Last updated: February 19. 2013 5:46PM - 630 Views

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WILKES-BARRE – The city's credit rating took a hit Friday on concerns about its ability to pay back $3 million borrowed in anticipation of collecting taxes to cover the note.

Standard & Poor's Ratings Services downgraded the rating to A- from A and warned it could go lower if the tax anticipation note isn't paid by year's end.

The city's cash-flow problems also kept it on S&P's CreditWatch with negative implications.

The downgrade preceded an announcement by the city of furloughs to cut payroll expenses and plug an estimated $2 million revenue shortfall.

The city's finances worsened since August when S&P issued a report on its concerns about the TAN payment. It has struggled to plug an estimated $2 million revenue shortfall partly caused by the mess created by Centax, a company that had been collecting earned income taxes throughout Luzerne County.

Mayor Tom Leighton said he is resorting to furloughs to cut payroll expenses and close the budget gap.

Drew McLaughlin, the city administrative coordinator, said in a prepared statement that employees to be furloughed have been identified and their union leaders were notified.

We are hopeful that reconsideration of concessions by the unions is an option to reduce the cuts that have been determined, McLaughlin said.

No one has been furloughed yet and union leaders have until next week to respond, McLaughlin said.

Numbers not released

He did not provide a number and none was given to firefighters, said Greg Freitas, vice president of the International Association of Fire Fighters Local 104.

Freitas said he and union President Mike Bilski met with the mayor and city administrator Marie McCormick.

Without a tax increase, services provided by the fire, police and public works departments will be cut, Freitas said.

Wilkes-Barre Fire Fighters Local 104 will continue to work with the administration to hopefully find a solution, Freitas said.

The firefighters, the Police Benevolent Association, the Laborers' International North America Local 1310 and the International Brotherhood of Teamsters Local 410 represent approximately 260 city employees.

The mayor asked for voluntary layoffs until the end of the year and offered continued health care coverage to employees who agreed to the concession. But the response was not enough to cover the revenue shortfall and the mayor took the next step by initiating furloughs.

Mayor issues statement

The downgrade, on the other hand, did not come as a surprise.

S&P's action today will have only a moderate impact on the cost to the city for future borrowings, Leighton said in a prepared statement. The city has a higher credit rating than most other municipalities in the state and some have none at all due to their financial distress, he wrote.

Leighton, who began his third four-year term in January, has touted the credit rating as a sign of the city's progress under his administration. He used it to attract buyers for bonds issued to fund capital projects and pay off unfunded debt such as employee pension plans.

The A- still is considered investment grade under S&P's ratings, but Wilkes-Barre's lowered rating could affect future bond sales and borrowing costs.

Bond buyers use the ratings to determine how much they're willing to invest relative to the risk, said Karl Jacob, senior director with S&P.

General obligation municipal bonds such as those issued for Wilkes-Barre average A+ across the country, Jacob said.

This is a step down, he said.

Often when that happens, We bring the outlook back to stable, he said. But in this case, the city remains on CreditWatch because of uncertainty on its cash flow.

The watch remains in effect for 90 days, added Hillary Sutton, primary credit analyst with S&P. The particular focus is on the maturity of the TAN at the end of December, she said.

The city would be removed from the watch if it has enough cash on hand before the note matures, S&P said in its Friday downgrade report.

The city still awaits payment of approximately $1 million in earned income tax revenue and expects to be paid in full by the end of the month, S&P said. But any delays could limit the city's ability to repay the TAN.

End-of-year scenario

The city projected to have a cash balance of $23,911 on hand by the end of the year after paying the note and receipt of $600,000 in back taxes, S&P said.

However, the city has two contingency plans in place, S&P said. The city could postpone $800,000 of health-related expenditures in December or access $1 million in its workers' compensation fund, according to S& P.

The city has a few things working in its favor, S&P said, listing its largely stable property tax base and its efforts to raise revenues and limit the growth of expenses in its 2013.

But, S&P said, the factors working against it include continued dependence on cash flow borrowing and a limited local economy with above-average unemployment.

The Scranton/Wilkes-Barre metropolitan region had an unemployment rate of 9.6 percent in September, the highest in the state. It was the 30th consecutive month the region led the state with the highest unemployment rate.

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