Banks may force Scranton default; state policy 'ineffective'
Writes Moody's Michael D'Arcy
"With a November 15 deadline to introduce a fiscal 2014 budget, Scranton, PA faces a $20 million gap" for 2014, writes Moody's Investors Service analyst Michael D'Arcy in a report to clients.
Unless the city can match taxes to spending, he adds, "two financial institutions, Janney Montgomery Scott and Amalgamated Bank, are likely to withdraw from planned debt financings necessary for the city to maintain positive operating cash flow in 2014. The resulting liquidity squeeze would leave the city with few options to meet its financial obligations, raising the threat of default or bankruptcy.
"Oversight by Pennsylvania, under its Act 47 distressed municipalities program, has so far been ineffective in relieving the city's financial woes several years after a similar failure in the city of Harrisburg, PA.
"Scranton had intended to complete a $28 million debt issuance by mid-2013 and use the proceeds to pay an arbitration award and fund increases to the city's 2013 pension contribution. However, in July, Janney, the underwriter, opted to delay the sale, citing Scranton's lack of progress in implementing its Act 47 recovery plan...
"Amalgamated Bank, currently the sole bidder for the city's cash flow borrowing scheduled for January, has indicated its purchase of tax and revenue anticipation notes also depends on passage of a balanced budget...
"Without the banks' participation, Scranton will begin fiscal 2014 with effectively a zero cash balance, creating significant operational strain until the bulk of its property tax revenue comes in March."
This has happened before, in mid-2012, after Scranton defaulted on parking revenue bonds. "Although the city cured the default swiftly, it was unable to access the capital markets for several months and had to temporarily reduce city workers' salaries. A second liquidity crisis could have more severe effects, including additional defaults," D'Arcy concludes. Scranton owes bond creditors $195 million, plus $15 million in state loans.