In new Mercatus research, Adam Millsap and I and unpack the causes for almost a quarter of a century of fiscal distress in Scranton, Pennsylvania and offer some recommendations for how the city might go forward.

Since 1992, Scranton has been designated as a distressed municipality under Act 47, a law intended to help financially struggling towns and cities implement reforms. Scranton is now on its fifth Recovery plan, and while there are signs that the city is making improvements, it still has to contend with a legacy of structural, fiscal and economic problems.

We begin by putting Scranton in historical context. The city, located in northeastern Pennsylvania was once a thriving industrial hub, manufacturing coal, iron and providing T-rails for railroad tracks. By 1930, Scranton’s population peaked and the city’s economy began to change. Gas and oil replaced coal. The spread of the automobile and trucking diminished demand for railroad transport. By the 1960s Scranton was a smaller service-based economy with a declining population. Perhaps most relevant to its current fiscal situation is that the number of government workers increased as both the city’s population and tax base declined between 1969 and 1980.

An unrelenting increase in spending and weak revenues prompted the city to seek Act 47 designation kicking off two decades of attempts to reign in spending and change the city’s economic fortunes.

Our paper documents the various recovery plans and the reasons the measures they recommended either proved temporary, ineffective, or simply “didn’t stick.” A major obstacle to cost controls in the city are the hurdle of collective bargaining agreements with city police and firefighters, protected under Act 111, that proved to be more binding than Act 47 recovery plans.

The end result is that Scranton is facing rapidly rising employee costs for compensation, health care and pension benefits in addition to a $20 million back-pay award. These bills have led the city to pursue short-term fiscal relief in the form of debt issuance, sale-leaseback agreements and reduced pension contributions. The city’s tax structure has been described as antiquated relying mainly on Act 511 local taxes (business privilege and mercantile business tax, Local Services Tax (i.e. commuter tax)), property taxes and miscellaneous revenues and fees.

Tackling these problems requires structural reforms including 1) tax reform that does not penalize workers or businesses for locating in the city, 2) pension reform that includes allowing workers to move to a defined contribution plan and 3) removing any barrier to entrepreneurship that might prevent new businesses from locating in Scranton. In addition we recommend several state-level reforms to laws that have made it harder to Scranton to control its finances namely collective bargaining reform that removes benefits from negotiation; and eliminating “budget-helping” band-aids that mask the true cost of pensions. Such band-aids include state aid for municipal pension and allowing localities to temporarily reduce payments during tough economic times. Each of these has only helped to sustain fiscal illusion – giving the city an incomplete picture of the true cost of pensions.

To date Scranton has made some progress including planned asset monetizations to bring in revenues to cover the city’s bills. Paying down debts and closing deficits is crucial but not enough. For Pennsylvania’s distressed municipalities to thrive again reforms must replace poor fiscal institutions with ones that promote transparency, stability and prudence. This is the main way in which Scranton (and other Pennsylvania cities) can compete for businesses and residents: by offering government services at lower cost and eliminating penalties and barriers to locating, working and living in Scranton.

The New York Times has an interesting piece on the pension troubles facing the small town of Loyalton, California (population 769). Loyalton has seen little economic activity since its sawmill closed in 2001. In 2010 the city made a decision to exit Calpers saving the city $30,000. The City Council thought that the decision to exit would only apply to new hires and for the next three years ceased paying Calpers. Four of the the pension plan’s participants are retired and one is fully vested.

In response, Calpers sent the town a bill for $1.6 million – the hypothetical termination liability – for exiting the plan. For years Loyalton operated under the assumptions built into Calpers’ system which values the liability based on asset returns of 7.5 percent. This actuarial value concealed reality. Once a plan terminates Calpers presents employers with the real bill: or the risk-adjusted value of its pension promises based on a bond rate of 3.25 percent.

To see how big a difference that makes to the bottom line for cities, Joe Nation, Stanford professor, has built a very helpful tool that compares the actuarial liability of pension plans with the market value for individual governments in California.

The judge in the Stockton bankruptcy case Christopher Klein characterized the termination liability as presenting struggling towns with a “poison pill” for leaving the system. Another way to look at it is that the risks and costs that were hidden by faulty accounting assumptions based on risky discount rates are coming due as Calpers fails to hit its investment target. The annual costs may start to be shifted, and in the case of termination, fully imposed on local employers.

The four retirees of Loyalton are facing the possibility of drastically reduced pensions. In a town with annual revenues of $1.17 million, Calpers’ bill is far beyond the town’s ability to pay. Negotiations between Calpers and Loyalton are likely to continue. Some ideas floated include putting a lien on the town’s assets or revenues.


Josh Zumbrun from the WSJ posted some interesting labor market charts that use data from today’s September jobs report. The one that jumped out at me was the one below, which shows the prime-age (age 25-54) employment and labor force participation (LFP) rate.


In a related tweet he notes that the 25 – 54 LFP rate is up nearly 1 percentage point in the last year. The exact number is 0.9 from Sept. 2015 to Sept. 2016, and in the figure above you can clearly see an increase in the blue line at the end. So does this mean we are finally seeing a recovery in the prime age LFP rate? Yes and no.

I dug a little deeper and females appear to be driving most of the trend. The figure below shows the prime age male and female LFP rates from Jan. 2006 to the Sept. 2016. (Female data series LNS11300062 and male series LNS11300061)


As shown in the figure, the female LFP rate (orange line) appears to be steadily increasing since September of last year while the male LFP rate (blue line) is flatter. To get a better look, the following figure zooms in on the period January 2015 to September 2016 and adds a linear trend line.


The female LFP rate does appear to be trending up since the beginning of last year, but the male line is essentially flat.

Much has been made about the short-term and long-term decline of the prime-age male LFP rate. President Obama’s Council of Economic Advisors wrote an entire report about it, and economists such as Larry Summers have recently said that figuring out why males are dropping out of the labor force and what to do about it is “vital to our future”.

The recent uptick in the overall prime-age LFP rate is a good sign, but it appears to be largely driven by women. I think it’s still too early to say that the LFP rate of prime-age men has started to improve, and what this means for the future is still unknown.

A recent paper by Donald J. Boyd and Yimeng Yin of The Nelson A. Rockefeller Institute of Government at SUNY  investigates how public pension funding practices contribute to big funding gaps and the need for sudden contribution increases. This is a situation public sector plans find themselves in due to three reasons 1) muddling the valuation of debt-like pension liabilities with the plan’s investment strategy (i.e. using discount rates basked on risky asset portfolios to measure pension liabilities) 2) amortization methods and 3) asset smoothing.

To find out the impact of these assumptions the authors build a stochastic simulation model for public sector plans that allows them to look at how different funding policies affect plan funding. They find that the funding polices and practices of most plans reduce the volatility of contributions and increase the risk of severe underfunding. And “even if investment return assumptions (7.5 percent annually) are met every single year and employers make the full actuarially determined contributions” they would only reach 85 percent funding after 30 years.

Now consider that it’s unlikely that plans will meet the 7.5 percent annual return each year. If investment returns vary – as they do –  the same plan faces a one-in-six chance of falling below 40 percent funding.

The authors have an interesting chart from a recent presentation highlighting what happens when returns vary each year. In reality, a plan with a portfolio made up of a mix of stocks and bonds is likely to achieve greater than 7.5 percent return in some years and less than 7.5 percent returns in other years). Current plan assumptions project steady and gradually increasing funding ratios and completely flat contribution levels. But in reality, it is all over the map: a roller coaster for funding levels levels and the potential for a huge ramp up in contributions.

Source: Boyd and Yin, 2016 "Standards and Metrics for Public Retirement Systems" The Nelson A. Rockefeller Institute at SUNY

source: Boyd and Yin, 2016, “Standards and Metrics for Public Retirement Systems” The Nelson A. Rockefeller Institute at SUNY

Privatizing Water Facilities Can Help Cash-Strapped Municipalities

October 5, 2016

In my latest Forbes piece I discuss water privatization in the U.S. and why it is often a good idea. “A public-private partnership has several benefits versus a completely public system. First, private firms often operate in many different jurisdictions, which means they have more experience and are able to institute best practices based on their […]

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New York’s Buffalo Billion initiative has been underwhelming

September 28, 2016

New York’s Buffalo Billion plan has come under fire amidst an ongoing corruption probe looking into whether some contracts were inappropriately awarded to political donors. The investigation has led to funding delays and there are reports of some contractors and companies rethinking their investments. But even without these legal problems, it is unlikely that the […]

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Economic Freedom, Growth, and What Might Have Been

September 16, 2016

Economists are obsessed with growth. And for good reason. Greater wealth doesn’t just buy us nicer vacations and fancier gadgets. It also buys longer life spans, better nutrition, and lower infant mortality. It buys more time with family, and less time at work. It buys greater self-reported happiness. And as Harvard economist Benjamin Friedman has […]

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More competition can lead to less inequality

September 8, 2016

Wealth inequality in the United States and many European countries, especially between the richest and the rest, has been a popular topic since Thomas Piketty’s Capital in the 21st Century was published. Piketty and others argue that tax data shows that wealth inequality has increased in the U.S. since the late 1970s, as seen in […]

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Thinking like an Economist Means Thinking about Tradeoffs

August 16, 2016

This week, I’ve written two articles about different types of tradeoffs that economists think about when they evaluate the likely effectiveness of proposed public policies. One type of tradeoff relates to the costs that consumers and businesses incur in exchange for the benefits policies will achieve, while a second type of tradeoff involves countervailing risks that sometimes increase as policies […]

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Local governments reluctant to issue new debt despite low interest rates

August 10, 2016

The Wall Street Journal reports that despite historically low interest rates municipal governments and voters don’t have the appetite for new debt. Municipal bond issuances have dropped to 20-year lows (1.6 percent) as governments pass on infrastructure improvements. There are a few reasons for that: weak tax revenues, fewer federal dollars, and competing budgetary pressures. […]

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