May 7 (Bloomberg) -- Harrisburg, Pennsylvania’s settlement of U.S. Securities and Exchange Commission claims that it misled municipal-bond investors may serve as a warning to other distressed communities about the agency’s intensified scrutiny.
The city of about 50,000 people misrepresented its fiscal condition in budget documents, financial reports and public statements, the agency said yesterday. The action is the first time securities regulators have sanctioned a municipality for information given outside formal disclosure documents, the SEC said. Harrisburg agreed to set new policies and wasn’t assessed a financial penalty.
The move by the SEC puts cities on notice, said Matt Fabian, managing director of Concord, Massachusetts-based Municipal Market Advisors.
“It certainly sends a message to other distressed issuers that being distressed isn’t a good excuse on its own to not disclose,” Fabian said by telephone. “Cities like San Bernardino are an obvious potential target for inquiry because their disclosure has been less than stellar.”
In March, Illinois settled SEC accusations that it misled investors by failing to disclose how it was funding its employee pension funds, which sent its credit rating tumbling. The SEC settled a similar case with New Jersey in 2010, the first time the regulator targeted a state. The bankrupt California cities of Stockton and San Bernardino have also reported being contacted by the commission.
Harrisburg’s fiscal woes stem from an overhaul of a trash-to-energy incinerator that didn’t generate enough revenue to pay off its debt, which is more than five times the city’s general-fund budget.
The Pennsylvania capital failed to provide audited statements from 2009 to 2011, leaving investors to rely on other documents for information.
“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” George Canellos, co-chief of SEC enforcement, said in a statement.
In January 2012, an audit of the incinerator financings said Harrisburg officials and advisers knew there was “substantial risk” that the facility wouldn’t repay its debt and proceeded with bond deals anyway.
The agency issued a related report warning that public officials who make misleading statements about municipal finances could be liable for punishment under anti-fraud laws.
Municipal officials afraid of a federal review affecting future debt sales may feel compelled to improve the information available to investors and taxpayers, said Howard Cure, director of muni research at New York-based Evercore Wealth Management LLC.
“I like the idea of setting an example,” he said. “Having the threat of the SEC puts additional pressure to make sure disclosure is up to date.”
Former Mayor Stephen Reed, who left office in 2010, didn’t respond to an e-mail seeking comment. A telephone number listed for his Harrisburg home wasn’t in service.
Mayor Linda Thompson said her administration cooperated with the SEC’s investigation and has “completely revamped” its rules.
“These new policies and procedures are designed to ensure that accurate and complete financial information regarding the city’s finances is made available to investors and the public in a timely manner,” Thompson said in a statement.
Harrisburg filed its 2010 audit report in December 2012. Its 2011 audit is expected this month, said Cory Angell, a spokesman for the city’s state-appointed receiver, William B. Lynch.
Dauphin County, of which Harrisburg is the seat, and bond insurer Assured Guaranty Municipal Corp., a unit of Hamilton, Bermuda-based Assured Guaranty Ltd., have covered the payments Harrisburg skipped since 2009.
An incinerator bond guaranteed by Assured due in 2034 traded April 24 at a yield of 5.1 percent, 2.4 percentage points above a top-rated benchmark of the same maturity, wider than the 1.12 percentage point spread on Feb. 19, according to data compiled by Bloomberg.