Tax ruling compounds new Scranton mayor's task

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Paige Cognetti, in her inaugural speech as Scranton mayor, said her administration's overriding goal is to "bring certainty" back to the city.

To do so, Cognetti must deal with some daunting uncertainties in the 78,000-population seat of Lackawanna County in northeast Pennsylvania coal country. They range from perceptions of the city after a corruption scandal to the final resolution of a taxpayer lawsuit that could leave a city already stressed financially on the hook for up to $50 million.

Another question is whether Scranton is in position to exit Pennsylvania's oversight program for distressed communities, known commonly as Act 47. Scranton has labored in the program in 1992, and officials were hoping to leave oversight sometime this year.

Cognetti, 39, a Beaverton, Oregon, native who parlayed her outsider status through a "Paige against the machine" campaign, running in a city that is home to presidential candidate and former vice president Joe Biden and senior U.S. Sen. Bob Casey.

She won a seven-person race as an independent on Nov. 5 to become Scranton's first female mayor. She gave birth two weeks before Monday's swearing in.

Cognetti is filling out the final two years of Bill Courtright's term. Courtright resigned in July and pleaded guilty to three felony pay-to-play public corruption charges in a Pennsylvania federal court.

The charges were criminal conspiracy, attempting to obstruct commerce by extortion and bribery concerning programs receiving federal funds. His sentencing at the U.S. District Court for the Middle District of Pennsylvania in Williamsport was postponed from early November.

"The culture around local government in this area has enabled some bad actors to degrade Scranton," Cognetti said Monday.

Wayne Evans was interim mayor for six months. "What a long, strange trip it's been," Evans said in his December State of the City speech.

Corruption aside, Scranton has serious financial challenges that Judge James Gibbons of the Lackawanna County Court of Common Pleas compounded last month. He ruled that Scranton has been overtaxing its residents by $10 million annually since 2015.

The city filed an appeal shortly before Evans left office.

“My team and I are digesting the decision," Cognetti said in a statement after the ruling. "We are working to collect the facts and get a full picture of how the city got to this point. We will take our time to study and consider possible options.”

A taxpayer group led by former independent mayoral candidate Gary St. Fleur argued that taxes the city charged exceeded limits under state's local tax enabling law, called Act 511. The city argued that as a home-rule charter municipality, it was not subject to the statutory cap of Act 511 nor "any limitation on rates of taxation imposed upon residents."

"We found the city’s argument wanting then and we find it wanting now," Gibbons said.

"The city's submissions belie its elements," Gibbons added, citing a variety of other local taxes under which the city identified as being under the Act 511 cap. "Virtually every single ordinance submitted cites Act 511 in one form of another. ... The city cannot consider Act 511 applicable in one breath and inapplicable in the next."

Gibbons also refuted the city's argument that state court rulings on Pittsburgh parking and Penn Hills School District mercantile taxes set relevant precedents,

Scranton taxpayers have no more to give, said St. Fleur, a New York native.

"Enough is enough," he said. "No other community in Pennsylvania collects taxes this way. Why should Scranton be any different?

“It’s fascinating, when you think about it and what America stands for," he added. "Imagine a taxpayer-led lawsuit over taxes. The local government lost and refuses to acknowledge a problem. I understand bad decisions happened and mistakes were made, but you have to confront them. You don’t deny them or sweep them under the rug.

"The rating agencies should see this as a negative.”

The city's bonds are already junk. S&P Global Ratings, the only agency that rates the city, assigns its BB-plus rating, one level into speculative grade. S&P in August 2017 upgraded the city from BB after it sold its sewer system and earmarked a majority of sale proceeds to retire more than $40 million in high-coupon debt.

Should the ruling stand, it would put a deep hole in Scranton's budget, according to Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

"If it reduces taxes by $10 million a year, that takes one-eighth of their revenue. That's a really big chunk of money and injurious to their fiscal health," Schankel said. "They would have to cut a lot of their expenses."

Scranton has long struggled with chronic budget imbalance and unfunded pension liability. Its credibility in capital markets plummeted in 2012 when it missed a bond payment to the local parking authority amid a political dispute. Roughly 28% of the city's budget goes toward fixed costs such as pension obligations and debt.

"There's not a lot of flexibility, and that's before you even get to refunding taxpayers," Schankel said.

Schankel expects caution from the markets, which had been kinder to the city in recent years after it monetized its parking assets and sold its water and sewer system.

"I think that kind of buzz is gone," he said. "I'm less worried about the convicted mayor — that's relatively easy to get beyond. The real issue is the money."

Schankel also said a longer stay under state oversight might be in order. "Act 47 does offer some flexibility that might not have after they leave."

Cognetti is a former senior advisor to the undersecretary for international affairs at the U.S. Treasury Department in the Obama administration.

While on the staff of Pennsylvania Auditor General Eugene DePasquale, she helped write a report critical of the Scranton School District.

On Monday she called for regional approaches to economic recovery.

"We cannot afford to act as though our problems begin and end at the city's borders," she said. "The health of our region is inextricably linked to Scranton's, and the city's success depends upon the progress of northeast Pennsylvania as a whole."

The city, Cognetti said, has received a $100,000 grant from the state's Department of Community and Economic Development for technology and public safety upgrades. DCED oversees Pennsylvania's distressed cities.

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Budgets Tax-related court cases Bill Courtright City of Scranton, PA Pennsylvania