Consulting Scranton

I was in Pennsyvania last Friday for a business/pleasure excursion to my friend’s sprawling estate and, on the way home, picked up the local paper drawn by the lead story:

Scranton council passes commuter tax
By Jim Lockwood
Published: August 1, 2014

For the first time since 1994, Scranton will again impose a commuter tax, this time to shore up the strapped city’s severely underfunded pension system.

City council on Thursday adopted a 0.75 percent earned-income tax on nonresident workers to raise an estimated $5.1 million a year. Council voted 4-1, with President Bob McGoff and councilmen Pat Rogan, Joe Wechsler and Wayne Evans in favor and Councilman Bill Gaughan opposed, to adopt an ordinance authorizing the Act 205 earned-income tax on nonresidents who work in the city.

Despite pending changes to Act 205 that would require the city to levy the same tax on residents, Mr. Rogan and Mayor Bill Courtright insisted residents would not see a wage-tax hike.

I follow pensiontsunami and other public-pension-crisis sites regularly and I was aware that Scranton was considering bankruptcy but only when I happened upon this story did I realize that Scranton really is on the precipice with their pension system and I suspect they got there because they were allowed to do what had been expedient for them as corroborated, if not dictated, by the advice they bought at the time.

Scranton’s story,  as pieced together from local-paper articles and working backwards, is instructive….and likely typical.

July 3, 2014

Consultant Henry Amoroso has been looking at the city’s finances for the last six months. Wednesday night, Amoroso released his 66-page report saying the city has to get its financial house in order now but taxpayers aren’t so happy with some of his ideas….One of the key proponents of the consultant’s plan is to raise taxes for each of the next three years, by 18-percent, six percent and four percent respectively…..Other recommendations of the consultant include selling the Scranton Sewer Authority, the Scranton Parking Authority and all of the city’s parking garages…..Consultant Henry Amoroso says reopening union contracts also needs to be done.

May 29, 2014

The market value of Scranton’s three pension funds dropped more than $1.7 million since January as the plans continue to pay out significantly more money than they take in through contributions and investment returns. A monthly report prepared for the city’s composite pension board showed the value sunk to $45.6 million as of April 30, compared to $47.4 million as of Jan. 31. The loss is partly attributable to significantly lower investment returns, which have averaged 2 percent so far this year. Last year saw returns of roughly 13 percent, according to Michael Smolinsky of BNY Mellon, the plans’ financial adviser. The latest report, presented to the board Wednesday, shows the plans’ investments earned $953,982 and took in another $2.2 million in contributions from the state, city and employees, for a total of $3.2 million as of April 30. But they paid out $4.4 million.

Let’s check these numbers (in millions):

  • Value as of 1/31/14………$47.4
  • + Deposits…………………..$ 2.2
  • + Earnings…………………..$ 1.0
  • – Payouts……………………$(4.4)
  • = Value as of 4/30/14…$46.2

Though the 4/30/14 value reported in the paper was $45.6 million which could mean that there were $600,000 in expenses left out or one of the numbers was for a different period or reported incorrectly…and nobody noticed.

January 14, 2014

In a news conference at City Hall, Mayor Bill Courtright on Monday introduced Henry Amoroso, who promised to reach out to the city’s various stakeholders, including employee unions, business community and nonprofit organizations, to try to devise solutions to the city’s financial problems…..Noting the city has a pension deficit of $100 million and a general obligation debt of $195 million, Mr. Amoroso said he needs to develop a true “transparent” picture of city finances by backtracking budgets and revenues over the past few years….He also is not keen on a commuter tax because the political cost and hostility it would create may not be worth it….The chamber will pay him a fee of $5,000 a month for six months from contributions designated to pay for his services.

I could not locate the consultant’s report (or any official valuation report on the plan) but I think the picture is clear.  This plan is dead.  With $17.6 million in annual payouts and $8.8 million in contributions the $45.6 million will be exhausted in 6 years even with exceptional earnings.

Another $5.1 million annually from the commuter tax will prop up the system for a few more years but is that really a valid estimate of revenues to be generated from a .75% income tax on non-residents?  In a city of 76,000 are there really 17,000 non-resident workers (assuming an average salary of $40,000) and, if so, will that number hold especially since they are being forced to pay for something that Scranton residents who have jobs out of town would have gotten much more benefit from?

But consulting on these zombie plans is not about coming up with what is fair but with what is possible.  At this stage it is impossible for Scranton, and hundreds if not thousands of other public plans, to keep their pension promises using the faulty methodologies that got them into this mess.  The best advice these people can get if they really want to fix this problem (without creating new and worse problems) is:

  1. Stop paying people to tell you what you want to hear
  2. Educate yourself on the numbers
  3. Take no action until you have done (1) and (2)

3 responses to this post.

  1. Posted by skip3house on August 6, 2014 at 11:49 am

    Lesson here can not be more clear. We equate independence with a supply of money from others.

    Reply

  2. Posted by George on August 7, 2014 at 10:38 am

    ” In a city of 76,000 are there really 17,000 non-resident workers”

    Daytime population change due to commuting: +6,613 (+8.7%)
    Workers who live and work in this city: 17,240 (52.5%)

    Read more: http://www.city-data.com/city/Scranton-Pennsylvania.html#ixzz39iEzHp26

    CHRISTIE CITES ‘CADILLAC TAX’ IN PUSH TO CUT PUBLIC EMPLOYEE BENEFITS
    http://www.njspotlight.com/stories/14/07/30/christie-cites-cadillac-tax-in-push-to-cut-public-employee-benefits/?p=all

    Atlantic City OKs 29 percent property tax hike (The Emily Vu mentioned actually led a futile tax protest which was not mentioned)

    http://www.nj.com/atlantic/index.ssf/2014/08/atlantic_city_oks_29_percent_tax_hike.html

    Republican mayor Don Guardian raised taxes but seems not to notice the other side of the problem:

    Watchdog report: Margate library director’s salary highest in Atlantic County, tops industry recommendation

    Atlantic City Free Public Library Director Maureen Frank’s salary last year was $111,256

    http://www.pressofatlanticcity.com/communities/margate_ventnor_longport/watchdog-report-margate-library-director-s-salary-highest-in-atlantic/article_c30a2102-9c38-11e3-96a2-001a4bcf887a.html

    FWIW I have not been to AC in years, but I did notice its library was very nice for a Jersey shore podunk. But not as nice as Margate’s was at the time. Yes I did visit libraries (and Lucy the Elephant) while taking advantage of the $26.26 a night during the (1926) Boardwalk Empire promotion at the Claridge. Shame on me.

    Reply

  3. Yup, just keep raising every kind of tax they can think of while turning a blind eye to real cause of deficits, public salaries, pensions, perks, and wasteful spending of our hard earned tax dollars. I wonder what it is that these people do all day that warrants such high salaries, beside drive towns and cities in financial chaos.

    Reply

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