Petitioning for Municipal Solvency

January 18, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal challenges to fiscal recovery for Scranton, Pennsylvania—a municipality that has verged on the edge of chapter 9 bankruptcy for many years.

Petitioning for Municipal Solvency. Scranton, Pennsylvania anticipates returning to court next month to obtain permission to continue imposing a tripled, annual local services tax of $156 on most who work in the city: the municipality has filed a petition in Lackawanna County Court to triple the local services tax. The city, Pennsylvania’s sixth-largest, is the county seat for Lackawanna County, with a population of 77,291. It is one of the nation’s oldest cities, incorporated on February 14, 1856, as a borough in Luzerne, and then as a municipality on April 23, 1866. It gained a reputation as the “Electric City” when electric lights were introduced in 1880 at Dickson Locomotive Works. By the end of the Civil War, Scranton rapidly transformed from a small, agrarian-based village to a multicultural, industrial-based city. From 1860 to 1900, the city’s population increased more than tenfold, in the wake of its official incorporation in 1866.

In 1856, the Borough of Scranton was officially incorporated. It was incorporated as a city of 35,000 in 1866 in Luzerne County, when the surrounding boroughs of Hyde Park (now part of the city’s West Side) and Providence (now part of North Scranton) were merged with Scranton. Twelve years later in 1878, the state passed a law enabling creation of new counties where a county’s population surpassed 150,000, as did Luzerne’s. The law appeared to enable the creation of Lackawanna County, and there was considerable political agitation around the authorizing process. Scranton was designated by the state legislature as the county seat of the newly formed county, which was also established as a separate judicial district, with state judges moving over from Luzerne County after courts were organized in October 1878. This was the last county in the state to be organized. Scranton earned the title as “The Electric City” when it completed the country’s first continuously operating electrified trolley in 1886—but it was also both a coal mining and steel center: at the onset of the 19th century, the city was home to the largest steel plant in the U.S.; by 1900, the city had a population of more than 100,000. However, by 1902, the dwindling iron ore supply, labor issues, and an aging plant began a reversal of fiscal fortunes: the city’s steel company left for New York—leaving Scranton, nevertheless, still as the capital of the anthracite coal industry—by which the municipality attracted thousands of workers needed to mine coal, the city developed new neighborhoods dominated by Italian and Eastern European immigrants, who brought their foods, cultures and religions. But the mining brought fortune and misfortune—the sub-surface mining weakened entire neighborhoods, damaging homes, schools, and businesses when the land collapsed, leading to, in 1913, state enactment of the Davis Act to establish the Bureau of Surface Support in Scranton. By the 1920’s, Scranton became a center for the manufacture of shellac buttons and a primary manufacturer of phonograph records. Thus, it continued to prosper and grow: by the mid-1930s, Scranton’s population had swollen beyond 140,000, because of growth in the mining and silk textile industries—and then, to support the war, in the 1940’s, mining became, once again, a major growth industry. However, even as many cities thrived in the wake of the war, the fortunes and population of Scranton began to ebb: coal production and rail traffic declined rapidly throughout the 1950s, leading to a reversal in employment. Indeed, that decade ended with the Know Mine Disaster, which virtually ended the mining industry in Northeastern Pennsylvania—and hammered the DL&W Railroad, which nearly went bankrupt itself because of the drop in coal traffic. Thus the city, which had served as a key hub of railroad operations lost another critical source of jobs and revenues. By 1957, the NYO&W Railroad, which depended heavily on its Scranton branch for freight traffic, was abandoned—leaving behind mine subsidence, which became an infrastructure nightmare for the city, as pillar supports in abandoned mines began to fail: cave-ins sometimes consumed entire blocks of homes, leaving the city scarred by abandoned coal mining structures, strip mines, and massive culm dumps, some of which caught fire and burned for many years. In 1970, the Secretary of Mines for Pennsylvania suggested that so many underground voids had been left by mining underneath Scranton that it would be “more economical” to abandon the city than make them safe. The physical and fiscal erosion meant that by the 1970s and 1980s, many downtown storefronts and theaters became vacant. By the beginning of this decade, Scranton itself was on the verge of municipal bankruptcy—the fiscal threat so dire that the city cut wages for all municipal officials, including the Mayor and fire chief, to $7.25 per hour—a step forced by estimates that the city treasury had just $5,000.

Thus, the city, in its petition to the court, is seeking approval to maintain a local services tax of $156, some $104 higher than the city’s prior level of $52 a year imposed before 2015. The city had raised the levy from $52 to $156 for every person working within the city limits who earns at least $15,600; now city leaders have deemed the proposed tax increases essential for the city’s recovery under the state-sponsored Act 47 for distressed communities, to which Scranton has belonged since 1992. (The city is junk-rated, albeit, as we noted last summer, S&P awarded it an upgrade in August to BB-plus from BB. The effort to obtain court approval to extend its higher local services tax, if approved, would continue to be $3 a week, or $156 a year per worker. (Previously, it was $1 per week, or $52 a year per worker. Under Pennsylvania law, these kinds of municipal taxes provide for exemptions for those earning less than $15,600 a year.) Scranton’s proposed recovery plan anticipates the city levying its local service tax at $156 a year annually through 2020, with the petition noting: “The Local Services Tax being levied at $156 represents a vital aspect of the plan as well as a key role in bringing about meaningful change to Scranton’s economic status.” Nevertheless, and even though the city confronted no opposition when it sought the previous approval, eight residents now contend the city would be in violation of a cap permitted under state law (Act 511) on a certain group of taxes, including the wage tax, business privilege/mercantile taxes, and the Local Services Tax. Nevertheless, Philadelphia Senior Judge John Braxton  dismissed the opposition as misplaced when he approved Scranton’s 2017 LST petition last February: his order noted the objectors could pursue a different legal avenue—an action they have now taken. Anyone wishing to file a response to the city’s petition has until the first week of next month to file.