Harrisburg, Pennsylvania, Bond Default Averted With State Aid

Pennsylvania’s capital city, Harrisburg, will get an advance on state aid to meet $3.3 million in bond payments due the day after tomorrow, averting what would have been the second-largest general-obligation default in the U.S. this year.

Governor Ed Rendell, who ordered the funds released early, warned city officials against seeking bankruptcy protection and said they must work out a longterm solution, perhaps by selling city assets, before another round of bond payments due in March.

“We could not stand by and let the city default on these bonds,” Rendell, 68, who leaves office after this year, said in a news conference yesterday with Harrisburg Mayor Linda Thompson. “What we did today gives us breathing space.”

Harrisburg’s default would boost borrowing costs or make credit unobtainable for other Pennsylvania municipalities and school districts, and jeopardize the city’s attempts to devise a recovery plan, Rendell said.

The city faces $68 million in debt-service payments this year on loans it guaranteed to help the Harrisburg Authority retrofit a trash-to-energy incinerator built in the 1960s. That’s about four times what the city of 47,000 raises annually in property taxes, according to its budget. It has a deficit of at least $4 million for this calendar year, Thompson said.

The city has skipped $8 million of those payments so far this year and is negotiating for relief with the Harrisburg Authority, which also operates the city’s water and sewer system; the bonds’ insurer, Hamilton, Bermuda-based Assured Guaranty Municipal Corp., and Dauphin County, where the city is located, which is co-guarantor on some of the bonds.

Governor’s Plan

Under the governor’s plan, Harrisburg will immediately receive three state grants for fire protection and pension assistance worth a total of $3.6 million that had been scheduled for later this year, Rendell said.

The early transfer will enable Harrisburg to meet a Sept. 15 due date for its 1997 Series D and 1997 Series F bonds, which it had told a trustee Aug. 30 it would skip. The state is also working with the city and private lenders to secure a short-term tax- and revenue-anticipation note for operating funds, the governor said.

If the city council doesn’t agree on an asset sale or other plan to shore up Harrisburg’s finances, Rendell said, local decision-making will be taken over by the state through Pennsylvania’s Act 47 municipal recovery program or a bankruptcy court.

“They have to decide,” Rendell said of the city council. “If they don’t get together, the decisions will be made by the Act 47 administrator or they’ll be made by a bankruptcy judge.”

Financial Consultant

The state will also give Harrisburg $350,000 in grants and a $500,000 loan to hire Chicago-based financial consultant Scott Balice Strategies LLC to develop options for financial recovery, potentially including the sale and lease of assets such as parking garages and meters.

The loan will be repaid “if there’s a sale of assets, and for the life of me I don’t see how there can’t be,” Rendell said.

Thompson, who failed to get City Council support to hire Balice in August, said she plans to sign a contract with the consulting company today.

The mayor, speaking at the press conference yesterday, chided by name three council members who have resisted her proposals to raise taxes and appraise assets for sale.

“It’s time for all of us to put the petty politics aside,” said Thompson, who became mayor in January.

The governor shouldn’t threaten council members with losing control to Act 47 administrators or a judge, said City Controller Dan Miller, a former councilman who has advocated bankruptcy over an asset sale.

“City Council has to do what’s best for the City of Harrisburg, not what’s best for Ed Rendell,” Miller said in a telephone interview yesterday.

If Harrisburg misses the Sept. 15 payment, it would be the second-largest borrower, behind Jefferson County, Alabama, to default on bond payments this year, according to Matt Fabian, managing director of Municipal Market Advisors, in Westport, Connecticut.

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