Harrisburg (9661MF), Pennsylvania’s insolvent capital, says it will miss general-obligation bond payments for the first time next week as its receiver seeks approval for a plan to sell assets.
The city, carrying a debt load of more than five times its general-fund budget, will miss $5.27 million in bond payments due March 15 on $51.5 million of bonds issued in 1997, according to a notice its receiver posted on the Electronic Municipal Market Access system, a database for filings by debt issuers.
The default is the latest for the $3.7 trillion municipal market, which has seen the number grow while remaining rare. The rate of U.S. municipal-bond defaults doubled to 5.5 a year in 2010 and 2011, from 2.7 in the previous 39 years, Moody’s Investors Service said this week in a report. Stockton, California, last month voted to default on some of its bonds.
“It’s a worrisome trend if it becomes more commonplace” for communities to expect bond insurers to pick up debt payments, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia. Municipal issuers may become increasingly willing to default even if there is no insurance for bondholders, he said.
“If it’s OK to hurt the bond insurer, is it OK to hurt bond holders?” Schankel said.
Objections to Plan
The default decision was made as some city officials objected to a plan to sell assets and avoid a trip to bankruptcy court. State law bars the city from seeking Chapter 9 protection from creditors until July. A majority of the City Council sought unsuccessfully to make that move last year.
“It’s just an indication of how severe the problem is,” Dan Miller, the city controller and a supporter of seeking court protection, said by telephone. “Without a bankruptcy judge, we can’t get a solution.”
Ambac Assurance, a unit of New York-based Ambac Financial Group Inc. (ABKFQ), insures the city’s general-obligation debt.
“We are honoring and paying” valid claims, Michael Fitzgerald, an Ambac spokesman, said by e-mail. He said the company doesn’t comment on specific cases.
While Harrisburg in 2009 started skipping payments on debt related to an incinerator overhaul and expansion, it hasn’t defaulted on general-obligation bonds. The city’s fiscal crisis is driven by more than $300 million in debt from the project at the waste-to-energy plant, which doesn’t generate enough revenue to cover its costs.
In December, David Unkovic was appointed as the city’s receiver, a first for the state. Pennsylvania Governor Tom Corbett, a Republican, had declared a fiscal emergency to ensure vital services, including making payroll and paying debt obligations, were continued.
“My first priority as receiver is to ensure that vital and necessary services such as police and fire are maintained,” Unkovic said today in a statement. “The city will not be making these payments to ensure sufficient cash flow so the citizens of Harrisburg continue to receive essential services.”
By defaulting, Harrisburg will be able to keep paying municipal workers about $1 million every two weeks, through the third quarter at least, Unkovic said by telephone. He declined to say if other bond obligations may be missed. The city’s debt service, including the March payments, totals almost $12 million this year, not including incinerator-related securities.
To the Brink
Harrisburg almost missed payments on its general-obligation bonds in the past two Septembers. Last year, it covered the obligations with the help of a $7.5 million advance from the Harrisburg Parking Authority for a lease of municipal land. In 2010, the community averted default after then-Governor Ed Rendell, a Democrat, expedited state aid to meet debt service.
Unkovic’s recovery proposal, which must be approved by a state court, calls for the sale or lease of city assets, raising taxes and fees, and winning concessions from municipal unions in the community of 49,500 residents.
“From my perspective, this doesn’t diminish my determination to proceed with the plan,” Unkovic said of the default. “This preserves my ability to do that.”
In court papers, Unkovic estimated the city’s deficit at $9.53 million this fiscal year, without concessions from labor unions, while net revenue is forecast at about $48.5 million.
A bid by the council majority to put Harrisburg into Chapter 9 proceedings was dismissed on Nov. 23 by U.S. Bankruptcy Judge Mary D. France in Harrisburg. She said the filing wasn’t allowed under state law. The council is seeking to appeal that decision.
The default “shows what a charade this receivership is,” said Mark Schwartz, a lawyer hired by the council, in a telephone interview today.
One of the general-obligation bonds to be in default, maturing in September 2021, traded at an average of 49.3 cents on the dollar on March 5. That’s up from an average of about 38.7 cents in October, the month the council sought bankruptcy protection, according to data compiled by Bloomberg.
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