Scranton Strains Under Pennsylvania Ruling Cutting Fiscal Repair Measure

Scranton (9664MF) Mayor Christopher Doherty is blunt when asked about a court order forcing his Pennsylvania city to pay about $30 million in wages withheld from police and firefighters under a state-approved fiscal recovery plan.

“I don’t have the money,” said Doherty, 53. As for the chance of borrowing the cash, more than half of the city’s projected general-fund revenue, he added, “there’s no financial institution that’s going to give me $30 million to pay it.”

The effect of a state Supreme Court ruling that put contract-arbitration awards ahead of fiscal recovery plans under Pennsylvania (STOPA1)’s Act 47 law may reach beyond Doherty’s city of 76,100 by removing a tool for communities in distress. The order probably will mean higher taxes, said Brian Jensen, whose nonprofit group counsels local governments. The decision also underscores the difficulty U.S. cities have in handling mounting labor costs without resorting to bankruptcy protection.

“This highlights a real gap between what’s available under a lot of the state recovery acts such as Act 47, and Chapter 9,” James J. Holman, a bankruptcy lawyer at Duane Morris LLP in Philadelphia, said by telephone, referring to U.S. municipal bankruptcy law.

“If the issue of insolvency relates fundamentally to collective-bargaining agreements, Chapter 9 has a fairly swift and fairly effective provision” to resolve those, Holman said.

Bankruptcy Option

Officials in other states have chosen bankruptcy. Robert Flanders, the receiver in charge of Central Falls, put Rhode Island’s smallest city in bankruptcy after failing to win concessions from unions last year. In California, the Bay Area city of Vallejo emerged from court protection in August, three years after entering Chapter 9 proceedings to cut labor costs.

Scranton’s Act 47 plan in 2002 barred raises for employees and capped longevity pay for three years, according to Matt Domines, a specialist in the state Local Government Services Center. The city, where 19 percent of residents live in poverty compared with less than 14 percent nationwide, is 125 miles (200 kilometers) north of Philadelphia.

An arbitrator awarded raises to police and fire unions, and the dispute ultimately was decided by the high court in October.

“Someone’s going to have to pay that freight,” said Jensen, the executive director of the Pennsylvania Economy League of Southwestern Pennsylvania LLC in Pittsburgh. “That’s going to come down to real estate taxes, and they will escalate.”

Containing Labor Costs

About 40 percent of Pennsylvania residents live in financially distressed cities, and those entering Act 47 often seek to contain labor obligations, Jensen said. Such expenses took 74 percent of Scranton’s 2011 spending, its recovery plan shows.

Public safety expenses add up. The median cost to U.S. cities is 52 percent of the budget, according to Richard Ciccarone, managing director at McDonnell Investment Management in Oak Brook, Illinois. He keeps data on municipalities.

Pay raises for police and firefighters in Act 47 cities recently ranged from 2 percent to 8.2 percent, according to Jensen. By contrast, an arbitrator awarded a 21.5 percent increase from 2006 to 2010 to police in Bethlehem, which isn’t under the distressed cities program.

Scranton’s recovery plan won community approval in a 2002 referendum, with 72 percent voting for it, said Domines.

The Supreme Court ruling doesn’t say when workers have to be given the additional money, said Fred Reddig, the executive director of the local government center. City, state and union officials are still working on what the final tab will be.

Broke the Law

Scranton violated collective-bargaining law by withholding raises, said Thomas W. Jennings, a senior partner at Jennings Sigmond PC in Philadelphia.

The ruling may compel municipalities to be more “flexible” on labor costs, said Jennings. He represents police and firefighter unions in Scranton and other Act 47 cities such as Harrisburg (9661MF), the state capital. He said the decision forces government officials to develop plans with unions.

Members of one Scranton union, the International Association of Fire Fighters Local 60, are open to keeping the taxpayer effects to a minimum through a payment plan, Jack Gaffney, a vice president, said by telephone.

“We’re willing to sit down and talk about this,” said Gaffney. “We have a stake in this as well as the taxpayers.”

Doherty said he’s asking lawmakers to prevent arbitration awards from trumping Act 47 fiscal plans, and include Scranton. He is also lobbying for the chance to impose local sales taxes.

If Scranton borrows to cover the cost, property taxes would probably rise 35 percent, Doherty said. Residents of the city, where about 55 percent own their homes, have a median household income of about $35,600, 29 percent under the state average, U.S. Census Bureau figures show.

Doherty cut 29 firefighting jobs to deal with this year’s 9 percent increase in personnel costs, driven by the court ruling.

“You just keep going and make it work,” he said. “We don’t go out of business. We’re cities. I still got to plow tomorrow if it snows and put the fire out the next day and have to plan for the new park.”

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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