Harrisburg Plans to Skip Payment for Second Bond Default

Harrisburg, Pennsylvania’s insolvent capital, says it will miss general-obligation bond payments for the second time this year, preserving cash to cover workers’ salaries.

The city will miss $3.4 million in payments due Sept. 15 on $51.5 million of bonds issued in 1997, William B. Lynch, Harrisburg’s receiver, said today by telephone. It skipped paying $5.27 million that was due March 15 on the same bonds.

“We don’t have enough money to make the payment,” he said. “High finance.”

While Harrisburg in 2009 started missing payments on debt related to an incinerator project, it avoided defaulting on its general-obligation bonds until March. The city joined another in the Keystone State, Scranton, as well as Moberly, Missouri, and Wenatchee, Washington, in skipping debt payments they could pay, according to Moody’s Investors Service. The credit-rating company said the cities may exemplify a “new trend” of cash-strapped communities unwilling to meet their obligations.

“The appropriate notifications have been communicated to those concerned” regarding the planned default, Lynch said.

Ambac Assurance, a unit of New York-based Ambac Financial Group Inc., backs Harrisburg’s general-obligation debt. Michael Fitzgerald, an Ambac spokesman, declined to comment on the move.

Bankruptcy Barred

Harrisburg, barred from bankruptcy until after Nov. 30 by state law, faces a debt burden of more than $300 million. Most of that is tied to an overhaul and expansion of a trash-to-energy incinerator that doesn’t produce enough revenue to cover the obligations.

Lynch is implementing a recovery plan that calls for selling or leasing city assets, including the power plant. Negotiations are under way over the incinerator and parking system, as well as for a water and sewage-system management contract.

A court on Sept. 6 delayed an order supporting Lynch’s request to force Harrisburg’s City Council to double an income tax on residents to 2 percent from 1 percent. The city may confront a $12.6 million budget deficit by the end of the year.

Skipping debt payments to pay workers isn’t a viable solution to the capital’s fiscal instability, said Dan Miller, Harrisburg’s controller. He said he expects the community to be able to pay salaries through the end of the year, while it may miss other bills.

“Once we get to the end of the year, we still don’t have any revenue,” he said. “We need to be put into bankruptcy as soon as possible.”

Council members sought to put the municipality of almost 49,700 into bankruptcy in October, despite a state ban. In November, a federal judge rejected their petition for court protection, saying it wasn’t authorized.

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