Scranton City Council is pursuing a plan to borrow up to $18 million from a hedge fund to cover this year's budget gap, council officials have said.
The financially strapped city has been struggling for months to craft a recovery plan that would be acceptable to lending institutions so they would again provide financing to the city, as well as pass muster of the city's state-appointed Act 47 recovery coordinator, Pennsylvania Economy League, Mayor Chris Doherty has said.
Council President Janet Evans and council solicitor Boyd Hughes said during Thursday's council meeting that they have been pursuing funding from outside sources that they did not specifically identify, including a hedge fund firm that has provided financing to another distressed city, Harrisburg, and a Wall Street firm. Such firms would not require the city to revise its Act 47 recovery plan, they said.
"City council and its solicitor have been trying actively for weeks to secure financing from a Harrisburg firm and a Wall Street firm," Mrs. Evans said during the council meeting.
Efforts to reach Mrs. Evans and Mr. Hughes Monday were unsuccessful.
It was on July 5 that Mrs. Evans first said she was pursuing unidentified financing from outside the local banking community that may not require revising the recovery plan. While the mayor had long argued that a revised plan is necessary to assure wary banks the city can repay debt, Mrs. Evans again said in mid-July she was trying to find a solution outside the local banking community. Those efforts followed the June 1 pullout of M&T Bank from a council-approved bond issue.
In May, council adopted an ordinance to issue up to $26.6 million in bonds through M&T Bank to raise $18.5 million necessary to keep the city afloat this year. The $18.5 million would have been composed of a court-approved $9.85 million in unfunded debt and $8.6 million for refinancing current and future debt. The remainder of the $26.6 million would be for costs of bond issuance and a worst-case cushion for possible high interest rates. As a companion to this bond issue, council also authorized a dedicated tax millage that would be in place for 10 years to pay for the $9.85 million in unfunded debt. However, M&T Bank pulled out of the deal after the council allowed the Scranton Parking Authority to default on bond payment that was due June 1, administration officials have said.
On Thursday, Mr. Hughes said that he had asked the city's bond counsel, Brian Koscelansky of Stevens & Lee, to ask M&T Bank to at least proceed with the unfunded debt, because it was backed by dedicated tax millage and "it did not depend on a recovery plan."
"And I was informed that wouldn't happen, (that) it was all one kit and kaboodle and all had to be put together," Mr. Hughes said.
He said he told Mrs. Evans they should look outside commercial and local banks, "and look to other sources of funding: private placements and investment banking, hedge funds and things like that."
She authorized Mr. Hughes to proceed and he contacted Michael Judge of CaseCon Inc. of Scranton, who has been involved in investment banking for more than 25 years and had previously done financing deals for the city, Mr. Hughes said.
Over the past month, there was interest from an unnamed Wall Street firm in putting together financing for the $9.85 million unfunded debt that would be secured by a dedicated tax millage, as well as an $8 million tax-anticipation note that would be secured by the city's earned-income (wage) tax, Mr. Hughes said. However, the Wall Street firm was concerned about the possibility of not getting paid if the city went bankrupt, and as a result, "They really don't have an interest at this point," Mr. Hughes said.
A few weeks ago, Mr. Judge contacted Mr. Hughes about a hedge fund firm that had provided financing to Harrisburg, and Mr. Hughes said he "authorized him (Mr. Judge) to proceed with that so hopefully we could have a source of funding outside the (local) banks, in the event that the recovery plan is not put together."
Mr. Judge notified Mr. Hughes last week about the hedge fund firm saying it could not deal with Mr. Judge because he had no standing to represent the city as its financial adviser, Mr. Hughes said.
The city's financial adviser is Michael Vind of Financial Solutions, a firm with offices in Scranton and Reading that is connected to the bond counsel firm of Stevens & Lee, which has offices in Pennsylvania, New York, New Jersey, Delaware and South Carolina.
However, Mr. Hughes said, "There is absolutely nothing that's ever been passed by the council appointing Financial Solutions as financial adviser or Stevens & Lee as bond counsel."
Mr. Hughes then asked for, and received, council approval to draft legislation for this Thursday's council meeting to appoint CaseCon Inc. as the city's financial adviser, so it could deal with the hedge fund firm.
Mr. Doherty said Monday that the first time that Mrs. Evans ever spoke to him about CaseCon Inc. was on Friday, after he asked her about what she and Mr. Hughes had revealed during Thursday's council meeting.
As for whether the hedge fund financing sounded feasible, Mr. Doherty said, "We're always open to new ideas. It's important that we work together."
Mr. Doherty also said the administration approached Mr. Judge a few months ago, when "At that time, he felt that he couldn't do anything for us."
Reached Monday by telephone, Mr. Judge declined to comment, saying he has no standing to comment as he has not yet been appointed by the city.
Efforts to reach Mr. Koscelansky and Mr. Vind on Monday unsuccessful.
Meanwhile, other possible sources of financing also have been under consideration, including:
n Tapping the city's employee pension funds.
n Having the Scranton Sewer Authority purchase $6 million in bonds from the city. This idea of the mayor's was revealed Thursday in a letter issued by PEL to the city expressing concern that various funding sources in the mayor/council's tentative recovery plan are far from guaranteed. Mr. Doherty said the city is in discussions with the SSA about this matter.
Contact the writer: jlockwood@timesshamrock.com