Detroit The Lucky One?

Wednesday,February 05, 2014

[Editor’s Note: The following post is by TDV contributor, Wendy McElroy]

Who knew Detroit is the lucky one by being forced into Chapter 9 bankruptcy?

The majority of Scranton, Pennsylvania's remaining 76,000 residents want to declare Chapter 9, and they want it yesterday. Bob Quinn, president of the Scranton and Lackawanna County Taxpayers Association explains, “The silent majority would like to see bankruptcy. Basically, it’s down to a point where people cannot afford to pay the taxes and are moving out of town.”

In a Reuters article (August 23, 2013), financial analyst Cate Long explained a key reason taxpayers were fleeing Scranton. The city's unfunded “pension benefit obligation...is $113 million, or more than a full year of revenues....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...”

Bankruptcy is attractive to taxpayers because it offers a partial exit strategy by reducing public sector pensions and other benefits. But public sector unions have a death grip on the power politics of many, if not most, American cities.

What happened in Scranton should be a cautionary tale. Similar battles are erupting across the continent – from Stockton, California in the West to Heartland cities like Pittsburgh and to Trenton, New Jersey in the East. The reason is the same. The enormous unfunded liability of public sector wages and benefits makes taxes and fees soar even as government 'services', like garbage collection and street lights, decline. People flee if they can. But property values plummet, and so many must endure. This is especially true of Scranton in which an unusual number of residents are elderly and on fixed incomes.

HOW SCRANTON BECAME A BOTTOMLESS PIT

Scranton has been off the financial rails for over 20 years. In January 1992, it joined the dozens of other Pennsylvania towns that are now declared to be “financially distressed” under Act 47 (The Financially Distressed Municipalities Act). Among the advantages it confers, the designation means revenue from nonresident taxpayers became available; instead of cutting back city expenditures, tax-money was imported into the city and poured out.

That wasn't enough, so Scranton hiked its own taxes...again and again. But that still wasn't enough to fund the public sector liability, to pay interest on debt and to continue basic city services.

That's why Chris Doherty, who was mayor of Scranton in 2012, proposed hefty new taxes on the private sector. For example, he wanted a 78 percent property-tax increase over three years. The Scranton city council rebelled. Its President Janet Evans placed the blame for the proposed increases on "Mayor Doherty's unbridled spending, borrowing and financial mismanagement." Doherty did not react well. A four-way conflict spun out of control between the mayor, city officials, public sector unions and the incredibly stressed taxpayer.

But something had to be done. The city had $133,000 in cash-on-hand and $3.4 million in vendor bills, including health insurance for public employees and pensioners. The cash could have covered one day of municipal expenses but only if payroll was excluded. Doherty cut every city worker's salary to minimum wage – $7.25 an hour. It was a rash gesture in which Doherty ignored a federal judge’s injunction that had barred him from imposing the pay cuts. The push-back was powerful. Doherty blinked. And, lest anyone make a private-sector hero out of a politician, Doherty almost immediately sought a $16 million loan from the public employees' pension fund, which the municipality (aka the taxpayer) would have paid back at 8 percent interest over 10 years.

Fast forward to 2014, and Doherty is out. A new mayor faces a $20+million deficit. In November 2013, Moody's threatened to cut Scranton's rating, which would weaken its ability to borrow more or to issue municipal bonds. The solution? Moody's recommendation was bankruptcy. Scranton made a different choice; its 2014 budget hikes taxes into the stratosphere. Property taxes and trash fees increase by almost 60%; rental registration fees tripled; the school district hiked taxes 2.4% to cover a $4-million deficit. With a 5% amusement tax already imposed on live entertainment, a 10% drink tax is being considered.

A Los Angeles Times article (Jan. 11, 2014) entitled "For Scranton residents, bankruptcy is an inviting option” explains the impact of what may seem to be a modest increase in taxes. “Bar owner Mert Gavin says...'I am one of the last two bars that's still downtown. Tink's is gone. Whistle's is gone, Banshee's is gone, Molly Brannigan's is gone,' said Gavin, who runs Mert's. 'Do they expect I'm going to bail the city of Scranton out myself'?"

Politicians and public sector workers probably think precisely that. The private sector can be drained forever, as history has proven. But, in this case, the past is not prelude. The state's foremost public policy research firm Pennsylvania Economy League (PEL) advised the mayor and the city council Scranton would need a 117% tax hike to close the budget deficit. The city plans a 50% hike in 2014 and is rumored to be eying a 125% one in 2015. The Reuters August 23rd article reported “the median household income was $28,805 in 2011.” The “median total compensation for a police officer (public sector union) was $71,250.” The well is dry.

Meanwhile, Council President Evans maintains, “We are in a different situation than Detroit. We were willing and able to do everything within the scope of our authority to continue the recovery of the city of Scranton until it sits once again on sound financial ground.” It is the willingness and ability of politicians “to do everything within the scope of our authority” that has the residents of Scranton on life support.

But Evans is correct about one thing; Scranton's situation is different than Detroit's. As financial guru Mike Shedlockexplained, “Detroit is better off. In bankruptcy, Detroit has a chance to dump union contracts and onerous pension promises. Detroit may have hit bottom. The union controlled politicians in Scranton are going to extract every ounce of blood they can from taxpayers, then eventually declare bankruptcy anyway.”