Aug. 25 (Bloomberg) -- Harrisburg, Pennsylvania’s capital, may miss $3.3 million in general-obligation bond payments due Sept. 15 if council members fail to approve a portion of a fiscal rescue plan, according to the mayor’s spokesman.
The city faces a $5 million deficit and is trying to arrange for a $7.5 million advance on a lease of municipal land to the Harrisburg Parking Authority. Harrisburg entered the state’s Act 47 fiscal-rescue program in December.
“If the Parking Authority lease doesn’t go through, the city will not be able to make that payment,” Robert Philbin, a spokesman for Mayor Linda Thompson, said by telephone from Harrisburg today.
Ambac Assurance, a unit of Ambac Financial Group Inc., which filed for bankruptcy protection in November, insures the debt. Michael Fitzgerald, a spokesman for New York-based Ambac, declined to comment.
Last year, a Harrisburg default on its general-obligation bonds was averted after former Governor Ed Rendell, a Democrat, expedited state funds to make the payments.
“It is important that all parties continue to work with the city and the mayor to implement a fiscal recovery plan in a timely manner that puts Harrisburg back on the path to financial solvency,” Steven Kratz, a spokesman for the state’s Department of Community and Economic Development, which runs the distressed-cities program, said by e-mail.
He said he was speaking for the administration of Republican Governor Tom Corbett, who took office in January.
Harrisburg’s crisis stems from its guarantee of debt for the overhaul and expansion of an incinerator. The community of 49,500, where about one-third of residents live below the poverty level, is also dealing with declining tax revenue.
Thompson plans to ask the City Council on Aug. 31 to approve her recovery plan. It calls for asset sales and a potential commuter tax to retire the debt burden, which is five times Harrisburg’s general-fund budget. Her proposal follows most recommendations made by state-appointed consultants and rejected by the council on July 19, a first for Pennsylvania’s 24-year-old distressed-city program.
Thompson previously said she would honor debt service before employees’ payroll if her plan wasn’t passed. Philbin attributed the reversal to the council not yet approving the Parking Authority lease.
As of today, her administration hadn’t sent legislation on the lease to the council to vote on, according to Kirk Petroski, acting city clerk.
While Harrisburg in 2009 started skipping payments on debt related to the incinerator, it hasn’t defaulted on general-obligation bonds. Since then, divisions between the mayor and council have hindered the city’s ability to find a solution.
The capital is barred from seeking bankruptcy protection before July, according to a Pennsylvania law that said the city would lose state funds if it tried.
Rejection of Thompson’s plan by the council also risks $3 million in state aid.
Court hearings are scheduled next month in lawsuits seeking to force the city to turn over revenue to creditors and appoint a receiver for the incinerator. Harrisburg needs $310 million to make bond payments, restructure debt and repay Dauphin County and insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility.
If Thompson fails to get council members to approve her plan, Pennsylvania “may make them dangle” and not prevent the general-obligation bond default, said Alan Schankel, director of fixed-income research at the Philadelphia financial-services firm Janney Montgomery Scott LLC.
“If you have a City Council or the leadership as a whole that can’t get their act together, I don’t know what other cudgel the state has,” he said in a telephone interview.
A default by Harrisburg might increase borrowing costs for the state and its municipalities, Schankel said. Local governments in Alabama are facing higher interest rates because of the possible bankruptcy of Jefferson County.
“It would send a tough signal about Pennsylvania issuers, so they would have to think hard about” letting Harrisburg default, Schankel said of state officials.
Kratz declined to comment on the potential effect of a default on borrowing costs.
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