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Scranton, Pennsylvania: where even the mayor is on minimum wage

Category : Business

With shrinking tax revenues, industrial decline and a political stand-off, the city is a symbol of a nation’s crisis – some of it self-inflicted

Scranton is the setting for the hit American version of the sitcom The Office. Not many people in this beleaguered city are laughing any more.

A former industrial city of 76,000 citizens, nestling amid the rolling wooded coal country hills of north-eastern Pennsylvania, Scranton is in crisis.

Its political system is deadlocked. The city coffers are virtually empty and its debts are huge. Last week the pay packets of all its municipal workers – including firemen, police and the mayor – were slashed to the minimum wage of $7.25 (£4.70) an hour. That effectively equates a life-saving Scranton fire chief with a burger-flipper elsewhere in the US. Not surprisingly, many expect Scranton to go bankrupt soon.

And Scranton is far from the only American community to face this dismal prospect. In the past month three Californian cities – San Bernardino, Stockton and Mammoth Lakes – have all gone bankrupt. Some experts have warned that a wave of municipal bankruptcies is set to sweep the United States as towns, cities and counties plunge into a fiscal black hole, collapsing under the weight of huge debts and reduced revenues. Last week Michael Coleman, a fiscal policy adviser to the League of California Cities, warned in the Los Angeles Times that some smaller cities in his state “may cease to exist”.

That sort of scary talk does not convince everyone. But it certainly rings a bell with proud Scrantonian Gary Lewis, 26. The financial consultant, whose family are fifth-generation Scranton residents, saw his city as a harbinger of a crisis to come elsewhere in America.

“Give it a couple of months. This is the first domino. This is the leak that indicates the dam is breaking,” he told the Observer. Lewis runs a respected financial blog on Scranton’s fiscal crisis. He has calculated that on 5 July the city had just $5,000 cash in hand. “If this city was a private company, they would be liquidating,” he said.

Scranton is a symbol for an age of economic crisis in America. There is not one simple factor that has caused Scranton’s problems, but it has instead been hit by a perfect storm of issues that are facing many similar communities.

The most obvious is industrial decline. Along with many once proud factory towns, Scranton has been hit by jobs going abroad and a collapse in manufacturing. Dubbed “the Electric City” by hopeful city marketers – it had the first electric trams in America – Scranton has seen its population almost halve since 1940. Critics say the city government has not adjusted to its reduced size, keeping up wage, retirement and healthcare commitments that it no longer has the revenue to pay off. At the same time, debts have racked up and policy mistakes have been made that have wasted millions. Yet, like so many politicians across the US, many on the city council have refused to approve the raising of taxes that would stave off fiscal catastrophe.

In the era of the anti-government Tea Party, talking about tax rises in America remains politically dangerous, even in the face of bankruptcy.

So Scranton finds itself in a fiscal mess with a dysfunctional and squabbling political system that is struggling to find an answer: a miniature version of what many believe has happened to America as a whole. Mayor Chris Doherty no longer attends council meetings, so bad are relations with the city council. He slashed wages to the minimum despite a judge ruling that he could not do so. But his action prompted the municipal unions to sue in court. He is desperate to raise taxes. The city council refuses.

Whatever the rights and wrongs, it hardly presents a picture of unity in the face of adversity. “It seems like they can’t just sit down together and work out a compromise,” said JoAnn Fremiotti, a supply teacher, as she drank coffee in Scranton’s grand main square. The newspaper she was reading bore the headline “We failed”. The reference was to a local college child abuse scandal but it was not much of a stretch to read it as expressing a more general despair. Some of Scranton’s problems have been farcical and self-inflicted. For example, a key part of a recent Doherty recovery plan for the city centred on the $5.4m sale of the city’s stormwater pipes. Yet, as the sale was being readied, it was discovered that the city had not actually owned them since the 1960s.

Not all experts are pessimists, however. In the aftermath of the recession, many American cities have reacted by desperately trying to get their fiscal houses in order. Richard Ciccarone, managing director of McDonnell Investments, is a specialist in tracking the finances of distressed American cities. He maintains a powerful – and lucrative – database that details their debts. He expects more city bankruptcies in the coming months, but nothing that will threaten the economy. “I don’t think we are going to see this become a systemic risk,” he said.

Ciccarone believes that most American cities are on a sounder financial footing now than two years ago because they have been building cash reserves to stave off the sort of crisis moments that Scranton, San Bernardino, Stockton and Mammoth Lakes have been caught up in. “Many cities have built up their cash reserves and cut their budgets,” he said.

But there is a devil in that detail

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Stretched budgets, rising debts – will Scranton be the next to go bankrupt?

Category : Business

Bankruptcy of Californian trio reignites debate over state of local finances, but experts do not expect surge in cities going bust

The bankruptcy of three Californian cities in less than a month has reignited concerns over the parlous state of local government finances across the US.

Attention has now shifted to Scranton, Pennsylvania, where municipal employees have had pay slashed to minimum wage levels amid warnings the city government is about to run out of money.

This crisis has some experts wondering if Scranton will follow San Bernadino, Stockton and Mammoth Lakes in a move that will see a sudden cluster of city bankruptcies spread from the west coast to the north-east. That in turn raises the spectre of other cities declaring themselves bust, which would hit an already faltering US recovery.

A variety of factors have caused the problems in California. Stockton was especially hard hit by the foreclosure crisis and the bursting of the real estate bubble. San Bernardino has suffered during the recession, and been hit by revelations that city officials have been faking accounts to mask heavy deficit spending for 13 of the last 16 years.

Scranton, however, is in the middle of a fierce political fight over cost-cutting measures aimed at putting the city’s embattled finances on a more even keel.

That has seen Mayor Chris Doherty slash the wages of city employees to the legal minimum, triggering a legal battle with unions, and a reliance on debts to keep the city running. Doherty also aims to raise taxes in the city to help get more revenue flowing into municipal coffers, but that plan is opposed by many other city politicians.

Many other cities across the US, hit by stretched budgets and huge debts, are also attempting furiously to cut costs or raise revenues.

But most experts do not expect the crisis to become a systemic one, even though a few other individual bankruptcies are likely to occur in the coming months.

“I don’t expect we are going to see a systemic risk, but we are likely to see a higher number of bankruptcies,” said Richard Ciccarone, an expert in municipal debt and managing director of McDonnell Investments.

Eileen Norcross, a senior research fellow with the Mercatus Center at George Mason University and an expert on municipal finances, said it was hard to tell yet whether the latest bankruptcies were an isolated cluster or the start of a trend.

“We are seeing stress increasing in California – and in other areas where they face mounting obligations – at the same time as property taxes are declining,” she said.

Norcross said that even though the economy is recovering, albeit slowly and from a low level, many of the fundamental issues faced by municipalities remain. She calculates that states and local governments have underfunded pensions by $4tn – a massive shortfallthat many have little hope of recovering.

In 2007 an accounting rule was brought in to make local authorities disclose the size of their healthcare liabilities. Government workers’ healthcare plans are believed to be underfunded by $627bn.

“What also concerns me is the financial reporting here,” said Norcross, referring to the reports that San Bernadino officials did not file accurate reports.

Norcross said that unless these underlying issues were tackled, a major US city could still go bankrupt. New York went to the brink of bankruptcy in 1975 and recently Detroit has teetered on the edge.

The city narrowly avoided bankruptcy earlier this year and still faces a massive financial crisis. In May mayor Dave Bing announced plans to save money by cutting off street lighting to half the city.

Those sort of drastic cuts are being followed by many other cities and towns across America, often resulting in lay-offs of large amounts of city workers, including police and fireman and the slashing of often basic services.

Last year the struggling city of Camden, New Jersey, laid off nearly half its police officers and almost a third of its firefighters in an effort to bridge a huge budget gap.

Though such measures have a serious cost, some observers do credit them with putting many American cities on a firmer financial footing. Ciccarone said that most of the American cities he tracked via an extensive municipal finances database actually now had greater cash reserves on hand than they did several years ago. “Many cities have built their reserves and cut their budgets,” he said.