In municipal finance, debt is not necessarily a four-letter word.
However, if it balloons to the point of drowning a struggling city, it could be, experts said.
Northeast Pennsylvania cities are finding themselves caught between having to provide necessary services but no longer being able to afford them, and so they have borrowed to get by. Like businesses, municipalities are concerned with revenue, expenses, debt and cash flow, and if any one runs into trouble, financial distress is not far behind, said Gerald Cross, executive director of the nonprofit Pennsylvania Economy League, a coordinator of distressed municipalities in the Keystone State.
In some financially ailing cities throughout Pennsylvania, "The revenue side is in danger of being swamped completely by the expenditure side," Mr. Cross said.
In Lackawanna and Luzerne counties, the total debt of the six cities - Scranton, Wilkes-Barre, Hazleton, Carbondale, Pittston and Nanticoke - is $250 million. The bulk of the collective cities' debt is from Scranton, which has $148 million.
The scenario often goes like this: A municipality's hands are tied by employee contracts that lock in salaries and raises while costs of benefits and pensions are soaring. Services - police and fire protection, trash pickup, road paving and snow plowing - must be delivered, but revenue and tax bases have been stagnant, if not declining, for years.
Where does the money come from to pay all of the bills? Raising taxes can only go so far. Hiking them too high may cause a spike in delinquencies, chase homeowners and businesses out of town or deter new ones from coming in, and lead to even less revenue.
So, deficits may recur and become "structural," and often are papered over with borrowing. That may be doable, but only to a certain point. Debt could become a serious problem if it is relied upon each year to pay routine operating expenses and eats up an increasingly larger share of a municipal-budget pie. And this could create more budget holes that often are filled with more borrowing.
Municipal debt is generally measured by comparing annual payments with the overall budget, said Joe Boyle of PEL. Payments equating to 10 percent or below of budgeted expenses are "acceptable and general practice" while payments of 15 percent or more of a budget generate "real concern," he said.
"If you're spending 70 percent on salary, benefits and health care and add 18 percent (of debt payments), you're already at nearly 90 percent," Mr. Boyle said. "What are you going to cut?"
Like a homeowner needing a mortgage or a motorist requiring a car loan, a city issuing bonds or notes may be practical ways to raise funds for any number of reasons, and becoming debt-free is not necessarily feasible, said Teri Ooms, director of the Institute for Public Policy & Economic Development, a Wilkes-Barre-based research and analysis agency.
"Debt is not necessarily a four-letter word. I don't think any government will be debt-free, (and debt may be OK) as long as it's a manageable debt to cover," Ms. Ooms said. "If debt is used to meet daily cash flow for any length of time, then you've got a major problem. Certainly, debt is one way to take things on, but it shouldn't be the resource you keep going back to for more and more."
"When you have increases in expenses without a concurrent increase in revenues, communities start borrowing and you end up in debt," Ms. Ooms continued. "The problem we have (in many cities) is that the (underlying financial) problem wasn't addressed early on and it snowballed, and now we have this wild animal that's out of control."
n Scranton
Such a scenario largely has been the story of Scranton for decades. In 1992, after years of budget imbalance, the city was officially designated as financially distressed under state Act 47. Lacking teeth, however, and undermined by a 2011 state Supreme Court ruling, the act has not been a fix for Scranton.
It was in 2002, and with aging infrastructure and bloated budgets, that the Electric City began borrowing tens of millions of dollars and has since accumulated $148 million in debt ($100 million in principal, $48 million in interest).
An annual operating budget of $111 million includes $10 million in debt service that accounts for 9 percent of the budget.
In notes and/or bonds, Scranton borrowed the following amounts, which include principals and interests:
- $7.3 million in 2002 to purchase the city's streetlights.
- $77.1 million from four bond issues in 2003 to fund workers' compensation and pension obligations, build new DPW and police facilities, upgrade parks and pay for costs related to flooding and paving.
- $2.3 million in 2004 to cover routine municipal operations.
- $14.4 million in 2006 to cover routine municipal operations.
- $8.8 million in 2008 to cover routine municipal operations.
- $30.8 million in 2012 for operations, coming from two bonds and one note for refinancing and two packages of 'unfunded debt' that had to be approved by a court.
- $7.3 million so far this year for refinancing.
And, Scranton still needs to borrow some $22.5 million this year to pay a $17 million landmark 2011 state Supreme Court arbitration award to the city's fire and police unions, and a $5.5 million increase in mandatory minimum pension contributions.
"A couple of the bonds were for capital improvements - new DPW and police headquarters, paving, upgrade of parks. The other ones have been operational borrowing and refinancing," Scranton Business Administrator Ryan McGowan said. "The last couple of loans have been to meet operational needs. You have to make good on vendor payments and there are contractual obligations that need to be met."
The $148 million of debt in Scranton also does not take into account another approximately $150 million in debt of city authorities for which the city ultimately would be on the hook because the city backs them.
"The difficulty for cities like Scranton is this idea that you have these liabilities because expenses have outpaced revenues for a number of years," said Public financing expert Tracy Gordon, Ph.D., a fellow in the economic studies program at the Brookings Institution in Washington, D.C.
She added that as debt rises the cost of debt also may increase.
"You could see a decline in services, difficulty in accessing capital markets or pay exorbitant interest rates," she said.
Indeed, Scranton ran into such difficulties last year securing financing to get through the year. First, wary banks shied away from lending the city money after it had failed to pay a debt on time in 2011; and then a default of city-backed debt of the Scranton Parking Authority in June led to the city later having to pay a premium in higher interest rates to land a private-placement bond.
Wilkes-Barre
Wilkes-Barre has $69.2 million in city debt. Its annual $44.9 million budget includes $7.7 million in debt service, or 17 percent of the budget.
City officials are quick to emphasize debt isn't always a bad thing. Borrowed money, along with grants, has allowed the city to take on big-budget capital projects, such as the $14 million Coal Street improvement project and the $28 million downtown transportation center. It's also a way to save money by refinancing existing debt.
However, some experts say Wilkes-Barre's debt might be too high. About 17.5 percent of the city's 2013 general fund budget will go toward paying off its debt. "When you hit 15 percent, you're in trouble with the guidelines," said Mr. Cross of PEL. "It's a warning sign."
Wilkes-Barre's debt comes primarily from general obligation bonds, which are bought by investors and repaid with interest over an extended period of time. Wilkes-Barre is paying off 19 different bonds, most of which were used to fund capital projects or refinance older bonds.
Last year, the city issued bonds for a $5.9 million energy savings project that is expected to pay for itself, plus save the city an additional $3.9 million over the course of the next 20 years. City spokesman Drew McLaughlin said the city also took advantage of rock-bottom interest rates to refinance old bonds to save $300,000.
"Our overall strategy is to restructure to save money, and make long-term investments to improve the city and put the city on a more sustainable path," Mr. McLaughlin said.
Dave Fiorenza, an instructor at the Villanova University School of Business who has worked with several Pennsylvania townships, said capital projects are usually good long-term investments for cities. But he said as cities take on more debt, they must look for ways to pay it off. There isn't much economic development in Wilkes-Barre, Mr. Fiorenza said, which means the burden on taxpayers could grow if the debt burgeons.
"Investors will be concerned and look long-term whether there will be growth in the city," Mr. Fiorenza said. "What will be the driving force to take Wilkes-Barre to the next level in the next five to 10 years?"
Mr. Cross said excessive borrowing can also reduce the city's ability to pay for services, like hiring more police officers or paving streets, since the city's highest budget priority is paying off its debt.
"That means services come second to debt service," Mr. Cross said. "If debt service becomes too expensive, services become secondary, and citizens should be concerned about that."
The city has also used bonds to pull itself out of financial binds. In 2011, the city borrowed money to make payments on an older set of bonds. Delaying that payment cost the city $626,000 in extra interest. Mr. McLaughlin said the city was dealing with stagnant revenues resulting from the recession, and buying more time to pay off the debt was in the city's best interest.
Hazleton
Hazleton operates on a $8.6 million general fund budget, but owes more than $13.3 million in long-term debt through 2025. It's $1.2 million in annual debt service is 14 percent of this year's budget and will continue for at least 12 more years.
While the outstanding balance is straining a cash-strapped city that's struggling to provide services and pay labor contracts, Mr. Boyle, of PEL, said the city's in relatively good shape in terms of managing its debt.
"I think if (Hazleton officials) keep making progress, at some point in the next four or five years they might be able to refinance and get it at a better rate," he said. "But they're not in bad shape."
A large portion of long-term debt stems from refinancing old borrowings. But, the city's most recent borrowing stems from the city's inability to pay tax anticipation notes that it secured in 2010 and 2011, Acting City Administrator Steve Hahn said.
The added debt led to a substantial increase in a portion of property taxes that is reserved for debt service. The debt-related millage rate climbed from 0.54 mills in 2012 to 1.3 mills this year - and was part of an overall property tax hike of 45 percent.
While refinancing typically leads to lower interest rates - and smaller annual payments - Mr. Hahn said municipalities should weigh those savings with expenses incurred during the process. Otherwise, communities could be extending interest payments on refinanced bonds or loans without significantly paying down the principle, he said.
While municipal leaders are quick to point out lower interest rates, Mr. Hahn said it's important for communities to consider closing costs, extended interest payments and other fees associated with refinancing.
"Any time you refinance, you carry that debt out further," Mr. Hahn said. "Sometimes if you keep cycling those types of things out - they claim there's better interest rates - but when you look (at some arrangements) you'll see that $50,000 or more went to lawyers for closings. Sometimes, there's a discount on the bonds. The brokerage companies end up making money on this, too."
Mounting debt led to the city's latest borrowing - a $5.6 million guaranteed lease-revenue note secured in June 2011 through the redevelopment authority.
PEL consultants who were working with the city at the time to develop a strategic financial plan said that while the borrowing was needed to avoid a default on a previously-secured tax anticipation note, they cautioned that continued reliance on such borrowings "cannot be sustained and leads to larger deficits."
That borrowing prompted the city to more than double taxes levied for the city's debt service fund, which climbed from 0.54 mills in 2012 to 1.3 mills this year.
Carbondale
Carbondale has $8.6 million in city debt, which includes the principal and interest. An annual $6.3 million budget includes $1.1 million in debt service, or 17 percent of the budget.
Along with funding capital projects and meeting pension obligations, Carbondale had to seek court approval for unfunded debt to make ends meet in recent years, Mayor Justin Taylor said.
"The city basically runs with a structural deficit every year," though it's been reduced in recent years from $500,000 to around $250,000, he said. "We've had some unfortunate situations where we've had to do three unfunded borrowings over the past 10 years."
A large chunk of Carbondale's debt was incurred in 2006 when the city borrowed $3.6 million to fund its pension obligations. That was a large amount for the small city, and its single largest borrowing, but one that officials deemed was necessary to not delay pension obligations.
"Every year we were seeing our MMO (mandatory minimum pension obligation) increasing," Mr. Taylor said. "We said we just need to bite the bullet, borrow the money and dump it into the pension plan so we see some stability. Most other municipalities probably didn't do that, but thankfully we did it when we did. We put it in the (stock) market when it was good."
The city also has cut expenses but has grappled with revenue estimates not being realized.
"Your best budget and projections go out the window when people don't pay their taxes," Mr. Taylor said. "Our biggest issue in Carbondale is people who don't pay their taxes or fees."
The city has implemented a new fee for fire protection and offered three veteran police officers a retirement incentive, he said.
Carbondale also raised taxes this year by 1.03 mills, the first increase in years, from the former level of 28.97 mills, to bring the rate up to the city's statutory maximum of 30 mills, he said.
The city's largest source of taxes, wage taxes, were not raised because they are already higher than surrounding towns, he said. At 1.6 percent for the city and .5 percent for the school district, the total earned-income tax on Carbondale city residents is 2.1 percent, he said.
As such, officials must weigh a balance when it comes to increasing wage taxes, said Mr. Taylor, adding, "Sure, we can raise EIT, but when does it become cost prohibitive for people to live and move here."
"Municipal finance is an odd animal. There's so many nuances to it and things you really have no control over, and that's the unfortunate part," Mr. Taylor said.
Pittston
Pittston has $8 million in city debt. An annual budget of $6.6 million includes $376,000 in debt service, or nearly 6 percent of the budget.
Pittston's borrowing abilities are more limited than Wilkes-Barre's because its budget is smaller. City administrator Joe Moskovitz said capital projects are still a priority, but they have to be within the city's budget.
"We're not a wealthy community, but that doesn't mean we shouldn't be investing in our community," Mr. Moskovitz said.
Pittston will pay $376,488 toward its debt, which is 5.7 percent of its $6.6 million budget. The city doesn't issue bonds and only takes on loans.
Of Pittston's $8 million in debt, $2 million was used to refund older obligations. Mr. Moskovitz said the borrowing paid for equipment and capital projects, including improvements to its fire station.
The city is also looking to take advantage of federal loans to improve its library and city hall. The $1.9 million in loans, provided to the city by the United States Department of Agriculture, will be paid off over 40 years at 3 percent interest. Mr. Moskovitz said this project is an example of the city taking advantage of opportunities that fit its financial needs.
"When this mayor (Jason Klush) was elected, he said we were going to invest our community," Mr. Moskovitz said. "You need to be very conservative about your borrowing, but now is the time to invest in our infrastructure."
Nanticoke
Nanticoke has $2.6 million in city debt. An annual budget of $4.9 million includes $528,000 in debt service, or nearly 11 percent of the budget.
Financial problems for Nanticoke began in 2004 when the city borrowed money simply to pay operating expenses.
The city was already taxing property owners at the highest rate allowed by law.
"When you're borrowing just to keep up operations, you're on the road to being distressed," said Mr. Boyle of PEL.
Outstanding debt once defined the city, which the state Department of Community and Economic Development declared financially distressed under state Act 47 in May 2006.
A recovery plan helped Nanticoke improve its financial outlook to where it no longer borrows money to pay day-to-day expenses. It's one reason why the city is expected to be released from distressed status by next year.
"Nanticoke made substantial progress and should be let out of Act 47 by 2014," Mr. Boyle said. ""We will do an amendment (to the recovery plan) this year specifically showing how the city has made the progress they needed to."
This year, Nanticoke has a $4.9 million general fund budget, with principle and interest payments toward debt accounting for $528,337. The city owes $2.6 million through 2019, when its final annual debt payment will be only $238,638.
According to Pam Heard, city manager, Nanticoke's problems with debt began when it borrowed money to complete various sewer and road repairs, and then to pay "operating expenses incurred during the periods prior to the city going to Act 47."
"All of our debt is old debt. It has rolled over so many times," Ms. Heard said.
Although its finances are improving, Nanticoke's debt obligation could become prolonged if officials move forward with much-needed capital projects, for which the city could borrow money in the future.
"They were not able to do capital projects because they were distressed financially," Mr. Boyle said.
Otherwise, the city would have to complete projects such as roadwork with state and federal grants that require a local match.
"It is very difficult to pull the funds from interest," Mr. Boyle said. "It is difficult for a municipality the size of Nanticoke to have money laying around to pay for major road projects."
Overcoming debt
How, then, can struggling cities overcome debt?
"The solutions are limited. I hate to say it, but bankruptcy is one of them. It is an option under Chapter 9" for municipalities, Ms. Ooms said.
Still, it's not clear whether the state would allow a municipality to file for bankruptcy. When Harrisburg tried it recently, the state stepped in and instead appointed a receiver to oversee that city's municipal finances. There have been around only a dozen municipal bankruptcies in the nation since the Great Depression, Ms. Gordon said.
The idea of bankruptcy has been raised in Scranton, but Scranton's leaders have not embraced it as an option. They fear it would label the city with a Scarlet letter, kill property values of homes and businesses and create an exodus.
Ms. Ooms also said cities must do more long-term planning and 'Plan B' budgeting, such that if a 'Plan A' fails there would be an alternative. However, such planning often is lacking because financially-strapped cities are understaffed and don't have the resources to do it, she said.
"It's a matter of putting out the fires today that we can't look to tomorrow," Ms. Ooms said.
PEL fills the planning void for distressed cities, but cities don't necessarily heed PEL's advice and it cannot force them to, Ms. Ooms noted.
Raising taxes often is a political non-starter, but some cities have had no choice. Hazleton this year passed a 45 percent property tax increase, some of which was due to increased debt service. Scranton's revised Act 47 recovery plan of 2012 calls for 79 percent tax increases over three years, and that amount may not even fill the void as various alternative revenues in the plan are speculative and may not be realized.
Mr. Cross has advocated for a regional approach among municipalities to pay for services.
"In my mind, the answer long-term is to fund services from a wider area. We do it with schools and counties. We don't do it with municipalities."
Under a regional provision of services, municipalities would remain intact and distinct and would not merge, he said. Rather, costs of service would be spread out over a larger area and savings would come from an economies of scale, Mr. Cross said. Still, it would likely be a tough sell, as municipalities would have to agree to contribute a portion of their assessed tax bases to pay for a regionalized service and would not be able to back out, he said.
Such a concept may be more difficult to implement with police and fire departments because of their contract safeguards under state Act 111, but sharing of DPW services may be more feasible, Mr. Cross said.
"People understand plowing streets across (municipal) boundary lines," Mr. Cross said.
Ms. Ooms agreed that municipalities are going to have to embrace collaboration and cooperation, and new laws from Harrisburg also may be required to fix the state's antiquated municipal systems.
"I think it's time for some out-of-the-box solutions because the old ways aren't working," Ms. Ooms said. "There's no one fix-it... solution. It's certainly not something anyone's going to see overnight."
Sam Galski, Shawn Kellmer and Chris Hong, staff writers, contributed to this story.
Contact the writer: jlockwood@timesshamrock.com.