Bloomberg News

Harrisburg Takes Deal to Avert Default for Pennsylvania Capital

September 14, 2011

Sept. 14 (Bloomberg) -- Harrisburg’s City Council moved to avoid a default by Pennsylvania’s capital, accepting a real- estate deal that provides cash for costs including debt service.

The council voted 5-2 yesterday to extend a lease of city land to the Harrisburg Parking Authority in exchange for $7.4 million, enough to make a $3.3 million payment due this week on general-obligation debt. The remaining funds will be used to help close a budget deficit for the rest of the year.

A default would deepen the fiscal crisis that has propelled the city to the brink of bankruptcy, driven by an expansion of a municipal incinerator that hasn’t produced enough revenue to cover costs and pay off debt. While Harrisburg has skipped payments owed from that project, it has remained current on general-obligation bonds.

“Allowing Harrisburg to miss a GO bond payment, and thus default, would not be in the state’s best interest, and could potentially be reflected in higher borrowing costs for other Pennsylvania cities,” Alan Schankel, director of fixed income research for Philadelphia brokerage Janney Montgomery Scott LLC, said ahead of the vote. He said the state likely would step in to prevent Harrisburg from missing its payment, due Sept. 15.

The Parking Authority will borrow to make the payment, and some on the council balked at the interest rate of as much as 10.75 percent on the loan. About a third of the city’s 49,500 residents live below the federal poverty level. The lease covers land under several garages, and the loan costs may reduce the authority’s income, which provides revenue to the city.

Costs Debated

“It’s an exorbitant amount,” Councilman Brad Koplinski said.

Others countered that the loan’s price pales in comparison with the consequences of default.

“We cannot recover from a general-obligation bond default,” Councilwoman Patricia Kim said during debate on the arrangement.

Mayor Linda Thompson applauded the council’s decision to approve the financing.

“We can keep the doors open now,” she said.

The state plans to provide the city with an advance on $2.6 million of pension-related aid by today, the mayor said. She said default can be averted as long as either the state money or the $7.4 million from the Parking Authority arrives by midday.

Robert Philbin, a spokesman for the mayor, declined to disclose the identity of the lender, which he said will be made public after the deal closes.

Discord Persists

Disagreement between the council and Thompson persists, leaving Harrisburg without a blueprint for getting out from under incinerator-related costs. The mayor has proposed a plan that includes selling the waste-to-energy plant to help the city deal with more than $300 million in related debts. The council has rejected that approach.

Given the local discord, city officials have said they expect the Legislature to let state appointees take control of Harrisburg’s finances. Republican Governor Tom Corbett has indicated he would support such a step.

The city avoided a general-obligation default a year earlier, when then-Governor Ed Rendell, a Democrat, advanced state-aid payments.

--Editors: Ted Bunker, Pete Young.

To contact the reporter on this story: William Selway in Harrisburg at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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