Following Detroit's application for bankruptcy protection under Chapter 9 last week, pundits have had a field day predicting which city would be next. Fox News thinks it's going to be Chicago, which Moody's just downgraded because of its $19 billion unfunded pension liabilities. The agency said those liabilities are “very large and growing” and as a result the city faces a “tremendous strain.”
Other cities like Cincinnati, Minneapolis, Portland, Oregon, and Santa Fe, New Mexico are also on the bankruptcy radar, according to Moody's. The song is the same: underfunded pension plans and dreadfully underfunded health care plans. While pension plans in these cities are about half underfunded, the health care promises are almost 90% underfunded.
The Pew Charitable Trusts study says that Baltimore is on their list, along with Charleston, West Virginia, Omaha, Nebraska, and Providence, Rhode Island.
But nobody is talking about what's happening in Scranton, Pennsylvania. It's a miniature Detroit without the political corruption, but with the same kick-the-can mindset. Instead of cars, Scranton produced coal – lots of it. Anthracite was its primary industry right up until about 1950, when oil and natural gas began making inroads, causing coal production and its related industries, such as transportation, to begin the long descent into oblivion.
The Knox Mine Disaster in 1959 permanently shut down the mining industry in northeastern Pennsylvania. The DL&W Railroad was forced to merge with the Erie Railroad in 1960. Whatever was left of the silk and other textile industries disappeared in the 1960s and '70s. Vacancies downtown grew as shopping malls were built in the suburbs. In 1950, Scranton's population was 125,000. By 2010 it had declined by 40%, to just over 76,000.
Last year, both The Economist and Bloomberg were pronouncing last rites as the city virtually ran out of money. With revenues of $80 million and expenses of $100 million, at one point the city had just $5,000 in its checking account. The mayor instituted drastic salary reductions for every city employee down to the $7.25 minimum wage, including his own. Firefighters were getting nearly $25 an hour, and they screamed bloody murder. The courts ruled in favor of the unions, forcing the city to reinstate back wages with interest.
Today, Scranton's situation is even worse: when the city failed to make a bond interest payment, lenders closed the lending window. 13% of property taxes haven't been paid. And this puts into serious jeopardy the city's plan to raise $27 million in a private bond offering just to pay off the back wages owed from 2012.
It's running out of options. It secured a $6 million FEMA grant (read: federal bailout) but that money is nearly gone. It sold off its future parking meter revenues and spent that money. It's trying to implement a “commuter tax” on people who live outside the city but work in town. They tried to sell the city's storm sewers (!), but discovered at the last minute that the city didn't really own them.
The Pennsylvania economy League (PEL) has projected an $18 million deficit for 2013 and a similar amount for 2014. With projected revenues of $80 million, but expenses of $100 million, there's only one option left: raise property taxes. According to PEL's analysis, just to end the tailspin, real estate taxes would have to increase from, on average, $506.98 per taxpayer to – ready? – $1,100.14. Do the math: that would be a 117% increase.
One of the dreamers on the city council, Frank Joyce, said this is “far too expensive for taxpayers to handle,” so he is suggesting something called a “scoop” where some interest payments on the city's bonds can be pushed off into the future. Said Dreamer Joyce:
It may be viewed by some as kicking the can down the road, but it may prove to the state that we need a sales tax.
When Bloomberg reviewed the situation in Scranton last year, it noted a distinct lack of connection with reality. Bankruptcy back then was “unthinkable,” and cutting pensions and modifying union contracts weren't even part of the discussion.
It's the classic collision between the irresistible force of inevitable mathematics meeting the immovable objects of political resistance and failure to grasp reality that is spelling doom for Scranton.
Pennsylvania Economy League (PEL) report: Scranton could be looking at $18 million deficit, 117 percent tax hike in 2014
Bloomberg: Scranton: When Your City Needs to Go Bankrupt
The Economist: The sadness of Scranton
Fox News: Detroit bankruptcy raises concerns about other US Cities under huge retiree debt
Pew Charitable Trusts report: A Widening gap in Cities Shortfalls in Funding for Pensions and Retiree Health Care