A real act of generosity or a mirage
The city of Harrisburg may have avoided the fate of Jefferson County, Alabama, and the distinction of becoming the second municipality (and first actual city) to default on its general obligation debt this year – for now - but the city still has some major challenges to get through. It really appears to many outsiders as if bankruptcy is not a question of if but when (similar to the Jefferson County’s situation which saw a lengthy buildup of fear before the actual default).
Most of the funds provided by the state are actually just cash advances on grants which the city was due to receive later in the year. For example, according to the Washington Post, “Harrisburg will immediately receive $2.6 million in pension support payments scheduled for October and $987,000 in state fire-protection grants so the Sept. 15 bond payments can be made.”
“The state will also give Harrisburg $350,000 in grants and a $500,000 loan to hire Chicago-based financial consultant Scott Balice Strategies to develop options for financial recovery, potentially including the sale and lease of assets such as parking garages and meters.” (interesting to note that apparently the half-a-million fee to hire an out-of-state financial consultant is an acceptable use of cash for a near-bankrupt city)
City vs. County vs. State
While cozying up with the state, the city is still at war with Dauphin County, which counts Harrisburg amongst its 39 municipalities. The county launched a new lawsuit to recover money that it has already paid (as a third guarantor on some of the incinerator bonds after the city failed to live up to its guarantee). The lawsuit was announced after the city got its latest financial lifeline from the state (you probably can’t blame them when they see half-a-million go to a financial consultant for work that the county already did for free back in May).
Harrisburg has in no way yet escaped its obligations on the incinerator debt. While it makes its GO debt payment, it once again missed a September 1, 2010 Harrisburg Authority guarantee payment leaving Dauphin County and insurers that are involved in parts of the deal on the hook for the cumulative sum of all the past and expected future payments. Each additional payment missed by the city (on the authority’s behalf) only adds to the financial bill for the county.
“The city of Harrisburg, which is the guarantor of the bonds and which has skipped about $6 million in payments on incinerator debt this year, hasn’t said how it will handle the Sept. 1 installments, said Chuck Ardo, a spokesman for Mayor Linda Thompson. Bermuda-based Assured Guaranty Municipal Corp. said in a statement yesterday that it will cover any claims.
Separately, Dauphin County, which includes Harrisburg, was told it will have to pay $34.7 million by Dec. 1 on notes that the authority issued in 2007 to cover operations at the incinerator. There’s just $1.34 in accounts to service the zero- coupon debts that mature Dec. 15, according to the trustee for the issues, TD Wealth Management.
Assured doesn’t insure the 2007 notes, according to its statement.”
A bevy of problems
Not everyone is surprised or shocked to hear about Harrisburg’s problems. The city was previously named one of the 7 “junkiest cities” by CNN Money earlier this summer (Jefferson County is not a city, and it was also after the county had defaulted). By all accounts has been the first to live up to that title. The other cities mentioned were: Central Falls and Woonsocket, R.I.; Detroit and Pontiac, Mich.; Harvey, Ill.; and Littlefield, Texas.
But Harrisburg’s and the Harrisburg Authority’s problems run much deeper than just bad publicity. The Authority is short of members to fill its board and had to resort to a judge ruling (allowing director liability insurance) in order to just keep the two that are still on board.
It did not help that the former 28-year mayor of the city, Stephen Reed, had previously spent $7.8 million of Harrisburg Authority money to buy “a collection of memorabilia in what can only be described as a quixotic effort to open a Wild West museum in central Pennsylvania.” (this probably makes the financial consultant fee seem like a basement bargain)
The incinerator issue itself has been a controversial one from the start. The city decided to retrofit the old facility after it had already been shutdown in 2003 by regulators for environmental violations for polluting the air with dioxin.
Muni market crisis overblown?
Could Harrisburg be the beginning of the end for a number of US cities? That is the unanswered question that continues to linger although some people place the blame for Harrisburg’s problems more on political issues rather than financial one (though they are obviously tied).
The possibility of a muni crisis is not new at all with the main municipal CDS index, the MCDX, having risen at times in the past on what seem to be cyclical fears. Nonetheless, critics continue to spread their worries and highlight famous investors such as Warren Buffet that also warn of a crisis. That, however, does not stop industry stalwarts from pointing to a bevy of statistics that vouch for continued smooth functioning and even strength in the muni markets. A recent interview report in the Bond Buyer with Assured Guaranty’s CEO Dominic Frederico stated that “threat of defaults in the muni market is unlikely to become another crisis for existing bond insurers because the majority of problematic credits are uninsured. In other cases, such as Harrisburg, Pa., and Jefferson County, Ala., revenue issues are being obscured by political considerations”
“We keep hearing about this impending crisis and about how people are just going to stiff the bond insurers,” he said, but added that there’s no evidence of that “if you really break down the numbers.”
“There have been 60 defaults in U.S. public finance this year through Aug. 2, totaling $2 billion. That’s less than 0.1% of the $2.8 trillion outstanding, according to Assured data. The majority of those — 47 issues totaling $1.8 billion — were either below investment grade or unrated.”
Disclosure: long all stocks