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Scranton's Charged Atmosphere Stymies Attempts to Stay Solvent

JUN 15, 2012 7:11pm ET
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SCRANTON, Pa. — Scranton styles itself as "The Electric City," but ongoing financial problems, combined with the discord on display at a City Council meeting last week, raise questions about its ability to keep the lights on at its 19th-century Gothic Revival City Hall.

Scranton as of Friday was down to roughly its last $140,000 after the City Council grudgingly agreed the previous night to release just over $1 million to the Scranton Parking Authority for a bond payment that was due two weeks ago.

Trustee Bank of New York Mellon and bond insurer Radian Asset Assurance Inc. said the authority could face four other conditions of default on July 7 that the City Council's own solicitor said are impossible to cure by then. The city had guaranteed the parking authority bonds.

Scranton, which also needs a $16 million loan to cover unpaid bills, hopes the vote will help appease M&T Bank, which, according to Mayor Chris Doherty, became skittish about underwriting such a bond issue after the council initially refused to release funds for the parking authority.

Unpaid bills include a $2 million demand from Blue Cross of Northeastern Pennsylvania for health care coverage and $200,000 from the city's fire-truck fuel supplier, Dunmore Oil Co. Additionally, Doherty has warned about payless workdays for municipal employees.

Some council members requested Doherty to pursue a $5 million sale of tax anticipation notes to cover short-term needs. Scranton issued $12.5 million of Tans in January.

Meanwhile, Scranton, for 20 years a distressed community under Pennsylvania's state-sponsored Act 47 workout program, lacks a revised recovery plan, which the mayor and council both admit is essential to winning back the favor of banks.

But the sides essentially don't talk with one another.

Doherty has only appeared sparingly before the council over his 11 years as mayor and since January 2010, an anti-Doherty bloc of four has dominated the five-member council.

Additionally, 77,000-population Scranton is on the hook for an extra $20 million to $30 million after the state Supreme Court ruled last year that the city could not use its distressed status to limit the size of arbitration awards. That ruling, in a case involving a Scranton firefighters union, generated efforts by state lawmakers to strengthen Act 47's ability to limit such awards. Such a bill is headed to the House floor.

Two weeks ago, the council rejected Doherty's revised recovery plan, in the works for two years in conjunction with consultant Pennsylvania Economy League and necessitated because the previous one was outdated. Doherty had proposed a 78% property tax increase over three years and a mix of other revenue streams, including the addition of amusement and commuter taxes. The latter, though, would need court approval.

The council has yet to release its own plan. On Thursday, it refused to even take up the matter, other than to criticize Doherty and state officials and consultants.

The state Department of Community and Economic Development, which oversees distressed communities, has offered mediation.

"We reached out to the mayor and City Council offering to have them sit with a third party mediator — a neutral party," said DCED spokesman Steve Kratz.

On Thursday, the council shot down the offer.

"Each side has different issues, but at the end of the day, they have to get together to restore some confidence by the banks," Kratz said Friday.

Council member Pat Rogan concurred. "I've said it a thousand times, all five council members and the mayor have to sit down in the same room and devise a plan," he said.

The city has $156 million of debt outstanding, while the Parking Authority's debt is $100 million. The parking debt accumulated during the past decade as the city added parking garages amid a downtown redevelopment, which included the opening of a Hilton hotel.

"Scranton cannot tax its way out of this situation and DCED should review all current options to get the city turned around," said David Fiorenza, a Villanova School of Business professor and the former chief financial officer of Radnor Township, Pa.

Council members, even those who reversed their earlier vote and released the parking bond funds on Thursday, have repeatedly called out the authority, under executive director Robert Scopelliti, as a symbol of mismanagement and opaqueness. They also cite conflict of interest in Paul Kelly serving as solicitor for both the city and the authority. The council has its own solicitor, Boyd Hughes.

"We got to this point over many years — lack of accountability, wheeling and dealing, stuff like that," said council member Jack Loscombe. "It's gone undetected for years but now it's come to light because we were able to get into it a little bit."

There are multiple Parking Authority bond issues listed on the Municipal Securities Rulemaking Board's EMMA site, but no continuing disclosures were posted for any of the issues as of mid-Friday, except for a notice about a 2004 advance refunding.

Some critics say default could mean the end of the Parking Authority through receivership.

"They're snakes. I don't want to give them an inch," said Rogan, the lone dissenter on Thursday's 4-to-1 vote.

Doherty and Scopelliti did not return repeated messages seeking comment.

Gary Lewis, a consultant for Deloitte who works in distressed debt and lives downtown, said he was "not too thrilled" with the council's action on Thursday.

"In some ways, it may have made it worse," said Lewis, who is considering a run for City Council next year. "Now we have $1 million less. The amount we now have [about $140,000] is less than the $200,000 we need for oil and not even 10% of what we owe Blue Cross. And it's not even close to what the city needs for payroll."

According to Lewis, the Parking Authority default may have constituted a material change that could place all of the city's bonds in default.

"Every time I get a handle on the situation it changes a little," he added.

The mayor-council impasse is similar to that in state capital Harrisburg, where political gridlock led to the imposition of a state-appointed receiver.

"In many ways, Scranton's more fractured than Harrisburg. They're all over the lot," said Mark Schwartz, who represented the Harrisburg City Council in its bankruptcy filing, which a federal judge ultimately invalidated.

Schwartz, though, does see some comparisons between the two cities. "They don't have something dark and precipitous hanging over them like the Harrisburg incinerator, but the rest of the story looks fairly familiar," said Schwartz, a former investment banker and bond lawyer.

"I want you to know that you are at a critical point. Once you have a receiver, you'll have no power to do anything," Schwartz told Scranton's council Thursday.

Elected officials seem averse to Chapter 9 bankruptcy as an option. "It doesn't solve our revenue problems," said Robert McGoff, Doherty's lone supporter on the council.

Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, said Scranton will probably obtain a loan.

"There's been some damage, yes, but I suspect they'll be able to borrow money, though at a higher interest rate," he said.

"They're not about to fall off a cliff. They can do it. I'm a pretty positive guy about the state's role with distressed communities," he said.

According to Schankel, the problems of Lackawanna County, of which Scranton is the seat, have hurt the city Last September, Moody's Investors Service dropped the county's general obligation bond rating five notches to a speculative-grade Ba3 from Baa1. Moody's cited "significant and rapid deterioration in the county's financial position."

One downtown businessman, though, sees much upside for Scranton and the region. "I have a good feeling about this city. It has a lot of potential," said Bob Dickert, a native of New York's Long Island who a year ago opened the upscale Carl Von Luger steakhouse up the street from City Hall.

Dickert is a descendant of Peter Luger, the German immigrant who founded the namesake landmark steakhouse in Brooklyn, N.Y.

"If shale gas comes through, I could see Scranton becoming the shale gas capital of the country," he said.

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