Another PA city going broke

Scranton PA is running out of money to pay police, firefighters and other city workers after City Council last week refused to boost property taxes or pay off parking-authority bonds, and M&T Bank therefore refused to lend the city more money, Scranton Times-Tribune reports here.

Scranton's elected officials are responding to the crisis with typical Pennsylvania municipal efficiency: City Council's finance chief has disappeared, while the Mayor refuses to consider the alternative of bankruptcy reorganization, the Times-Tribune reported. (The City Council chairwoman has taken time off to bury her mom.)

Scranton marks "the second default by a PA municipality," following Harrisburg, in recent months, notes Matt Fabian of Connecticut-based Municipal Market Advisers in his MMA Weekly Outlook newsletter.  

It's one of a "small but increasing trend" of US communities "electing to shirk their obligations" for "projects that issued bonds in more prosperous times."

Fabian also predicted that (as in Harrisburg) bond insurance companies will sue Scranton to make it pay. "The city has thus invited disrepute and likely increased its future capital costs," Fabian scolded -- while also acknowledging that hard-pressed local governments are increasingly "less willing to provide scarce funds to support troubled projects." 

“It’s not clear how (Scranton) will find its way out its broader financial difficulties," James Holman, partner at Duane Morris law firm in Philadelphia, told me. "The city has mounting obligations and revenue sources that are extremely stretched, and there currently are no effective state law tools for the city to address its mountain of financial woe.

"In the days ahead, all eyes will be on Harrisburg to see what, if any, additional support the Commonwealth of Pennsylvania might provide.”

State government, which has intervened in a similar crisis in Harrisburg, with embarrassing results, told the Times-Tribune only that it's watching Scranton carefully. 

Is Scranton following in Harrisburg's footsteps? David Unkovic, the receiver initially appointed with Gov. Tom Corbett's support as Harrisburg's financial receiver, has testified that he resigned that job after coming under political pressure to sell city assets and pay bondholders quickly.

Alternatives that might protect city assets but hurt bond investors -- such as default and federal bankruptcy proceedings -- could leave elected officials and bond lawyers, advisers and other professionals who benefit from municipal borrowing, vulnerable to civil or criminal investigations into why they encouraged the cities to borrow millions for questionable projects that failed to pay for themselves as required under tax-exempt financing guidelines.