Scranton, Pa., may finance its $31.5 million settlement with police and fire unions with a refunding of some of its $50 million stranded parking authority debt, officials said Friday.

Bundling such a transaction, which would include the use of debt-service reserve funds, could save on interest and also mark a major step toward restoring a bond rating for the city, city business Administrator David Bulzoni said in a conference call from City Hall that included Mayor Bill Courtright and other city leaders.

"We don't have a final offer rate, but we are looking at a blended rate that's below 6%," Bulzoni told reporters. Courtright, upon taking office two years ago, rejected borrowing at 12% for an unrated city that has been a capital markets pariah since 2012.

Earlier this week, Courtright announced the union settlement, which includes back pay the city owes retirees under a 2011 state Supreme Court ruling that said the city could not cut benefits based on its status as a distressed city. The $31.5 million includes active interest and a combined $1.6 million deposit into the pension funds, split equally.

The City Council must approve the settlement and Scranton must finance it by June 30.

"To put it bluntly, without reaching a solid resolution to this issue, concluding some of our other major initiatives this year, from stabilizing and modernizing the parking authority to restoring financial health and sound management to our pensions, would have been challenged," said Courtright, who succeeded Chris Doherty in January 2014.

The city, he said, also achieved a further $3.6 million in concessions.

Scranton's struggles come amid heightened focus nationally on the unfunded liability of pension and other-post-employment-benefit plans, or OPEBs.

The Manhattan Institute for Policy Research estimated the public-sector pension shortfall at more than $1 trillion. According to Moody's Investors Service, market volatility points to more escalating pension-related debt this year that could wipe out investment returns made in 2013 and 2014.

Scranton, the 76,000-population seat of Lackawanna County in northeast Pennsylvania and the setting for the U.S. version of the television show "The Office," has been working to restore credibility in the capital markets ever since the City Council voted in June 2012 to default on a $1 million bond payment to the parking authority amid a political dispute.

The city since repaid the $1 million, but the parking authority stranded debt remains.

So does the black mark.

"We've had problems getting financing, even tax anticipation note debt, given the city's history," said Bulzoni. "The parking default was absolutely debilitating. That's a hangover that doesn't go away overnight."

Bulzoni said that the city and one of its financial advisors, Public Financial Management Inc. of Philadelphia, expects to have "very detailed discussions" with rating agencies later in the year about getting its bond rating restored.

"I think time is the biggest thing," said Alan Schankel, a managing director with Janney Capital Markets in Philadelphia. "But if they can finance it while refunding some of the parking debt, then that's a plus for them. They have new leadership and they're taking some of the right steps, which the rating agencies will take into consideration, but it will be a while before they get an investment-grade rating."

State Auditor Eugene DePasquale called Scranton's pension plans "severely distressed" and warned the city could go bankrupt within two years. Its non-uniformed pension plan was 23% funded as of January 2013, while firefighter and police plans were 16.7% and 28.8% funded, respectively.

"We never should have been in this situation in the first place," Courtright said in a clear swipe at Doherty. Had Doherty's administration settled by the June 30, 2013, said Courtright, the city could have saved $3.7 million, or about two years of debt service.

According to Courtright, the city was able to negotiate out the interest payment to retirees, saving $3.6 million, or more than 10% over its payout for back pay.

"To provide critical relief to our pension funds, we negotiated the retirees' payment to be a part of this deal, not out of the pension funds themselves," he said. "Had we not been able to negotiate this key deal point, the pension fund's actuary wrote that the alternative result 'would have been devastating to the pension plans.' "

Negotiating down the interest rate from 6% to 3%, starting when Courtright took office, enabled the city to make the deposits into the pension funds, split equally between fire and police. Without the settlement, the court would have imposed the 65%/

"[This will] help defray the long term liability we are working every day to reduce," the mayor said.

A third-party administrator will manage the city funds. A specialist physician with no union or administration ties will make final determinations on disability pensions. In addition, changes negotiated last year into the fire contract, which sought to rein in cost-of-living adjustments for disability pensioners, will be added to the police contract.

DePasquale last year called out Scranton for a double-dipping fiasco in which 35 employees benefited from an early-retirement incentive that began in 2002, with no authorization or city ordinance to support the payouts.

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