As Goes Scranton

I don’t know if you’ve been following it but a fascinating story in unfolding in Scranton, Pennsylvania and its one that has special resonance for me as a Chicagoan and an Illinoisan. The city of Scranton is broke. It has just $5,000 left in its operating bank account. The mayor has cut the wages of city employees including himself to minimum wage: $7.25 an hour. Here’s the rundown:

Mayor Chris Doherty, a Democrat, temporarily cut the wages of police, firefighters and others to $7.25 an hour Friday, hours after a judge issued an injunction requested by three unions that represent most of the workers. A lawsuit filed July 2 in Lackawanna County Court on behalf of the unions argued that cutting the salaries unilaterally would violate the workers’ contracts under state laws governing public employees as well as federal law.

Meanwhile, Scranton’s business administrator said the city had just $5,000 in the bank last week after transferring enough money to cover the city’s payroll at $7.25 an hour, the state’s—and the nation’s—minimum wage. Mayor Doherty has said that once the immediate crisis is over, workers will be paid their deferred pay.

The mayor wants to raise taxes. The city council wants to borrow. However, a quick look at the city’s budget casts a little more light on the subject and reveals that neither of those moves will solve Scranton’s problems. The basic problem is not that revenues are not rising (they are). The basic problem is that expenses are rising faster than revenues. The main culprit: healthcare insurance costs.

Compared to just last year healthcare insurance costs have risen about 10% for police officers, 30% for firefighters, more than 200% for non-union workers, and almost 300% for something called the “single tax office”.

Mike Shedlock suggests that bankruptcy is the city’s only way out:

Inept city management, with public union wages and benefits at the heart of it, killed Scranton.

The city is bankrupt. Period. Will the state once again deny the obvious?

IMO even that’s only a temporary fix unless one assumes that a bankruptcy resolution would eliminate all of the city’s payouts for healthcare insurance. It’s healthcare insurance that’s killing Scranton and no relief is on the horizon.

11 comments… add one
  • Barbara O'Brien


    Please contact me back via email when you can–just have a quick question!


  • sam

    “Inept city management, with public union wages and benefits at the heart of it, killed Scranton.”

    Ept city management, I gather, would be to cancel all the health insurance for city employees, right?

  • jan

    It appears that Scranton may eventually have to go the way of Stockton, CA.

  • PD Shaw

    It may be the pensions as much as anything:

    “Assets of $77.1 million at the end of 2006 had collapsed to $47.5 million by Jan. 1, 2012, due to the 2008 stock market collapse and slow recovery”

    . . .

    “Raises in pension payouts and decreases in staff and pension contributions also have meant less funds going in and more going out. Between Dec. 31, 2006, and April 30, 2012, $22.9 million was contributed to the pension funds, but $55.3 million was disbursed.”

  • Icepick

    And PPACA will fix this how?

    (Rhetorical question, of course.)

  • PD Shaw

    Something I did not know, Illinois units of local governments are not authorized to file for bankruptcy since most units do not have statutory authority to do so. They have to go into some sort sort of state-managed receivership, run by a commission, which can, in its discretion reccomend Chapter 9. Background:

    Other states similarly situated (26 + DC): Alaska, Delaware, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming

  • sam

    Before we completely shit on the city management of towns such as Scranton, and now San Bernadino, maybe we should reflect on this:

    Rate Scandal Stirs Scramble for Damages

    As unemployment climbed and tax revenue fell, the city of Baltimore laid off employees and cut services in the midst of the financial crisis. Its leaders now say the city’s troubles were aggravated by bankers’ manipulation of a key interest rate linked to hundreds of millions of dollars the city had borrowed.

    Baltimore has been leading a battle in Manhattan federal court against the banks that determine the interest rate, the London interbank offered rate, or Libor, which serves as a benchmark for global borrowing and stands at the center of the latest banking scandal. Now cities, states and municipal agencies nationwide, including Massachusetts, Nassau County on Long Island, and California’s public pension system, are looking at whether they suffered similar losses and are weighing legal action.

    Dozens of lawsuits filed by municipalities, pension funds and hedge funds have been consolidated into a few related cases against more than a dozen banks that are involved in setting Libor each day, including Bank of America, JPMorgan Chase, Deutsche Bank and Barclays….

    The complaints being voiced by municipalities are mostly related to their use of a popular financial contract known as an interest rate swap. States and cities generally enter into these swaps with specific banks so that they can borrow money in the bond market. They pay bondholders based on a floating interest rate — like an adjustable-rate mortgage — but end up paying their bankers a fixed rate through a swap. If Libor is artificially lowered, the municipality is stuck paying the same fixed rate, but it receives a smaller variable payment from its bank.

    Even before the current controversy, some municipal activists have said that banks took advantage of the financial inexperience of municipal officials to sell them billions of dollars of interest rate swaps. Experts in municipal finance say that because of the particular way that cities and states borrow money, they are especially liable to lose out on their swaps if Libor drops.

  • PD Shaw

    @sam, the DOJ attorney explaining the penalty settlement with Barclays on LIBOR basically said there was no evidence of damages — the LIBOR rate is based upon too many banks, with the highest and lowest several rates excluded, and Barclay’s submissions (though improperly low) were higher than average.

    Perhaps the cities can prove damages that the DOJ could not, but if they can’t then they are spending a lot of resources that could go to police and fire protection.

  • sam

    My point was, and not to gainsay what you said (though I think cases can be made), it’s more than possible that cities/states were fucked by the banks (as astounding as that may sound), and, thus, to heap opprobrium solely on the city/state governments is misplaced.

  • PD Shaw

    I guess the question I would have is what are cities doing playing the swap market in the first place? The cities appear to be cash-strapped before and heading into the economic downturn.

  • Sara

    A big problem is the unions and their unsustainable everything and their incestuous relationship with the politicians.

    States know they can’t go bankrupt so states like Cali are off to the races so wealthy states can pay for their excesses.

    We’re on the cliff.

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