An appeal to President Obama as he goes to Scranton

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.

Will Scranton recover?

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.

Rising personnel costs are weighing down cities

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.”

States hold sway over their cities in bankruptcy matters

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.

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