The Securities and Exchange Commission's whistleblower office has requested additional information regarding a complaint that distressed Scranton, Pa., misled investors about the nature of a millage increase last fall in a bond document, according to the original tipster.
Gary Lewis, a private-sector financial consultant who works with distressed debt, said the city is using the 10% millage increase to cover unfunded debt, and not a budget gap, due to a Lackawanna County court striking down a proposal to impose a 1% commuter tax.
On Dec. 20, right after the court's decision, city officials issued a supplement to a Dec. 5 private-placement memorandum after receiving a $14.7 million commitment from Janney Capital Markets. The memorandum cited the need for an accelerated real estate tax hike - according to city officials, the 10% would produce about $1.5 million to cover the revenue shortfall from no commuter tax.
But Lewis, who is a Republican candidate for Scranton mayor, said the official statement to the bond document also indicated that the accelerated tax was necessary to cover an October court order allowing for additional unfunded debt. He cited comments at a Dec. 13 council meeting by Mayor Chris Doherty and City Council President Janet Evans that the tax hike was needed to cover the unfunded debt.
"It is my belief that the city knowingly and willfully misrepresented the true nature of the Dec. 13, 2012 millage rate increase of 10% when it filed the Dec. 20, 2012, supplement," Lewis said in a letter to SEC whistleblower office chief Sean McKessy.
McKessy had written Lewis on Feb. 19 requesting more information after Lewis had notified the agency a month earlier.
"It was encouraging for the SEC to seek additional information. Once the city sees this, hopefully they'll think twice about doing this kind of thing again," Lewis said in an interview.
City business manager Ryan McGowan said he hadn't seen Lewis' latest document.
"No, not really. It's his opinion. He's running for mayor, so maybe it's a platform thing," McGowan said in an interview. "I know we've had some tough decisions to make the last couple of years and we're doing what needs to be done."
Messages seeking comment were also left with Doherty and Evans.
Janney's issuance consisted of $9.75 million in Series 2012C general obligation bonds and $4.91 of Series 2013A general obligation notes. Janney officials cited Scranton's progress in attempting to deal with its financial problems.
Scranton, the 76,000-population seat of Lackawanna County, is in the state-sponsored workout program for distressed municipalities, known commonly as Act 47. It struggled to access the capital markets last summer after the city council withheld a $1 million parking authority bond payment slide for two weeks.
For two weeks in July, Doherty paid city workers, including himself, the federal minimum wage.