Friday, July 13, 2012

Meanwhile in Scranton, Pa a Test is Coming Between the Courts, the Law and the Lack of Money

Can the Legal System Manufacture Cash for a City That Has None

In what may be regarded as the most self destructive move taken by a municipal government this year, the city of Scranton, Pennsylvania earlier this year decided to back away from guarantees on certain bonds the city had issued.

The troubles of Scranton, a city of 76,000, are a combination of long-term structural decline, a mayor and City Council at loggerheads and, since June, an inability to borrow. A majority on the Council turned Scranton into a financial pariah this spring by refusing to honor a guarantee that the city had placed on the revenue bonds issued by its parking authority.

The municipal bond market took its refusal as a sign that the city might also default on its own bonds, and cut off credit.

What happened next is that the city experienced the same thing that a business experiences when the supply of credit is cut off.  It ran out of money.

Gary Lewis, a financial consultant living in Scranton who follows the developments closely, said that last Thursday, July 5, the city had only $5,000 on hand. By Monday, he said, the total was up to $133,000 — but still nowhere near enough to pay its unpaid bills.

So the mayor did what everybody else does when they run out of money, they stop making payments.  In this case the city cut the wages of most of its employees to the minimum wage level.  As might be expected this is highly unsatisfactory to police and fire personnel, and almost certainly violates contracts and agreements.

Unions representing city workers won a court injunction last week ordering the mayor not to cut their pay. But the city issued the smaller checks anyway last Friday, and the union went back to court on Tuesday, asking a judge to hold the mayor and the city in contempt of court. It also challenged the city for not paying overtime and for cutting disability payments.

“They are running out of laws to violate,” said the lawyer representing the unions, Thomas W. Jennings, who said the workers were caught in the middle of the battle between the mayor and the City Council. “We are literally caught in the cross hairs between the Hatfields and the McCoys.”

So in the next several weeks the drama will play out.  Courts may well order the city to pay, the city may well not have the money to pay, and yes, this is a preview of things to come elsewhere.

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