"I knew it was bad, but not this bad," says Scranton Mayor Bill Courtright.

SCRANTON, Pa. -- Bill Courtright ran for Scranton mayor in 2013 knowing the three public pension funds in the Electric City were low on juice.

After he took office, he found them even worse.

"I didn't like the direction the city was going in and I didn't want to move," he said in an interview at the city's 19th-century neo-Gothic City Hall building. "I knew the difficulties of the job when I ran, though I didn't realize the pension problem was as bad as it is.

"I knew it was bad but not this bad."

Citing audits, Pennsylvania Auditor General DePasquale said Scranton, the state's sixth-largest city and the 76,000-population seat of Lackawanna County, could go bankrupt within three years thanks to chronic underfunding and a double-dipping fiasco.

Its non-uniformed pension plan was 23% funded as of January 2013 and could be bone dry by 2018. Firefighter and police plans are 16.7% and 28.8% funded, respectively, and could expire within three and five years, respectively.

Pew Charitable Trusts considers 80% an acceptable threshold.

Scranton, while a severe case, is not alone. A separate DePasquale report, on behalf of the task force he chaired at Gov. Tom Wolf's request, called for funding- and transparency-related measures to tackle local pension shortfalls statewide. In January he labeled 567 of Pennsylvania's 2,600 municipal pension plans "severely distressed," with combined municipal liabilities at about $7.7 billion.

Pennsylvania itself is wrestling with an estimated $53 billion unfunded liability that prompted downgrades last year from all three major bond-rating agencies. Nationally, pensions have been central to bankruptcy filings in Central Falls, R.I., Detroit and several California cities, and fiscal distress from Chicago to Puerto Rico.

DePasquale said Scranton inflicted its own wounds with a double-pension bonanza beginning in 2002 that helped chop the non-uniformed employee ratio from 78%. In what DePasquale called "the definition of disorganization," 35 employees benefited from an early-retirement incentive offered by Courtright's predecessor, Chris Doherty, with no authorization or city ordinance to support the payouts.

Neither the pension board nor City Council gauged, at least on record, the financial impact of the double-dipping, DePasquale said. "They either knew and didn't want to say on the record, or they were passing it without knowing what it was," he told reporters at a City Hall news conference. "Either is completely irresponsible."

According to the Times-Tribune newspaper, people who benefited included former mayor Jim Connors; former councilman Daniel Noone; and Terri Barrett, the wife of Tom Barrett, pension board president at the time.

DePasquale said he forwarded his findings to the State Police and to the FBI.

Courtright, a former city tax collector and longtime local businessman who followed Doherty's 12-year reign, immediately proposed moving Scranton to the Pennsylvania Municipal Retirement System, a state agency that administers public employee pension plans.

He said the move, among other positives, could take pressure off local pension board members. "If I were a retiree I'd want to be in PMRS," he said.

DePasquale cited the state system's management of capital city Harrisburg. While Harrisburg flirted with bankruptcy from 2011 to 2013, two of its three pension funds under PMRS management were funded at 116% and 136%. Harrisburg, though, had one of Pennsylvania's lowest rates of disability pensions for firefighters and police officers, just 3.3%. Scranton's is 54%.

Scranton's City Council, whose rapport with the mayor's office has improved under Courtright, also supported the change. Buy-in from the pension boards in the union town could be difficult, although the mayor, who campaigned on his ability to communicate with unions, cited "a good sense of cooperation" from labor officials. He said he has arranged for PMRS officials to brief union members on the system.

PMRS insists on a 5.5% expected rate of return, a sharp drop from the high 8% Scranton uses. Dramatically increasing its minimum municipal obligation, or MMO, stands to worsen the cash crunch in a city already low on revenue and high on long-term debt.

Scranton may have to increase the contribution in steps.

"We have to rectify some of the plan differences, the most glaring of which is the 5.5% rate of return," said city business administrator David Bulzoni. "Obviously that's something we can't do immediately."

Unrated Scranton has reported its unfunded liability at $150 million, based on the 8% discount. Moody's Investors Service last August, using a lower, market-based discount rate, pegged it at nearly $260 million.

William Rhodes, public finance chairman at Philadelphia law firm Ballard Spahr LLP, said the contribution spike and the loss of independence through consolidation often make the state system a tough sell. "Driving up the MMO holds back some of them."

Taking advantage of state laws that enabled distressed cities to cut contributions by 25% annually, Scranton pruned its MMO payment from $48 million to $32 million over six years and in 2014, paid $12.1 million as opposed to $15.7 million. Doing so, however, also created a $10.9 million shortfall.

Courtright would not rule out another tax increase. The 2015 budget included a 19% increase in property taxes, while the annual local services tax for people who work in Scranton triples from $52 to $156.

The mayor wants to avoid bankruptcy at all costs. "Some people think bankruptcy is a solution," he said. "They think it eliminates all contracts. They think that arbitration rulings go away. They don't."

Other noteworthy long-term debt includes an arbitration back-pay award to police and firefighter retirees, and $53 million related to the city's guarantee of parking authority bonds.

The state Supreme Court late in 2011 mandated the award for which the city is on the verge of implementing a payment plan. The court ruled that Scranton could not adjust contracts based on its distressed status under state-sponsored Act 47 program. Scranton has been in that program since 1992.

"We're reasonably close to presenting a plan," said Bulzoni. The city could bond to pay the debt, which could rise to about $24 million by year's end.

According to consulting firm HJA Strategies LLC of Hackensack, N.J., city debt could spiral to about 16% of the city budget by 2018. A debt payment of upwards of $20 million could be due that year.

HJA, whose clients include troubled New Jersey municipalities Newark and Atlantic City, is working with Scranton along with financial advisor Public Financial Management Inc. of Philadelphia. The Pennsylvania Economy League is the city's Act 47 coordinator.

Scranton is looking to sell or lease its parking and sewer systems, possibly with bond financing, to provide a consistent revenue stream. The local sewer authority would have to sign off on that related transaction, for which Scranton has issued a request for proposals.

"Like many municipalities, Scranton lacks options on the revenue side," Rhodes said. "Scranton in many ways has been hamstrung."

Rhodes cited the Lackawanna County court ruling last September that nullified a 0.75% commuter tax one day before it was to take effect. The court ruling cost Scranton an estimated $5.1 million annually.

"They have to think of ways to raise revenue, to be honest," he said. "Everything has to be on the table."

Those options range from further increases in the real estate tax to issuing pension obligation bonds. Heated debate has engulfed the latter.

"I doubt the market would support issuance of some pension bonds, given all these unknowns. And that also only adds to costs," said Gary Lewis, a private-sector financial consultant and Republican candidate for mayor in 2013.

Bulzoni said pension bonds could be viable. "Interest rates are favorable," he said. "The market would have a greater level of confidence if we have a defined revenue stream. By creating a defined revenue stream, we could have an attractive sale."

The parking authority, which amassed debt during an economic development buildup in the Doherty years, was central to a 2012 default that damaged Scranton in the capital markets. That June, the City Council, looking to dismantle the parking authority, refused to allocate money for a city backed guarantee of a $1 million authority bond payment.

Two weeks later the council reversed its vote, but a spooked M&T Bank backed off a $16 million bond issue the city needed to pay bills. Scranton could not borrow. Its reserves dwindled to $140,000 and Doherty for two weeks paid municipal employees, including himself, the federal minimum wage.

Scranton made national headlines and not just because it was the setting for the U.S. television show, "The Office." Doherty even told the Times-Tribune that negative coverage in The Bond Buyer and The Wall Street Journal made it harder for his city to obtain financing.

"The defaulted loan was an embarrassment for the city," said Courtright. Scranton has since repaid it.

Union-oriented Amalgamated Bank came through with a series of short-term financings, notably tax anticipation notes, the past two years.

Regaining the good graces of lenders for the long haul will take time and efficiency in addition to revenue, according to Bulzoni.

"We recognized the foolishness of the engineered default," said Bulzoni, a former supervisor of nearby Newtown Township, Pa., and 28-year PNC Bank operative who joined after Courtright's election.

The city also dedicated its real estate tax collections in the past fiscal year - roughly $3 million - to offset debt. Additionally, it tapped the state Department of Transportation for a 10-year, $2.25 million loan at 1.6% through the Pennsylvania Investment Bank to pave some of the city's notoriously bumpy streets.

"We weren't going to get that anywhere," said Bulzoni. The city is repaying the loan outside its general fund, through increases to the liquid fuels fund the city receives annually.

Most pressing, though, is still ever-ominous pension underfunding.

Ballard Spahr's Rhodes urged city officials to work hand-in-hand with DePasquale.

"If that means getting a grip on the minimum municipal obligation, they should do it," he said. "The capital markets, when they look at Scranton, will look at how well they implement their recovery plan. Craft a five-year plan or even a 10-year plan, the way Baltimore did."

 

 

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.