Custodian says Pa. capital will skip debt payments

By MARC LEVY

HARRISBURG, Pa.

With money for its payroll growing short, the state-appointed financial custodian of the troubled Pennsylvania capital said Friday that Harrisburg will not make looming installment payments of nearly $5.3 million on two series of general obligation bonds, which would be the city's first default on its debt.

The custodian, David Unkovic, said in a statement that the city is skipping the payments to ensure there will be enough money to maintain essential services, such as police and fire, in the Susquehanna River city of 50,000.

"The problems the city faces did not develop overnight and I am working hard to address these problems while maintaining the core functions of Harrisburg's city government," Unkovic said. "This action will enable the city to continue operating and providing services while taking important steps to recover fiscal stability."

The payments are due Thursday. The bonds are covered by insurer Ambac Assurance Corp, and a missed payment could mean steep interest costs. Ambac spokesman Michael Fitzgerald said that the New York-based company will pay valid claims on general account policies, which includes Harrisburg.

City officials have warned twice in the last two years about missing such bond payments, only to make 11th-hour arrangements to pay. But this is the first time under state control that Harrisburg is issuing such a warning.

"It's a much more deliberate default," said Matt Fabian, managing director of the Concord, Mass.-based municipal bond research firm Municipal Market Advisors.

A decision to skip the bond payment typically draws close scrutiny from the nation's municipal bond investors and money managers, since municipalities have historically taken great pains to make timely payments on bonds for civic projects such as roads.

However, Fabian said Harrisburg's default shouldn't have a big impact on investors, in light of Harrisburg's series of defaults on debts tied to a massive municipal trash incinerator. But the warning comes at a time when two California cities, Stockton and Mammoth Lake, are having financial difficulties and it could raise the concerns of institutional investors, Fabian said.

"The amplification of this problem from an incinerator problem to a government operating problem could accelerate that (concern) and make people generally jumpier about credit," Fabian said.

Harrisburg's approximately $300 million incinerator debt prompted an unsuccessful attempt by city officials to seek federal bankruptcy protection and spurred the state's unprecedented takeover late last year.