George Mason’s Mercatus Center Report On Scranton

 

The George Mason University Mercatus Center recently released a report on Scranton detailing its long distressed financial history. Here is a brief overview of what the reports says:

In One Shot

The story is one of economic malaise due to loss of population from the decline of local industry. Between 1951 and 2005, expenditures for the Scranton government have increased from $20 million to more than $100 million. These costs are spread over fewer and fewer people.

Baumol’s cost disease

William Baumol was an economist who discussed the tendency for government to increase cost while producing the same amount of output.  This is fundamentally what is at work in Scranton. Goods and services provided by local government- police, fire, education, do not create any revenue gains. Thus, to attract workers, government increase pay despite maintaining the same level of output. This means that government cost can increase while their level of service and output remain the same or even lower.

Public Unions

The report details how the Scranton government has been incapable of gaining control of their cost. This is especially the case with regard to employee cost.  During a lengthy legal battle where the city of Scranton attempted to use the Act 47 recovery plan to get out of its distressed status, the unions sued and won. This is despite the fact that lower courts agreed that any arbitration awards prohibit the city from improving its financial health.

Out of Time

A revised 2015 recovery plan clearly stated that Scranton is “out of time”. Mounting deficits due to operating increases show a projected cost of $19.4 million by 2020. In order to mitigate this cost, real estate revenues would need to increase by 119 percent in addition to cuts made to government services.  The report state that the new plan “urges city officials to act quickly to cut employee costs in order to avoid bankruptcy.”

Act 47 Ineffective

Act 47 was supposed to be a temporary measure but in the 25 years Scranton has been under it, we have seen rising employee cost. This is due to “collective bargaining and binding arbitration” that has in effect  played in “Scranton’s downward spiral”. These cost coupled with ineffective tax structures make for a ruinous situation for Scranton.  Public-sector salaries in Scranton have exceeded the median household income of Scranton.  The assuming constant work force ratio between government employees and the Scranton public demonstrates signs that taxpayers are allocating more and more of their income to the government instead of other goods and services.

Scranton’s Debt

Scranton has made extensive use of debt to cover operating expenses, development and employee compensation.  This has compounded Scranton’s fiscal distressed and resulting in the loss of its credit rating.  In 2015, Scranton’s debt was at $218 million which represented 200 percent of Scranton’s total revenues for that year. Utilizing lease-payment agreements, Scranton obtained proceeds by agreeing to lease property to an agency and make rental payments to said agency.  These one shot measures are always temporary in nature.

A Healthy Municipality

There are three most common indicators for the health of a city: population, wages, and house prices. Scranton doesn’t do well in any of these indicators relative to its neighbors. This also includes business environment which can be tracked by the Chen and Rosenthal index. Scranton ranks 248th for quality of business and 176th in quality of life.  Scranton is relatively unattractive to both younger workers and retirees. Some civic leaders in Scranton are focusing on Richard Florida’s creative class strategy by making Scranton a “cool” place to live. Many of the city’s efforts to do this have not fared well. Scranton is better served by focusing on improving its business environment. Economic freedom is correlated to improvements overall.  Economic freedom is based on (1) overall economic freedom, (2) takings and discriminatory taxation (3) size of government (4) labor market freedom. In these indicators Scranton ranks in the middle of the pack in the region. Nevertheless, it lacks the quality-of-life” amenities such as museums, professional teams, and universities” that a place like Pittsburgh has.  Things like Regulation have a discouraging affect on entrepreneurship. Devin Bunten and coauthors have tracked the births and deaths of local business environments which showed local product demand, availability of supply networks, access to finance and business-government relations have a major impact on a successful business environment.  “A regulatory and tax environment that discourages entrepreneurs from trying to open new business decreases the amount of information available to other entrepreneurs and harms economic growth in to the long run.”

Recommendations

  1. Scranton must confront the reality that it is no longer an industrial city.
  2. Employee cost and other government cost must be curtailed.
  3. Scranton should seek to fix regulatory and tax barriers to attract young educated workers and entrepreneurs.

Final thoughts

“In an area that is already losing jobs, it is unwise to levy taxes that discourage firms from forming or locating in Scranton.”

“The current pensions should be capped, the plans closed, and
the employees given the option to enter a new defined contribution system”

“Benefits have been enhanced without regard for the
locality’s ability to pay. The city cannot control those costs.

“State aid has increased the incentive to promise unsustainable benefits and to shift the cost to state taxpayers. State-granted funding deferrals have shifted the burden
to future generations. “

 

Full report here: https://www.mercatus.org/system/files/mercatus-norcross-scranton-v1.pdf

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