Scranton Unlikely to Make Required Pension Contribution; Mish Proposal: Offer the Union 35 Cents On the Dollar

It is really disheartening to watch Scranton public officials make matters worse for city taxpayers.

I spoke about Scranton a couple days ago in Moody's Warns of Scranton Bankruptcy; Fitch Downgrades Chicago Citing Pension Problems; Liberal Fantasyland.

Here is a synopsis of the details.

• Scranton has more than $195 million in outstanding debt, according to Moody’s.
• Scranton also faces more than $100 million in unfunded pension debt, on top of the $195 million in other debt owed.
• Adding to Scranton’s financial woes is the need to borrow another $28 million to pay a court-mandated settlement with the city’s police and firefighter unions.

Unsolvable Mess

That is an unsolvable mess, except by shedding pension and other obligations in bankruptcy.

Meanwhile, the problem just got worse (how could it not), and city officials still do not see the light.

City Unlikely to Make Required Payment to Pension Fund

The Times-Tribue reports Scranton Unlikely to Make Required Payment to Pension Fund.

It's unlikely Scranton will make the required $6.3 million contribution to its pension plans by the end of the year, meaning city taxpayers will have to pay an additional $504,000 in interest into the composite pension fund.

The city has until Dec. 31 to make the payment, but its failure to secure a $27 million loan that's earmarked to pay that debt and a $21 million back-pay award to firefighters and police officers leaves little chance it can make good on the payment, Larry Durkin, solicitor for the city's composite pension board, told members Wednesday. The board represents the police, fire and non-uniform pension plans.

Mr. Durkin sent a letter to city officials on Tuesday, reminding them of the urgent nature of the matter.

"I know they are aware of this. I'm trying to convey to them this needs to be a priority payment. ... This has to be paid first" over other debts, he said.

Union Arrogance

Note the disgusting arrogance of union solicitor Larry Durkin who demands "pension debts be paid first". I suggest the first and foremost obligation of the city is health and safety of its citizens, not the union pension plan.

I am delighted the city was unable to borrow money to meet the obligation. Bond buyers stupid enough to buy Scranton bonds, deserve one hell of a haircut in bankruptcy court.

Head in the Sand Approach

My comment on Tuesday was "It is truly pathetic watching politicians flop like fish out of water trying to prevent something that was clearly inevitable long ago."

Union arrogance coupled with head-in-the-sand denial by city officials is seldom a good mix for taxpayers.

Board member John Hazzouri requested the city alter its mix of investments from a 60-40 mix of bonds and stock, to a 50-50 mix. "Mr. Hazzouri made the suggestion in hopes of increasing investment performance."

Fortunately, the city did not go along.

A Few Pertinent Facts

1. The market value of the portfolio is only $43.8 million
2. The fund returned 30% this year and the plan is still $100 million underfunded.
3. Stocks are in a bubble. Even if they weren't it's far too late to act because the crisis is now.

Concerns

Board members are concerned about a financial hit the fund will take based on the back pay award for police and firefighters. The award will affect the pension because retirees are entitled to a portion of all pay increases. The amount owed to retirees has not yet been calculated, but it is expected to be at least several million dollars, Mr. Durkin said.

Obvious Solution

The obvious solution is to tell Durkin "go to hell" (politely of course). The polite way is to file bankruptcy, then not pay another dime to the pension plan.

Then the city can sit down with the union, and work out a plan based on simple math.

Simple Math

• Plan assets: $43.8 million
• Plan liabilities: $143.8 million
• Plan funding: 30.45%

Generous Offer

The city should offer the union 35 cents on the dollar. That would be a generous offer given the plan only has assets of 30.5 cents on the dollar. In fact, 35 cents on the dollar may be extremely generous depending on plan rate-of-return assumptions.

No doubt the city is worried bankruptcy would destroy its credit rating.

So what? The solution is for Scranton to live within its means and not spend more (or make more promises) than collections allow.

If the city does that, its credit rating would quickly improve.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com