Moody’s Warns of Bankruptcy in Scranton, Pennsylvania

Published November 13, 2013

Scranton, Pennsylvania could be headed toward another fiscal crisis like the one that resulted in city workers having their pay cut to minimum wage in 2012, according to a major credit ratings agency.

In a weekly publication, Moody’s Investors Service warned investors that Scranton could be facing default or bankruptcy due to a $20 million budget gap for the fiscal year that begins Jan. 1. The city council on Nov. 21 approved a $130.2 million budget that includes a 56.7 percent increase in the city’s property tax and a 68.5 percent increase in the city’s trash collection fee. The additional money will be used to close the deficit, pay a $28 million union arbitration award, and make pension payments in 2014.

Without a balanced budget, the ratings agency warned two financial institutions could withdraw from scheduled debt financing for the beleaguered northeastern Pennsylvania city.

“The resulting liquidity squeeze would leave the city with few options to meet its financial obligations, raising the threat of default or bankruptcy,” wrote Moody’s analysts.

In Similar Straits Last Year

A similar crisis hit the city in July 2012, which led to Mayor Chris Doherty cutting all city workers’ pay to minimum wage for several weeks, a move that made national headlines.

“A second liquidity crisis could have more severe effects, including additional defaults,” Moody’s warned.

Doherty is the current mayor of Scranton but didn’t seek re-election this year and will step down from the post at the end of the year. City tax collector Bill Cortwright, a Democrat, was elected mayor on Nov. 5 with 55 percent of the vote, beating Republican nominee Jim Mulligan.

Neither Doherty nor Cortwright returned calls for comment.

Scranton has more than $195 million in outstanding debt, according to Moody’s.

The city has been enrolled in the state’s Act 47 program for financially struggling municipalities since 1992. A new state-approved recovery plan was put in effect in August 2012, following the last fiscal crisis.

Tax Increases On Table

To generate revenue necessary to address its debt, Scranton officials considered taxing commuters and alcoholic drinks, though neither proposal was approved by the City Council.

The Pennsylvania Economy League, which is overseeing Scranton’s Act 47 recovery plan, warned in October the city would have to raise taxes to avoid a default at the beginning of the 2014 fiscal year.

“The ability to provide sufficient revenue for the 2014 budget is crucial to meet employee, vendor and creditor obligations, to avoid a repeat of the 2012 cash flow crisis and to provide necessary and vital services to Scranton residents and businesses,” wrote Gerald Cross, executive director of the PEL, in a letter to Doherty and Janet Evans, City Council president.

Moody’s said the state’s Act 47 recovery plan hasn’t done enough to help cities like Scranton escape their financial troubles. Lawmakers in Pennsylvania’s capital of Harrisburg have been eyeing changes to Act 47 for some time but have been unable to reach consensus on what changes are needed.

Adding to Scranton’s financial woes is the need to borrow another $28 million to pay a court-mandated settlement with the city’s police and firefighter unions.

Scranton also faces more than $100 million in unfunded pension debt on top of the $195 million in other debt owed.

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