Scranton, Pa., risks default as it faces a $20 million budget gap with a Friday deadline to introduce its fiscal 2014 budget, said Moody's Investors Service.

Without a balanced budget, Janney Montgomery Scott and Amalgamated Bank will probably withdraw from planned debt financings necessary for the city to maintain positive operating cash flow in fiscal 2014, said Moody's, which does not rate Scranton.

"The resulting liquidity squeeze would leave the city with few options to meet its financial obligations, raising the threat of default or bankruptcy," the rating company said in its weekly credit outlook, released Monday. "Without the banks' participation, Scranton will begin fiscal 2014 with effectively a zero cash balance, creating significant operational strain until the bulk of its property tax revenue comes in March."

Scranton must also borrow a further $28 million to pay a 2011 arbitration court award to police and fire unions and fund required pension system increases. The court two years ago ruled that the city could not use its distressed status under Pennsylvania's Act 47 workout plan for distressed communities to diminish pension payments.

With outgoing Mayor Christopher Doherty and the City Council at an impasse over the budget, the city could be looking at an asset sale or steep property tax hike in the 70% to 80% range. One asset-sale scenario could involve a sale-leaseback of a new police headquarters.

A court-appointed receiver took control of the Scranton Parking Authority's five garages last year.

The city had intended to complete the $28 million issuance by mid-summer, but according to Moody's, underwriter Janney delayed the sale, citing Scranton's lack of progress in implementing its recovery plan. Janney had hinged its financing on the city balancing its 2014 budget. Moody's said.

"It's a pretty sorry situation, but it's nice to see the banks hold their feet to the fire and not lend them anything until they come up with a budget based on real revenue. They city has been relying on imaginary revenue for three years, such as $1.3 million from payments in lieu of taxes and fees from car towing, or whatever. Hopefully this will be the domino that straightens things out," said Gary Lewis, a private-sector financial consultant.

Lewis won the Republican nomination for mayor in the spring but later dropped out and moved to Indiana, Pa.

Lewis for two years has argued that filing Chapter 9 bankruptcy would be a better option. "I still maintain that the benefit of bankruptcy is that it hits a pause button for the city and gives them time to negotiate long-term debt," he said.

Scranton, the 76,000-population seat in northeast Pennsylvania's Lackawanna County, has struggled financially the past few years. In 2012 it paid employees the federal minimum wage for two weeks after a $1 million parking authority bond payment triggered a shutoff from the capital markets.

A message was left with Mayor Chris Doherty seeking comment. Doherty, the city's mayor for 12 years, did not seek re-election.

Tax Collector Bill Courtright, a fellow Democrat, will succeed Doherty on Jan. 1.

"I knew going in that I would be walking into a mess," said Courtright on Nov. 6, the morning after he defeated Republican Jim Mulligan in the general election. "I know it will be difficult, but I'll surround myself with good people and we'll come out of this fine."

Given Courtright's strong union backing, renegotiating contracts seems unlikely.

Scranton has $195 million of long-term debt outstanding, according to Moody's, including direct obligations of the city, city-guaranteed debts of component units and $15 million of state loans. Of the $195 million, $16 million bears interest at a variable rate, while the remainder is fixed rate. Scranton also issues $14.5 million of tax and revenue anticipation notes annually.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.