MuniLand

Scranton, Pennsylvania blasted into the national consciousness last summer when its mayor, facing a cash shortage, slashed city worker wages to minimum wage.

In August the city was saved from immediate ruin by the union-owned Amalgamated Bank:

Amalgamated Bank recently provided $6.25 million of short-term financing to the City of Scranton, Pennsylvania. Nearly two months ago, the salaries of 400 municipal employees were reduced to the minimum wage level. Now with Amalgamated’s loan, the City can make its full weekly payrolls and pay its vendors while completing and putting in place a three-year fiscal recovery plan.

After Amalgamated was repaid, it gave Scranton a larger loan with longer terms:

Scranton was then able to subsequently line up long-term financing through a ten-year private placement, and the City is now continuing to implement its multi-year Recovery Plan.  Scranton fully repaid our first TAN loan in December 2012; Amalgamated subsequently stepped-up our commitment to Scranton in January 2013 with a larger and longer second TAN loan.

Scranton then entered the bond market to do a private placement of $14 million of bonds due in 2023 with 7.50 percent interest. These are general obligation bonds backed by the full faith and credit of the city. The city needed to borrow more in large part due to a court decision that required it to pay city unions a $17 million settlement. That required additional debt around $25 million (page 7):

Bloomberg’s Romy Varghese wrote an excellent piece about escalating wages and pension costs for public safety workers that mirrors much of what I’ve been writing about several bankrupt California cities. As municipal revenues slowly inch up, mandated wage and pension increases have been ravaging budgets:

Rising personnel costs have helped drive revenue-strapped cities toward insolvency from coast to coast.

“A majority of their costs are tied up in people,” said Christopher Hoene, research director for the National League of Cities in Washington. “If you look at any organization of any size around the country, you’ll see anywhere between 60 to 80 percent of their costs are in personnel-related expenditures.”

Bloomberg View’s Josh Barro wrote an interesting piece Thursday urging Scranton, Pennsylvania to declare Chapter 9 bankruptcy. Scranton has achieved national attention after the mayor reduced all city workers’ pay to minimum wage last week because the city could no longer afford paying their full salaries, a powerful image of how little cash Scranton has left.

The problem with Barro’s proposal is that Scranton cannot file for Chapter 9 without the consent of Pennsylvania’s state government. Chapter 9 bankruptcy is a part of the federal bankruptcy code, and it gives individual states the authority to decide whether their cities can go bankrupt:

States play a key role as gatekeepers or guardians in that, by virtue of [bankruptcy code] amendments codified in 1994, they have to specifically authorize their municipalities to file for Chapter 9. Silence on the matter is taken as a prohibition on filing.