ounce of blood they can from taxpayers [and] then declare bankruptcy anyway.

That’s Economics Lesson Number Three: don’t mix economic ignorance with union influence.

A graduate of Cornell University and a former investment advisor, Bob is a regular contributor to The New American magazine and blogs frequently at www.LightFromTheRight.com, primarily on economics and politics. He can be reached at BobAdelmann@msn.com.

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Sources:

Mish Shedlock: Scranton Residents Plead for Bankruptcy vs. Higher Taxes; Different Than Detroit

Los Angeles Times: For Scranton residents, bankruptcy is an inviting option

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

Moody's credit outlook for Scranton - Nov. 8, 2013

Scranton Times-Tribune: Fresh from big win, Scranton Mayor-Elect Bill Courtright enters transition phase

Scranton Times-Tribune: Detroit bankruptcy ruling reverberates in Scranton

Mert’s Piano Bar

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