Debt Plagues NE Pa. Cities

Some are struggling to provide necessary, everyday services to residents

By Jim Lockwood, Sam Galski, Shawn Kellmer and Chris Hong
|  Tuesday, Apr 2, 2013  |  Updated 10:08 AM EDT
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Debt Plagues NE Pa. Cities

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In municipal finance, debt is not necessarily a four-letter word.

However, if it balloons to the point of drowning a struggling city, it could be, experts said.

Northeast Pennsylvania cities are finding themselves caught between having to provide necessary services but no longer being able to afford them, and so they have borrowed to get by. Like businesses, municipalities are concerned with revenue, expenses, debt and cash flow, and if any one runs into trouble, financial distress is not far behind, said Gerald Cross, executive director of the nonprofit Pennsylvania Economy League, a coordinator of distressed municipalities in the Keystone State.

In some financially ailing cities throughout Pennsylvania, "The revenue side is in danger of being swamped completely by the expenditure side," Cross said.

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In Lackawanna and Luzerne counties, the total debt of the six cities - Scranton, Wilkes-Barre, Hazleton, Carbondale, Pittston and Nanticoke - is $250 million. The bulk of the collective cities' debt is from Scranton, which has $148 million.

The scenario often goes like this: A municipality's hands are tied by employee contracts that lock in salaries and raises while costs of benefits and pensions are soaring. Services - police and fire protection, trash pickup, road paving and snow plowing - must be delivered, but revenue and tax bases have been stagnant, if not declining, for years.

Where does the money come from to pay all of the bills? Raising taxes can only go so far. Hiking them too high may cause a spike in delinquencies, chase homeowners and businesses out of town or deter new ones from coming in, and lead to even less revenue.

So, deficits may recur and become "structural," and often are papered over with borrowing. That may be doable, but only to a certain point. Debt could become a serious problem if it is relied upon each year to pay routine operating expenses and eats up an increasingly larger share of a municipal-budget pie. And this could create more budget holes that often are filled with more borrowing.

Municipal debt is generally measured by comparing annual payments with the overall budget, said Joe Boyle of PEL. Payments equating to 10 percent or below of budgeted expenses are "acceptable and general practice" while payments of 15 percent or more of a budget generate "real concern," he said.

"If you're spending 70 percent on salary, benefits and health care and add 18 percent (of debt payments), you're already at nearly 90 percent," Boyle said. "What are you going to cut?"

Like a homeowner needing a mortgage or a motorist requiring a car loan, a city issuing bonds or notes may be practical ways to raise funds for any number of reasons, and becoming debt-free is not necessarily feasible, said Teri Ooms, director of the Institute for Public Policy & Economic Development, a Wilkes-Barre-based research and analysis agency.

"Debt is not necessarily a four-letter word. I don't think any government will be debt-free, (and debt may be OK) as long as it's a manageable debt to cover," Ooms said. "If debt is used to meet daily cash flow for any length of time, then you've got a major problem. Certainly, debt is one way to take things on, but it shouldn't be the resource you keep going back to for more and more."

"When you have increases in expenses without a concurrent increase in revenues, communities start borrowing and you end up in debt," Ooms continued. "The problem we have (in many cities) is that the (underlying financial) problem wasn't addressed early on and it snowballed, and now we have this wild animal that's out of control."

Scranton

Such a scenario largely has been the story of Scranton for decades. In 1992, after years of budget imbalance, the city was officially designated as financially distressed under state Act 47. Lacking teeth, however, and undermined by a 2011 state Supreme Court ruling, the act has not been a fix for Scranton.

It was in 2002, and with aging infrastructure and bloated budgets, that the Electric City began borrowing tens of millions of dollars and has since accumulated $148 million in debt ($100 million in principal, $48 million in interest).

An annual operating budget of $111 million includes $10 million in debt service that accounts for 9 percent of the budget.

And, Scranton still needs to borrow some $22.5 million this year to pay a $17 million landmark 2011 state Supreme Court arbitration award to the city's fire and police unions, and a $5.5 million increase in mandatory minimum pension contributions.

"A couple of the bonds were for capital improvements - new DPW and police headquarters, paving, upgrade of parks. The other ones have been operational borrowing and refinancing," Scranton Business Administrator Ryan McGowan said. "The last couple of loans have been to meet operational needs. You have to make good on vendor payments and there are contractual obligations that need to be met."

The $148 million of debt in Scranton also does not take into account another approximately $150 million in debt of city authorities for which the city ultimately would be on the hook because the city backs them.

"The difficulty for cities like Scranton is this idea that you have these liabilities because expenses have outpaced revenues for a number of years," said Public financing expert Tracy Gordon, Ph.D., a fellow in the economic studies program at the Brookings Institution in Washington, D.C.

She added that as debt rises the cost of debt also may increase.

"You could see a decline in services, difficulty in accessing capital markets or pay exorbitant interest rates," she said.

Indeed, Scranton ran into such difficulties last year securing financing to get through the year. First, wary banks shied away from lending the city money after it had failed to pay a debt on time in 2011; and then a default of city-backed debt of the Scranton Parking Authority in June led to the city later having to pay a premium in higher interest rates to land a private-placement bond.

Wilkes-Barre

Wilkes-Barre has $69.2 million in city debt. Its annual $44.9 million budget includes $7.7 million in debt service, or 17 percent of the budget.

City officials are quick to emphasize debt isn't always a bad thing. Borrowed money, along with grants, has allowed the city to take on big-budget capital projects, such as the $14 million Coal Street improvement project and the $28 million downtown transportation center. It's also a way to save money by refinancing existing debt.

However, some experts say Wilkes-Barre's debt might be too high. About 17.5 percent of the city's 2013 general fund budget will go toward paying off its debt. "When you hit 15 percent, you're in trouble with the guidelines," said Cross of PEL. "It's a warning sign."

Wilkes-Barre's debt comes primarily from general obligation bonds, which are bought by investors and repaid with interest over an extended period of time. Wilkes-Barre is paying off 19 different bonds, most of which were used to fund capital projects or refinance older bonds.

Hazleton

Hazleton operates on a $8.6 million general fund budget, but owes more than $13.3 million in long-term debt through 2025. It's $1.2 million in annual debt service is 14 percent of this year's budget and will continue for at least 12 more years.

While the outstanding balance is straining a cash-strapped city that's struggling to provide services and pay labor contracts, Boyle, of PEL, said the city's in relatively good shape in terms of managing its debt.

"I think if (Hazleton officials) keep making progress, at some point in the next four or five years they might be able to refinance and get it at a better rate," he said. "But they're not in bad shape."

A large portion of long-term debt stems from refinancing old borrowings. But, the city's most recent borrowing stems from the city's inability to pay tax anticipation notes that it secured in 2010 and 2011, Acting City Administrator Steve Hahn said.

Carbondale

Carbondale has $8.6 million in city debt, which includes the principal and interest. An annual $6.3 million budget includes $1.1 million in debt service, or 17 percent of the budget.

Along with funding capital projects and meeting pension obligations, Carbondale had to seek court approval for unfunded debt to make ends meet in recent years, Mayor Justin Taylor said.

"The city basically runs with a structural deficit every year," though it's been reduced in recent years from $500,000 to around $250,000, he said. "We've had some unfortunate situations where we've had to do three unfunded borrowings over the past 10 years."

A large chunk of Carbondale's debt was incurred in 2006 when the city borrowed $3.6 million to fund its pension obligations. That was a large amount for the small city, and its single largest borrowing, but one that officials deemed was necessary to not delay pension obligations.

"Every year we were seeing our MMO (mandatory minimum pension obligation) increasing," Taylor said. "We said we just need to bite the bullet, borrow the money and dump it into the pension plan so we see some stability. Most other municipalities probably didn't do that, but thankfully we did it when we did. We put it in the (stock) market when it was good."

The city also has cut expenses but has grappled with revenue estimates not being realized.

Pittston

Pittston has $8 million in city debt. An annual budget of $6.6 million includes $376,000 in debt service, or nearly 6 percent of the budget.

Pittston's borrowing abilities are more limited than Wilkes-Barre's because its budget is smaller. City administrator Joe Moskovitz said capital projects are still a priority, but they have to be within the city's budget.

"We're not a wealthy community, but that doesn't mean we shouldn't be investing in our community," Moskovitz said.

Pittston will pay $376,488 toward its debt, which is 5.7 percent of its $6.6 million budget. The city doesn't issue bonds and only takes on loans.

Nanticoke

Nanticoke has $2.6 million in city debt. An annual budget of $4.9 million includes $528,000 in debt service, or nearly 11 percent of the budget.

Financial problems for Nanticoke began in 2004 when the city borrowed money simply to pay operating expenses.

The city was already taxing property owners at the highest rate allowed by law.

"When you're borrowing just to keep up operations, you're on the road to being distressed," said Boyle of PEL.

Outstanding debt once defined the city, which the state Department of Community and Economic Development declared financially distressed under state Act 47 in May 2006.

A recovery plan helped Nanticoke improve its financial outlook to where it no longer borrows money to pay day-to-day expenses. It's one reason why the city is expected to be released from distressed status by next year.

Overcoming debt

How, then, can struggling cities overcome debt?

"The solutions are limited. I hate to say it, but bankruptcy is one of them. It is an option under Chapter 9" for municipalities, Ooms said.

Still, it's not clear whether the state would allow a municipality to file for bankruptcy. When Harrisburg tried it recently, the state stepped in and instead appointed a receiver to oversee that city's municipal finances. There have been around only a dozen municipal bankruptcies in the nation since the Great Depression, Gordon said.

The idea of bankruptcy has been raised in Scranton, but Scranton's leaders have not embraced it as an option. They fear it would label the city with a Scarlet letter, kill property values of homes and businesses and create an exodus.

Ooms also said cities must do more long-term planning and 'Plan B' budgeting, such that if a 'Plan A' fails there would be an alternative. However, such planning often is lacking because financially-strapped cities are understaffed and don't have the resources to do it, she said.

"It's a matter of putting out the fires today that we can't look to tomorrow," Ooms said.

PEL fills the planning void for distressed cities, but cities don't necessarily heed PEL's advice and it cannot force them to, Ooms noted.

Raising taxes often is a political non-starter, but some cities have had no choice. Hazleton this year passed a 45 percent property tax increase, some of which was due to increased debt service. Scranton's revised Act 47 recovery plan of 2012 calls for 79 percent tax increases over three years, and that amount may not even fill the void as various alternative revenues in the plan are speculative and may not be realized.

Cross has advocated for a regional approach among municipalities to pay for services.

"In my mind, the answer long-term is to fund services from a wider area. We do it with schools and counties. We don't do it with municipalities."

Under a regional provision of services, municipalities would remain intact and distinct and would not merge, he said. Rather, costs of service would be spread out over a larger area and savings would come from an economies of scale, Cross said. Still, it would likely be a tough sell, as municipalities would have to agree to contribute a portion of their assessed tax bases to pay for a regionalized service and would not be able to back out, he said.

Such a concept may be more difficult to implement with police and fire departments because of their contract safeguards under state Act 111, but sharing of DPW services may be more feasible, Cross said.

"People understand plowing streets across (municipal) boundary lines," Cross said.

Ooms agreed that municipalities are going to have to embrace collaboration and cooperation, and new laws from Harrisburg also may be required to fix the state's antiquated municipal systems.

"I think it's time for some out-of-the-box solutions because the old ways aren't working," Ooms said. "There's no one fix-it... solution. It's certainly not something anyone's going to see overnight."
 

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