By Gary St. Fleur. Originally published at ValueWalk.
Scranton issues several types of debt. Those types are:
Special Revenue Bonds: these are tied to a specific revenue stream, such as money collected from city-owned parking garages. Often times, the city also guarantees the revenue stream (like they did with the SPA)
General Obligation Bonds: these are paid for by the city with any available funds. Think of this as a personal loan.
Also Read
- Scranton, PA, Deep In Debt, Tries To Pick Itself Up
- Pension Crisis Reaching a Tipping Point
- State Pension Crisis Leading To High-Tax Exodus
Pension Funding Bonds: money collected from issuing these bonds can only be deposited into the pension fund. The private sector equivalent of this would be a margin account – or borrowing money to invest, hoping to earn more than you pay in interest.
Typically, the way a bond works is that it pays interest only until a certain date, at which point a principle “bullet” or tranche (don’t get caught up on the wording here, let’s just call them bullets. Because they’re killin’ us, man).
Scranton has been using a technique called “scoop out financing” – as each bullet comes due, the city refinances it. This is a bad idea, but it is common practice.
The state limits the number of times you can refinance debt before they penalize you by making the bond taxable (which means the city has to pay a higher interest rate, to account for the tax expense a bond holder will incur).
In 2018, the city owes $9.8M on a pension funding bond issues in 1998.
They also owe $2M on a 2001 issuance and $6M of taxable pension funding bonds from 2003.
So here’s basically what happened: in 1998 the city issued nearly $30M of pension funding bonds. During the last 20 years, several bullets have been paid but some have been “scooped out” and refinanced – and turned taxable in the process. That means the city hit the limit on the number of times it could refinance this particular debt.
So of the $26M the city owes in 2018, $6 CANNOT BE REFINANCED. There is also over $6M in interest which must be paid. That means the city MUST come up with $12M (and it could potentially refinance the other $14M, but that’s a horrible idea).
Oh – and the city also owes nearly $14M to the pension now that the average salary of retiring officers has crept up and fund performance as lagged the markets.
So nearly $40M (but likely only about $25M) in cash needs to be paid BEFORE the city pays another $42-45M in salary and $6M in benefits.
But they only have $60M of cash flow.
The post The City Of Scranton Runs Out Of Money Next Year! appeared first on ValueWalk.
Sign up for ValueWalk’s free newsletter here.
