Lackawanna County patches budget gap with scoop-and-toss deal

Bonds

Lackawanna County, Pennsylvania, faced persistent budget gaps patched with one-time revenues, two ratings downgrades since September, and its upcoming scoop-and-toss bond deal will yield spiking debt service costs in the coming years. 

But the county believes its upcoming financial plan and hidden economic strengths will turn around its fortunes. 

“For anyone who still thinks this area is strictly a coal mining area, especially anyone who would have an interest in investing in county debt, I tell them to visit here,” Lackawanna County CFO David Bulzoni said. “It’s a very vibrant area. There’s a lot that’s going on here. The investment in this area is incredible.”

A road leading into downtown Scranton, Pennsylvania, the county seat of Lackawanna County. The county believes its upcoming financial plan and hidden economic strengths will reverse its recent financial woes.

Bloomberg News

The $12.8 million scoop-and-toss deal was approved by the Lackawanna County Board of Commissioners by a two-to-one vote earlier this month. The bonds mature in 2035. S&P rated the bonds BBB with a negative outlook.

The proceeds of the bonds will partially refund and restructure roughly $12.3 million of debt from series 2016A, 2016B, 2017 and 2020 bonds. The county will use $5.5 million of the proceeds to close its budget gap, $4 million to fund its long-unfunded capital budget, and around $1.4 million to pre-fund a single-point paying agent account.

The deal will increase the county’s debt service by $604,000 in 2026, $1.05 million in 2031 and $7.2 million in 2035. In 2036, debt service costs will drop from roughly $21 million to $7 million.

Chris Chermak, a Republican and the commissioner who voted against the issuance, said it would require the county to raise taxes in the future. At the same vote, Bulzoni justified the deal, saying it allows Lackawanna to “live to fight another day.”

“We’re trying to slow, at this point, a runaway train,” Bulzoni said at the meeting, according to the Scranton Times-Tribune. “We’re looking at every possible opportunity that we have in order to create some stability in this process.”

The “runaway train” is the county’s budget deficits. In 2022, Lackawanna had to plug a $4.5 million deficit. In 2023, the preliminary deficit was $8 million. 

This year’s deficit required $10.38 million use of one-time funds. 

In addition to the $5.5 million from its upcoming issuance, the county offset its deficit with $3 million of American Rescue Plan Act funds and around $2.3 million in surplus healthcare funding. The county also raised property taxes by just over $1 million and cut expenditures by $1.2 million.

Lackawanna can no longer use reserves to close budget gaps, because they’ve been depleted to just 13.3% of 2021 operating revenues. And the county is in a hole on pension contributions and delayed payments to vendors.

S&P cited these problems when it downgraded Lackawanna to BBB-plus in 2023 and again, to BBB, earlier this month. 

The rating report also noted the county’s “debt service carrying charges at 7.5% of expenditures and net direct debt that is 77.4% of total governmental fund revenue.” 

Bulzoni said he disagrees with the decision to downgrade Lackawanna, but he admitted the county has suffered from poor fiscal management in the past. 

The previous crop of county commissioners increased the county’s expenditures over the last eight years despite its repeated budget gaps and slow economic growth. 

The county’s current commissioners, two of whom were elected in 2023, are charting a better course, Bulzoni said.

‘New commissioners came in this year, and they’re very intent on making sure that the county employs best business practices in its approach to fiscal management,” Bulzoni said. “Sometimes the calculations from prior administrations are not exactly what might be in the best interest of the county. And you deal with it. You wind up making adjustments based on what you think those best practices should be.”

Lackawanna’s long-term struggles to raise revenues might call into question the county’s ability to cover higher debt service costs from its upcoming scoop-and-toss deal. But Bulzoni thinks this is a defensible occasion to use this tactic.

“It’s certainly not a tool you want to use consistently,” Bulzoni said. “But at least for this year, it presented itself as a valuable tool. Because otherwise our real estate tax increase would have been much more significant than, I think, would have been approved by the county, and was maybe even necessary.”

The issue will not change the duration of the county’s debt, Bulzoni noted; Lackawanna was going to have a large drop in debt service costs after 2035, and it structured the deal to keep that decrease in place. 

The county will find the revenue for the higher near-term costs through its upcoming financial plan, Bulzoni said. Lackawanna has partnered with the Pennsylvania Department of Economic and Community Development to contract PFM to provide an operational fiscal review of the county and provide a five-year strategic management planning program. 

The plan is expected this summer.

“The funding helps municipalities support the hiring of independent financial consultants to develop and implement multi-year Financial Management Plans, improve management practices and/or financial administration procedures, develop multi-municipal or regional intergovernmental cooperation initiatives and cost sharing strategies, and provide training for local officials,” the DECD said of the plan in an email. Lackawanna received a $100,000 grant through this program.

Lackawanna’s general fund revenue in 2022 was 61% taxes and 20.6% fees for services, according to S&P. Presumably, the plan will involve increasing one or both of those sources of revenue enough to cover the recurring budget gaps and ever-rising debt service costs. But Bulzoni declined to speculate on what could be in the plan, and he’s simply waiting for its release. 

“We’d really like to see exactly what the five-year outlook is for the county and how that’s going to affect our finances,” Bulzoni said. “It’s certainly too early to discuss how we’re going to approach the 2025 budget, other than we know we have responsibilities to meet our expenditures.”

One benefit of the fiscal plan likely will be political cover to raise these revenues. The state government and a third party will formally tell Lackawanna to raise taxes, so its commissioners won’t have to say it themselves; part of the reason the county let revenues stagnate for so long was the difficulty of raising taxes with inflation at high levels, Bulzoni said. 

S&P noted the plan in its rating report: “Although we expect a plan will be in place, we recognize that it could take time for actions to produce a structurally balanced budget.”

Lackawanna is taking other measures that could increase revenues, Bulzoni said. The county contracted PFM to be its financial advisor earlier this year, it’s switching from zero-based to performance-based budgeting, and it’s using some of the proceeds from its upcoming issuance to set up a single-point paying agent. 

Lackawanna also has a lot of outstanding tax abatements through Local Economic Revitalization Tax Assistance (LERTA), a Pennsylvania program offering tax breaks for redeveloping or relocating commercial properties. LERTA abatements last 10 years, and when Lackawanna’s expire, the county will receive an additional $1.6 million in property tax revenue.

In 2026, the county will finish its first countywide reassessment since 1968, which Bulzoni and S&P agree will result in a big increase in the Lackawanna’s assessed value. 

The reassessment will “likely result in the redistribution of tax burdens more so than increased levy extensions, as state law limits the ability to increase revenue as a result of reassessment,” S&P said. 

The county’s plans will have to resolve its pension problems. The commissioners set pension contributions around $3.9 million in 2020 and hadn’t increased that contribution to avoid raising taxes.

S&P said the county “has been severely underfunding its pension actuarially determined contribution.” Bulzoni argued the pension plan is funded at 77.5%, which Pennsylvania’s ranking system would categorize as only “minimally distressed.”

This year’s ADC was $7.1 million. Lackawanna increased its contribution to $4.1 million and plans to increase its contribution by increments of $250,000 each year. Since the funding level exceeds 70%, Bulzoni argued this is a reasonable approach, but the county will adjust if needed. 

S&P said this strategy risks rapid deterioration, “but in our case,” Bulzoni said, “we think it’s a sound plan. We’re going to continue with it as long as we believe it works.”

“There are a lot of things that I think were missed in the rating review that are very positive for the county,” Bulzoni said. 

The area is becoming a logistics center because of its proximity to major interstate highways, it’s benefiting from shale deposits, and its housing market is hot, Bulzoni said. The county is funding its capital plan budget for the first time since 2018 and will soon see construction on a corridor connecting it to New York City. 

Bulzoni said Lackawanna is not opposed to issuing more bonds, but doesn’t plan to do so soon, and he doesn’t see an opportunity for refunding.

“We’re going through a few difficulties right now, but I think the future for this area is extremely bright,” Bulzoni said.

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