Scranton plans to borrow at least $22.1 million this year through an arcane, though not uncommon, financing mechanism called a "sale-leaseback" of an as-yet unspecified city property.
The money is needed to pay the landmark state Supreme Court arbitration award of $17 million to the police and fire unions and a $5.1 million increase in the city's contribution to its severely underfunded employee pensions, officials have said.
Allowed under state law, sale-leasebacks are commonly used by municipalities as ways to generate one-time revenue infusions that do not count toward a municipality's regular debt ceiling, officials said.
Here's how it would work: The city would sell for a nominal amount an asset, such as the police headquarters or a combination of assets, to a component of city government, such as the Scranton Redevelopment Authority. That agency then would use the property as collateral to issue bonds to raise the $22.1 million for the city. The city would lease the property back from the agency. Rent payments made from the city to the agency would fund the agency's debt payments on the transaction. At the end of the lease term, which likely would be 20 years, the building ownership would revert back to the city.
The city has not yet secured any commitment from a lender for a sale-leaseback or decided which asset to use, Mayor Chris Doherty said.
City Business Administrator Ryan McGowan said, "We're working on it. Obviously, it's a work in progress and something we'll be working on in the next few months, and we'll be pushing to get it done in a timely manner."
Time is of the essence, as the landmark court award is supposed to be paid to the unions by June 30, or a 6 percent interest penalty would kick in, said fire union President John Judge.
Furthermore, the $17 million arbitration award figure is a union estimate from before the landmark ruling was issued in October 2011, and interest has been accruing daily since then, Mr. Judge said. That means the final figure owed would be higher, although the city has been relying on the union's preliminary estimate and is still in the process of calculating its own final figure, Mr. Judge said.
"The city is not really good with numbers. They haven't been for 12 years. What concerns me is they don't know the real figures," Mr. Judge said.
The sale-leaseback figure of $22.1 million has been a bit of a moving target. That amount was the figure used by city witnesses in testimony during last month's hearings on a commuter tax that was rejected by a panel of county judges. However, the city's 2013 budget states that the city plans to borrow $25 million through a sale-leaseback to fund the arbitration award and pension-contribution increase.
Either way, a sale-leaseback is by far the largest plank of the 2013 budget, and one that so far remains a question mark.
The sale-leaseback issue was a key line of questioning and concerns by the judges in the commuter tax hearings. They were not familiar with the financing mechanism and asked city witnesses, including representatives of Pennsylvania Economy League, the city's Act 47 coordinator, to explain sale-leasebacks.
Those witnesses testified that sale-leasebacks are common in the state and used by municipalities for one-time revenue infusions, with the debt falling outside a municipality's regular debt ceiling. A municipality's nonelectoral debt limit typically is 250 percent of average revenues over the previous three years, and a sale-leaseback allows another 100 percent of that borrowing base, such that the debt limit actually becomes 350 percent of a borrowing base, according to the testimony.
Even though a sale-leaseback debt is incurred by a component unit of a local government, such as an authority, the debt remains a general obligation of the municipality - meaning a city is on the hook for the debt and is responsible to pay it, according to the testimony. Bond markets also likely would look favorably on a sale-leaseback, depending on the term and interest rate, and in this case the interest rate is expected to be in the 7 percent range, according to the testimony.
Statewide, around 10 sale-leasebacks occur per year, according to the state Department of Community and Economic Development, although that agency did not have figures on a total number of sale-leasebacks that exist among all municipalities.
In Scranton's case, the city has three outstanding sale-leasebacks. The city's most recent annual audit, of 2011, details them as follows:
-âA $4 million bond issue at 5.99 percent interest by the Scranton Sewer Authority on Dec. 22, 2004, to fund the purchase of the city's DPW complex on Poplar Street. The SRA leased the DPW back to the city for 12 years at the same terms as the Guaranteed Lease Revenue Bonds. At the end of the lease on Dec. 15, 2016, the city will purchase the complex for $1. The amount outstanding as of Dec. 31, 2011, was $2.43 million.
-âA $10 million bond issue at 6.1 percent by the Scranton Redevelopment Authority on Dec. 1, 2006, to acquire a leasehold interest in a city property. The SRA entered into a sublease agreement with the city, in which the city pays rent to the SRA's trustee, to allow the trustee to pay the principal and interest on the bonds. The 18-year term expires Nov. 1, 2024. The amount outstanding as of Dec. 31, 2011, was $9.66 million.
-âA $5.9 million variable bond issue by the Scranton Redevelopment Authority on Nov. 1, 2008, to acquire a leasehold interest in a city property. The SRA entered into a sublease agreement with the city, in which the city pays rent to the SRA's trustee, to allow the trustee to pay the principal and interest on the bonds. The 18-year term expires Nov. 1, 2026. The amount outstanding as of Dec. 31, 2011 was $5.89 million.
The city properties in the last two leasebacks were not identified in the audit.
While the city has had positive discussions with two firms regarding a new sale-leaseback, it's also possible that such a transaction could fail to materialize - a scenario that would raise the question of how the city will fix a $22 million problem, PEL officials had testified.
The court-award and pension obligations would not go away and their costs would rise and become even more of a monumental problem for a new mayor and council to deal with next year, Mr. Judge said.
Asked if he is confident that a sale-leaseback will occur, Mr. Judge said yes, but added that he has some concerns that perhaps it won't. Those reservations, however, are "not based on anything, other than the city's track record."
Asked the same question, Mr. Doherty said, "I'm confident we will meet all of our obligations."
Contact the writer: jlockwood@timesshamrock.com