Harrisburg Shows Path From Distress Besting Detroit: Muni CreditRomy Varghese
Harrisburg, the Pennsylvania capital, is poised to exit a fiscal quagmire after a half-decade of political paralysis and skipped debt obligations. Distressed municipalities nationwide should take note.
While Detroit, which filed a record $18 billion bankruptcy in July, wants to cut pensions and impose losses on bondholders, Harrisburg struck a deal to eliminate its insolvency that avoids reducing pensions. The linchpin of the recovery plan is a $286 million sale of tax-exempt bonds to finance a lease of its parking system. The deal is set to price today as the city taps assets to repay liabilities.
By negotiating with creditors and unions out of court, Harrisburg avoided the expense of bankruptcy while building the framework for a sustainable future, said Paul Mansour, head of municipal credit research at Conning, which oversees $9 billion in local debt.
“The Harrisburg model would be the one most municipalities want to choose,” said Mansour, whose company is based in Hartford, Connecticut. “It makes a lot of sense for bondholders, taxpayers and investors without causing the disruption.”
The complexity of the case of Detroit, which lost a quarter of its population in the decade through 2010, dwarfs that of the Pennsylvania city. Yet Harrisburg also finds itself combating insolvency. The city owes $362.5 million, or about seven times its general-fund budget, because of debt guarantees on a 2003 overhaul and expansion of an incinerator. A local waste-management agency is buying the facility, which doesn’t generate enough revenue to cover the debt.
Proceeds of that transaction and the lease of its parking system go toward creditors, as well as to economic development and infrastructure in the city of about 50,000.
Both deals would close Dec. 23, according to Cory Angell, a spokesman for Harrisburg’s state-appointed receiver.
Eric Papenfuse, a 42-year-old Democrat who will be inaugurated as mayor next month, will have balanced budgets for the next three years, according to the recovery plan. The threat of bankruptcy had made it difficult for the community on the Susquehanna River to attract business, he said.
“We haven’t been able to do that over the past several years because of the uncertainty in the air,” Papenfuse, a city bookstore owner, said by telephone. “With that lifted, the future of the city is bright.”
Papenfuse has his work cut out for him. About 31.6 percent of residents live in poverty, compared with 12.6 percent statewide, Census data show. Harrisburg’s jobless rate in October was 9.2 percent, compared with the state average of 7.5 percent, preliminary figures from the Bureau of Labor Statistics show.
In Harrisburg, taxpayers ended up owing more than $300 million for a project that was supposed to cost $64.2 million and generate a surplus of $57.4 million by 2028, according to a 2001 projection cited in an audit. In October 2011, before Harrisburg was placed under state receivership, city council filed a bankruptcy petition that was thrown out within a month by a federal judge because it wasn’t authorized by state law.
Surrounding Dauphin County and bond insurer Assured Guaranty Municipal Corp., the biggest creditors, made incinerator debt payments after the city started skipping them in 2009. Harrisburg was placed under receivership in 2011. William B. Lynch, the state-appointed receiver, in September received court approval for the recovery plan started by his predecessor, David Unkovic.
Last week, Lancaster County Solid Waste Management Authority sold $129 million in tax-exempt revenue bonds to finance its purchase of the incinerator.
Securities rated AA-, fourth-highest, and maturing in December 2033 priced to yield 4.89 percent, or about 1.04 percentage point over benchmark munis, data compiled by Bloomberg show. Bonds of the same maturity with a guarantee from Dauphin County and rated one step higher priced to yield 4.65 percent.
In today’s offer, the Pennsylvania Economic Development Financing Authority is selling the parking-revenue bonds to finance its 40-year lease of city lots and garages.
The parking-bond sale is the largest such issue since June 2011, when the Metropolitan Boston Transit Parking Corp. sold $304.6 million of securities rated A+ by S&P, data compiled by Bloomberg show. Bonds due in July 2026 traded Dec. 11 with an average yield of 3.98 percent, or 1.56 percentage points above benchmark munis. The spread averaged about 0.9 percentage point from January through June.
After the lease and sale of Harrisburg’s assets, Assured Guaranty, a unit of Hamilton, Bermuda-based Assured Guaranty Ltd., and Dauphin County would recover at least $210 million on claims totaling $298.5 million.
They would receive proceeds from a fuel tax, if authorized by the state legislature, and from parking revenue that could satisfy the remainder.
Unions also agreed to receive less than they are due, though pensions will be intact. Meanwhile, on Dec. 3, a federal judge overseeing Detroit’s bankruptcy said pensions can be cut.
In Harrisburg, police officers and municipal employees are forgoing raises this year and next that were originally in their contracts. Officers hired after January no longer receive longevity pay as well.
The city was “an absolute financial mess,” said Jason Brinker, president of Fraternal Order of Police Capital City Lodge 12.
“You’ve got to look at what the reality is,” Brinker said by telephone. “You can have everything in promises or nothing in reality. You have to look at what’s sustainable.”
The receiver asked firefighters to consider concessions similar to those made by police officers, and no action has been taken on the proposal, said Bill Junkin, treasurer for International Association of Fire Fighters Local 428.
“Time will tell if the desired solution actually brings Harrisburg out of a distress status,” Junkin said by e-mail.
Unlike in Chicago, which in 2008 agreed to a 75-year parking meter lease for an upfront sum, Harrisburg would receive annual revenue from parking operations, starting with at least $5.2 million in 2014. The city would also receive $16 million from the bond sale for the parking transaction to fund economic development, infrastructure and retiree health benefits, according to the plan.
“It was how we would like to see restructurings happen, where assets are sold to fund liabilities, but at the same time getting the municipalities back on their feet and having the ability to function going forward,” said Adam Weigold, a portfolio manager at Boston-based Eaton Vance Corp., which oversees $25.6 billion of munis.
Elsewhere, issuers nationwide are selling about $2.9 billion in long-term debt this week as yields are falling from a three-month high, Bloomberg data show.
Benchmark 10-year munis yield 2.95 percent, after reaching 3.05 percent on Dec. 11, the highest since Sept. 12. The interest rate compares with 2.88 percent on similar-maturity Treasuries.
The ratio of the interest rates, a measure of relative value, is about 102 percent, in line with its five-year average. The higher the figure, the cheaper munis are compared with federal securities.