An appeal to President Obama as he goes to Scranton

August 23, 2013

President Obama and his entourage are pulling into Scranton, PA for a speech on Friday. In many ways Scranton is the east coast equivalent of Detroit; a former industrial powerhouse reduced to the economic wilderness. The city’s unemployment rate was 9 percent in April 2013. Scranton almost ran out of cash last summer and the mayor reduced everyone to minimum wage to meet payroll.

The city of 76,000 has defaulted on contracts that can lead to loan defaults and is deficit borrowing at extremely high rates. It’s been in the state fiscal distress program for over two decades. The city has finally taken steps to right its fiscal ship. But it had to fight public unions tooth and nail to alter their path (page 14):

The full implementation of the 2002 Recovery Plan was never fully realized due to the opposition from the public safety unions of the City. The public safety unions sought Act 111 binding arbitration proceedings to challenge the 2002 Recovery Plan. After years of legal proceedings relating to the arbitration awards, the Pennsylvania Supreme Court ruled in late 2011 in favor of the public safety unions, overturning prior appellate court decisions.

The unions litigated wage cuts and now the city owes $16 million of back wages. So taxes really have to go up (14):

The approved Act 47 Recovery Plan calls for an aggressive approach to current revenues. The adopted plan calls for 70.32 percent property tax increase from 2013 through 2015. The City of Scranton is proposing that the Pennsylvania State Legislature approve a dedicated 1 percent increase to the current sales tax for imposition within Lackawanna County.

If this legislation is enacted, the property tax increase for 2013-2015 would be 35.01 percent. Additional revenue enhancements, such as increasing the current Real Estate Transfer tax from 2.8 percent to 2.9 percent, will allow the City to receive an additional $555,000. The adoption of an Amusement Tax will net the City $700,000 of new revenue.

These are important steps for the city, but raising taxes doesn’t fully address the costs that it has tried to support with a diminishing business base. Scranton, like other stressed cities, has unfunded pension liabilities that have been neglected and allowed to grow. The pension benefit obligation (unfunded pension liability for the city) is $113 million, or more than a full year of revenues (page 65). The average funded ratio for the city’s three pension funds is 34 percent. This is coupled with $21 million of accrued worker’s compensation claims, $177 million in long term debt and $225 million of unfunded future retiree health care costs. This adds up to about $536 million of future liabilities for Scranton.

The median total compensation for a police officer in Scranton is $71,250, while the median household income was $28,805 in 2011. This is a situation that is almost identical to bankrupt Stockton, California, where federal bankruptcy judge Christopher Klein wrote in his bench ruling about excessive public employee compensation levels:

Some of the problems were also the incrustation of a multi-decade, largely invisible or non-transparent pattern of above-market compensation for public employees.

What is my message to President Obama? A speech about education in a broken town is useful and might have the potential to bend the cost curve for higher education. But many of our cities are burdened with legacy costs and benefit structures that will snuff out any possibility of increasing local education spending. Who can take on the vested police and union interests?  The elected leadership of these communities are often overwhelmed by the organized force of public unions. Scranton is a perfect example.

I’m asking President Obama to begin a national discussion about the role of public unions in state and local governments. Are there ways to adjust funding or benefit structures for pensions and post-employment benefits to relieve massive pressure on local budgets? The federal government can help citizens become more informed about their future tax liabilities by developing a national database of public safety, teacher and other public worker salaries and benefits. I understand that there is a limit to how much the federal government can intervene in local and state affairs, but beginning the dialog and aggregating information are within its purview.

If America does not address state and local costs (see Chicago and Illinois especially), there will be crushing tax increases down the road. It’s not possible to grow out of these problems that have festered for decades. These are hard problems, but the federal government can have a role. I’m calling on President Obama to begin the discussion.

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