Scranton, the sixth-largest city in the state and seat of Lackawanna County, faces the potential of bankruptcy in three years due to chronic underfunding of pensions and a double-dipping fiasco. This same scenario has played out in Detroit and several cities in California.

While Pew Charitable Trusts considers 80 percent to be an acceptable threshold for pension plans, Scranton’s non-uniformed pension plan was 23 percent funded as of January 2013, and could be totally depleted within five years. The firefighter and police plans fare just as poorly or worse, and could be totally withdrawn in three to five years.

Scranton’s plans are not the only ones in trouble. According to audits and reports issued by Pennsylvania Auditor General DePasquale, 567 of the state’s 2,600 municipal pension plans are “severely distressed.” The combined liabilities of those municipalities are approximately $7.7 billion.

Pennsylvania’s nearly $53 billion in unfunded liabilities caused all three major bond-rating agencies to issue downgrades last year.

One possible remedy involves moving the pension funds under management of the Pennsylvania Municipal Retirement System (PMRS) which oversees public employee pension plans. Such a change will require buy-in from the pension boards in this union town, and an increase in the city’s minimum municipal obligation (MMO) which could make matters worse in a city which has a tight cash flow and significant long-term debt obligations.

William Rhodes, Public Finance Chairman at Ballard Spahr, said it may be hard to persuade the city to move to the PMRS due to having to increase their contributions and ceding control. “Driving up the MMO holds back some of them,” he said.

They are facing some tough decisions on how to tackle pension underfunding to avert larger issues and bankruptcy.

“If that means getting a grip on the minimum municipal obligation, they should do it,” Rhodes said. “The capital markets, when they look at Scranton, will look at how well they implement their recovery plan. Craft a five-year plan or even a 10-year plan, the way Baltimore did.”

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