Dunderheads: Part 1, 19% structural budget deficit

July 25, 2012 | Capital markets, Cities, Guarantees, Municipal bankruptcy, Municipal bonds, Real estate taxes, Scranton, US News

By:David A. Smith

 

No one will be seated after the start of each performance, read movie theatre signs of my childhood, because unless you followed the plot from the beginning, you’d be lost and might confuse heroes from villains.


We’re taking over for your city council

 

A similar confused fate would befall readers of the New York Times (July 11, 2012), as they sought to untangle just how Scranton, Pennsylvania, had run itself out of cash.

 

See? No money left at all

 

Unions Fight Scranton Mayor After He Cuts Pay to Minimum Wage

 

Given that headline, you could be forgiven for thinking the story about the mayor and the unions, but the pay cut is just the precipitating event – as we’ll see in this post, it’s at best a means of getting everyone’s attention. 

 

The city’s problems are related in part to a standoff between the mayor and City Council. Its members, at a meeting last month, include its president, Janet Evans, Frank Joyce, center, and Jack Loscombe.

 

Scranton has been living beyond its means for more than a decade, and doing so using what in the private sector would be clear-cut fraud but which, because of an oversight in government reporting obligations, is merely criminal deceit.

 

Deceitful?

 

When the city of Scranton, Pa., found itself down to its last $5,000 in the bank last week, its Democratic mayor took a highly unusual step: he unilaterally cut the pay of city workers — including police officers, firefighters and even himself — to the minimum wage, just $7.25 an hour.

 

One wonders why he stopped there.  Perhaps it was simply the lowest rate with even a minimally plausible justification, one to pass muster to a newspaper headline.

 

Now the city’s unions are fighting for their promised pay in court.

 

I’ve posted many times before that public-sector union pay and pensions have been the cause of many a municipality’s failure – and that municipal bankruptcy may be the only remedy available.  Though bankruptcy will probably be in Scranton’s future, this time the union contracts appear not to be the proximate cause.

 

“The teenagers who work at the ice cream stand not far from my house, they make $8.50 an hour — that’s a dollar and a quarter more than I now make,” said John J. Judge IV, a 10-year veteran firefighter who is the president of the Scranton local of the firefighters’ union.

 

The ice cream stand isn’t broke.  Scranton is.  Indeed, that’s the title of a hilarious and spluttering ly erudite blog by Scranton local Gary Lewis, who’s also done all the spadework necessary to document the myriad ways in which Scranton has played a bad position badly.

 

That bad, huh?

 

But Scranton finds itself in a position that is unusual even in this era of widespread budget pain: it has nearly run out of cash and, so far, no one is willing to lend it more.

 

Sub-sovereign entities like cities and states have no inalienable right to tap financing – and for that matter, neither do sovereign entities like Greece. When that happens, the cash has just plain run out.

 

As the city has fallen behind on its bills, it has received warning letters from the company that sells it gasoline for its police cars and fire trucks; the landfill where it dumps its garbage; and even its water company, which threatened to cut off service –

 

When it comes to utilities and supplies, there is a big difference between continuous-availability and quantum-delivery.  In utilities like electricity, gas, and water, the product flows automatically until someone cuts it off, whereas in quantum-delivery utilities (oil for heating, gasoline for cars, even dump trucks for trash), each and every time service is needed, someone must decide to do it.  The small vendors know if they are caught with a big receivable from a local government, they can expect pennies on the dollar.  I don’t blame them at all. 

 

– according to a lawsuit that Mayor Christopher A. Doherty filed against Scranton’s City Council last month in an attempt to force it to adopt his financial plan, which calls for raising taxes.

 

Sometimes you just have to sue somebody

 

When there is an impasse between governmental bodies, perhaps litigation is the only recourse; even so, it’s a depressing commentary on our government’s dispute-resolution alternatives.

 

Mr. Doherty warned in the suit that the city’s “basic daily operating functions” could be compromised, “placing the city’s residents in immediate peril and undermining their health, safety and public welfare.”

 

In any good lawsuit, the plaintiff’s filing is its press release, so we can take such statements as the best kind of self-serving – but likely to be true.

 

God, I’m good, aren’t I?

 

What brought Scranton to this mess?  The Times seems to suggest the problems could have happene3d to anyone:

 

The troubles of Scranton, a city of 76,000, are a combination of:

 

Long-term structural decline

A mayor and City Council at loggerheads

Since June, an inability to borrow.

 

You’re questioning my leadershjip?

 

Actually, that’s wrong – and the Times well knows it’s wrong, because the New York Times itself reported on the real cause a few weeks earlier, on June 26 (Arial red):

 

Scranton, a faded former coal center, touched off a full-blown debt crisis this month [June – Ed.].  A local parking authority –

 

This ‘local parking authority’ is in fact a creation of the city, though one with its own balance sheet and income/ expense statement.

 

– had issued bonds to finance parking garages that the city had used in a campaign to woo Hilton Hotels and Resorts to operate a conference center downtown.

 

Though it has its own board and its own assets, the authority was set up by the City of Scranton to borrow money to build city parking garages, but seemingly not on the city’s budget.

 

Gary Lewis, a Scranton accountant, at the first garage that was financed by the Scranton Parking Authority.

 

Two years ago, we saw Harrisburg in a similar plight, having financed a mega-waste treatment facility in hopes of luring revenue from surrounding communities, all part of a grandiose (and, in the event, unsuccessful) strategy to cope with declining industry and revenues. 

 

Scranton has been in dire fiscal straits for years.

 

You want to be paid?  There’s pay for you!

 

Scranton’s play was similar – building a facility in hopes of creating a comparative advantage. 

 

Our choral group should count, shouldn’t it?

 

But the revenues didn’t arrive, and Scranton kept investing.

 

Each time the authority issued more bonds, the city backed them with a powerful “full faith and credit” guarantee. By 2008 the authority had $54 million in bonds outstanding, and was spending about 60% of its [The parking authority's – Ed.] budget on debt service — so much that it could not cut parking rates to compete with cheaper parking lots nearby.

 

That statement is ludicrous.  Debt service is what you need; the market is what you can get.  Refusal to cut rates because you need more than the market will bear is financial innumeracy, or stubborn foolishness.

 

Now, here’s my pyramid scheme

 

[Recently the authority] said it couldn’t make a bond payment coming due in June, calling on the city’s guarantee.

 

Nowhere in the Times’s story does it explore the relationship between the parking authority’s board (Stella, Hiller, Tunis Jr., Salerno, Matvievich), the city council (Loscombe, Rogan, McGoff, Joyce, Evans) and the mayor (Doherty). 

 

A majority on the City Council refused to honor the guarantee, saying the authority’s finances were in disarray and they wanted to strike a blow for fiscal rectitude.

 

I’m sending fiscal rectitude to the Moon, Alice

 

 

 

Fine grandstanding … but it’s a bit late for that.  The city council should have been paying attention when the authority was racking up those bond issues, and the city council was approving putting the city’s full faith and credit behind them.

 

Suddenly Scranton was a pariah.

 

 

Suddenly?  As if repudiating a legal contract was just a passing fancy, whose consequences no one could foresee?

 

Only one bank had been willing to help it raise money, and it backed out of a $16 million deal to provide short-term financing.  Without that cash, the mayor said Scranton couldn’t make its next payroll.

 

Scranton, as local analyst Gary Lewis repeats as necessary, is broke.  .  And financing it with more debt doesn’t make it any less broke; instead, if any lender is foolish enough to provide capital, then Scranton becomes more broke. 

 

In praise of Scrantonisbroke

 

Gary Lewis, a self-appointed watchdog, has done an absolutely superb job in documenting, carefully and solely from public information, the chapter and verse of Scranton’s situation.

 

You can’t solve a math problem with good intentions

Total long-term obligations
The “Council’s 2012 Budget”

Solicitors and professional services

Debt service requirements

 

As he put it, most eloquently, in one of his posts, “Scranton is broke.  Completely.  Utterly.  Totally.  Broke.”

 

Mr. Lewis’s work is proof of the transformative power of the internet and in particular of analytical blogs.  He has done everyone a huge service, and I salute him.

 

As he put it in a devastating ‘material event’ letter (Arial brown) published on his web site, Scranton is broke:

 

Issues the city will face in 2013 [include]:

 

·         A structural deficit of nearly $10,000,000, exclusive of debt service,

·         Debt Service of $8,168,536.35, exclusive of new debt issuance,

·         An additional $1,400,000 that will be due to the local public employee unions due to the recent settlement of a court-ordered arbitration award, and,

·         Unpaid bills rolled forward from the prior year, which exceeded $6,000,000 in 2012.

 

Altogether, I believe the city will have a deficit approaching $25,000,000 in 2013. 

 

Broke means broke:

 

The City’s current year deficit as a percent of budget – more than 19% – exceeds similar metrics in Sacramento and San Bernardino, both of which filed for Chapter 9 Bankruptcy protection in the last few weeks. I believe the city is also a prime candidate for a bankruptcy filing. 

 

Meanwhile, the lenders will seek to collect on the available collateral.  The first collateral is real estate:

 

A bond insurer, Radian Asset Assurance, started a 30-day countdown to foreclosure on the authority’s parking garages.

 

The second collateral is the taxing power, which apparently Scranton’s city council also pledged.

 

The trustee for the bondholders, Bank of New York Mellon, warned that it would get a court-ordered tax increase.

 

Somewhere in here the reader shrieks, Where was the city council when all this was going on?  I would have called this inconceivable if I knew what the word meant.

 

You’re not blogging for your brains, you hippopotamus!

 

Taken aback, the mayor and City Council changed course, saying Scranton would pay the parking authority’s debts after all. But the damage was done.

 

Yes, when you betray all of your principles, thinking you have the whip hand over your creditors, only to scuttle back cravenly once you discover that they have the whip hand over you, why then you’ve done some serious damage.  You’ve sold your integrity cheap and have nothing to show for it.

 

Who’s in charge of whom?

The initial decision to not make the $1 million bond payment had tainted Scranton’s credit on all of its debts for the foreseeable future.

 

Meanwhile, that’s making one group of stakeholders particularly upset:

 

Guess whom

 

[Continued tomorrow in Part 2.]

 

 


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