Cash-Strapped City Turns to Pension Fund For Loan

(July 26, 2012) — The mayor of an ailing municipality says he has a novel investment opportunity for the city’s underfunded pension plans—$16 million of the city’s own debt.

The mayor of Scranton, Penn., floated the proposal in a letter to the Scranton Composite Pension Board as a way for the destitute city to meet its payroll. If the board accepts the deal, the city’s four pension plans would purchase $16 million of Scranton municipal bonds with a 10-year duration and offering a yield of 8%.

“Please allow this letter to serve as a formal request to the Pension Board to consider investing the sum not to exceed Sixteen Million Dollars into taxable City of Scranton Municipal Bonds,” wrote Mayor Christopher Doherty. “The cash infusion from the bond proceeds allows the City to meet current year obligations for payroll and debt service. This investment proposal includes a fixed rate of return on the investment of 8% [which] will greatly assist future funding in order to maintain the corpus of the fund.”

While there is no legal barrier to the investment, there remain deep concerns over whether buying a large chunk of the city’s debt is a wise investment for the pension plans. “Just because it’s not illegal doesn’t mean you have met your fiduciary obligations,” pension board solicitor Lawrence Durkin told the Scranton Times-Tribune.

As it turns out, the financial situation of Scranton’s pension funds is little better than that of the city. According to data collected by the Public Employee Retirement Commission, the agency that oversees local pension plans in the state, Scranton’s pension plans had assets of about $60 million and liabilities of more than $140 million as of July 2010. The agency lists the pension funds as “severely distressed” because of their lack of funding. Furthermore, the pension funds’ consultant BNY Mellon warned recently that if equity prices do not improve, the funds could run out of money within five years, the Times-Tribune reported.

Scranton’s mayor made headlines this month when he slashed the salaries of city workers—including his own—to minimum wage. Scranton unions have initiated legal action to reverse that move, and Doherty faces a contempt of court charge for going through with the pay reduction after a judge forbade it.