Bankruptcy Looms as Scranton’s Public Pensions Collapse

Published September 8, 2014

Scranton, Pennsylvania was formally declared financially distressed under Act 47 of 1987, on January 10, 1992. The purpose of the statute is to restore a municipality to fiscal health, by having a state-appointed coordinator devise a recovery plan that can involve a multitude of recommendations for the municipality.

Since Scranton was declared distressed 22 years ago, 12 additional municipalities — including Pittsburgh, Pennsylvania’s second-largest city and Harrisburg, the state’s capitol — have entered, and remain in Act 47 status.

Over the years, it has become clear that the state legislature is considering reforming Act 47 — considering options such as trying early-intervention methods to stave off entering into distress in the first place, placing time limits on how long a municipality can be in distress, and the possibility of disincorporation for municipalities that are no longer viable. However, Scranton’s problems have remained seemingly intractable, despite the state government’s intervention.

So, what should be done about Scranton? Recommendations have been made in the City’s 2012 recovery plan to get the City on solid footing and out of Act 47, but that plan is in effect only through the end of the 2015 calendar year.

In August, the state’s Auditor General visited Scranton, opining that the condition of the City’s pension funds suggested the high likelihood of a bankruptcy declaration within the next 3 years.

In aggregate, Scranton’s municipal pension plans had $43.7 million in assets and $194 million in liabilities: a funding ratio of a staggeringly low 23 percent. Under the terms of Pennsylvania’s 2009 municipal pension law, Scranton’s pensions are “severely distressed.”

Entering into a Chapter 9 municipal bankruptcy proceeding is quite rare, but it is permitted in Pennsylvania. Based on a memorandum from a California bankruptcy court when the City of Vallejo filed in 2009, state provisions regarding impairment of contracts — meaning a law cannot be passed to erase pension promises — would yield to the national government’s bankruptcy laws.

Can the city tax its way out of distress and avoid bankruptcy? Currently, it levies taxes on real estate, realty transfer, parking, business gross receipts, amusements, and local services — just as many other municipalities. However, in response to its distressed status, Scranton levies higher rates than most cities on earned income of both residents and non-residents, and is currently attempting to impose an additional commuters-only tax, under provisions of the state’s pension law.

Such a tax will almost certainly harm relations between Scranton and its neighbors, especially those who commute to work in Scranton.

The city could examine selling and/or leasing city assets to close the pension gap, but Scranton cannot decide to enroll any employees, particularly new hires, in a pension system that moves away from a defined benefit structure, unless the state enacts legislation permitting such a change. However, such a switch would not eliminate the accumulated liabilities.

Regardless of how Scranton city officials decide to deal with or avoid the impending bankruptcy, it remains clear that past failures to properly save and spend taxpayer money in accountable ways has resulted in the city’s inability to keep its promises — a failure which may soon hurt both the general public and their servants in city government.

Eric Montarti ([email protected]) is Senior Policy Analyst for the Alleghany Institute for Public Policy, based in Pittsburgh, Pennsylvania.

Internet Info:

“Chapter 9 Bankruptcy: What it Means for Pennsylvania’s Municipalities,” Eric Montarti, Allegheny Institute for Public Policy