Harrisburg Default Underlines Lack of State Support: MMA

Harrisburg’s notice of a second general-obligation debt default contrasts the way distressed cities are dealt with in Pennsylvania compared with Rhode Island, according to Matt Fabian of Municipal Market Advisors.

Harrisburg’s plan to skip $3.4 million in payments due this week on $51.5 million of bonds underscores the state’s lack of support for investors in its capital city’s debt, said Fabian, a managing director and senior analyst with MMA. He said Rhode Island provided “critical elements” that helped Central Falls bondholders through that community’s bankruptcy.

Pennsylvania’s “failure to act has impugned credit quality” statewide, Fabian said yesterday by telephone. “From an investor perspective, you have to assume Pennsylvania local governments are a bit riskier on average than others because of the state’s failure to intervene to enforce bond covenants.”

In Central Falls, the city about to emerge from bankruptcy protection, Rhode Island helped to ease the community’s fiscal straits while protecting bondholders, Fabian said. The Ocean State’s smallest municipality kept up its debt payments while raising taxes, cutting jobs and reducing pensions during 13 months under court supervision.

“Increasingly, municipal analysts and lenders will need to respect these state-by-state differences which can be, arguable, more important to credit quality than financial balances or recent economic trends,” Fabian said yesterday in a newsletter published by the Concord, Massachusetts-based company.

Investors Notified

Pennsylvania’s insolvent capital has notified bondholders that it will miss payments on its general-obligation debt for the second time this year, to preserve cash to cover workers’ salaries, William B. Lynch, Harrisburg’s receiver, said Sept. 10 by telephone. Payments on the securities issued in 1997 are due Sept. 15. The city skipped paying $5.27 million that was due March 15 on the same bonds.

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

While Harrisburg failed to cover debt service on securities related to an incinerator project starting in 2009, it avoided defaulting on its general-obligation bonds until March. The city joined Scranton, Pennsylvania; Moberly, Missouri, and Wenatchee, Washington, in deciding not to make payments and use the funds for other purposes, according to Moody’s Investors Service. Moody’s said the cities may exemplify a “new trend” of cash-strapped communities unwilling to meet their obligations.

Insured Bonds

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 Sept. 10.

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 the sale or lease of city assets, including the power plant. Talks are under way on the incinerator and municipal parking system, as well as for a water and sewage-system management contract. He also has tried to raise a local income tax to boost revenue.

A state court on Sept. 6 delayed an order backing 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 cover workers’ wages isn’t a viable solution to fiscal instability, said Dan Miller, Harrisburg’s controller. He said he expects the city to be able to pay salaries through year-end, while it may miss other bills.

Still Broke

“Once we get to the end of the year, we still don’t have any revenue,” Miller 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 the state ban. In November, a federal judge rejected their petition for court protection, saying it wasn’t authorized.

One of the general-obligation bonds to be in default, a zero-coupon capital appreciation bond maturing in September 2014, traded yesterday at an average of 86.7 cents on the dollar, yielding 7.3 percent, according to data compiled by Bloomberg. That’s almost triple the 2.7 percent yield on a Bloomberg Fair Value index of insured zero-coupon municipal bonds maturing in nine years.

Yesterday’s transactions compare with a trade of the same security at about 79.1 cents on the dollar, yielding 9.7 percent, on March 20, after the first default. On Oct. 20, the bonds traded at 74.8 cents on the dollar, yielding about 10.3 percent, the data show. The council had sought bankruptcy protection about a week earlier.

While Central Falls “breaks the mold” for distressed cities, Harrisburg shows how “economic disruption created severe political frictions between government players and major stakeholders, disabling the recovery process and worsening both events and their impact,” Fabian said in the newsletter. “At the heart of Central Falls’ success was state intervention.”

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