Why Scranton Is The Next Detroit by Save Scranton

It has been said repeatedly by several newspapers, commentators and financial agencies but it bears mentioning again that Scranton, Pennsylvania is the next Detroit. To compound the matter further, the situation is completely avoidable, but there is this seeming refusal to acknowledge this. Serious comprehensive pension reform is not only needed but is absolutely necessary to save this city. In order to really appreciate this, we have to look into the recent budget that is being submitted to vote by the current Scranton Government. Before we do that, let’s take a walk down memory lane.

The beginning of the End

Around July 2012, Scranton Mayor went into the city’s coffers and realized that the city did not have any money left. The pension obligations that the city had were underfunded by 80%, and they were predicted to be bankrupt in 2 to 3 years. Mayor Dougherty, decided to take extreme measures and force every government worker to work for minimum wage until the budget could be balanced. The idea was that the 398 police officers, firefighters and other public workers, who were paid between 18 to 36 an hour, could settle for 7.25 an hour for sometime, or at least until the government could pay its bills. At that point, the city owed 3.8 million in unpaid bills, including 2 million in unpaid health insurance premiums. This is in addition to a ballooning pension liability that towers 232 million. Although the Mayor vowed to reimburse the city workers the city workers explained that they could not wait. The three unions representing local firefighters, police and public works employees filed a lawsuit against the city citing that the Mayor’s plan was unfair and devastating. This suit ended up all the way to the state Supreme Court where the judge ruled in favor of the unions, slapping the city with a 27 million dollar bill. The city, already suffering from insolvency, had to find a way to pay its current liabilities, long term liabilities, and this new debt. The cities answer was to raise taxes and increase fees of almost every service imaginable. The obvious repercussions were the flight of businesses and residents which the city shows signs of everywhere you turn.

Today..

If we look at Scranton Situation today, we see that it is in far worse shape than anyone could imagine. The city has absolutely no money but it is submitting a budget that it claims has an operating budget of 132 million dollars. Really? This is an increase from last year’s budget of 107 million. In a city where businesses are closing and population has been reduced by 42%, how can they justify this increase? Well, a look at the budget will find that it is based on speculative assessments about the ability of city collect on notes, loans, and bond issuance. Let’s be clear, Scranton has no rating. It doesn’t even have a junk rating. Even if it does borrow money, the rates will be astronomical and only add to crushing debt. And about that debt, the cities debt towers at 232 million dollars and the current budget only has it growing. There is no way this dying city can ever pay back this debt but that appears to be lost on the city council and the Scranton Mayor. They believe that they can sale off enough government assets and raise taxes to make up the short fall. The reality is all those efforts will just be a means to keep the show running until the inevitable collapse. What will be left is the elderly who cannot move, a bunch of boarded up businesses and an inventory of blighted homes.

Michael Mauboussin: Here’s what active managers can do The debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More

Here is the current budget for review: