If there is a formula for fiscal problems that lead to bankruptcy, it may be in Harrisburg, Pennsylvania — not Washington, DC.
Last week, Harrisburg announced it would default on a $3.3 million bond payment due Sept. 15, highlighting how a crushing debt load, plus a council and mayor who are barely on speaking terms, can lead a city to the brink. “The political gridlock has gotten worse,” said David Black, head of the Harrisburg Regional Chamber and Capital Region Economic Development Corporation. “The local business community is pretty upset about this, and it really gives Harrisburg a bad name.”
Harrisburg is groaning under a $225 million debt load created by an ill-fated plan to retrofit the region’s incinerator. But despite the warning signs that multiplied early this year, it has failed to find a formula for raising the money to pay back the loan, reducing the debt load through negotiations with bondholders, or declaring bankruptcy, which is possible under state law. That led to the announcement of a plan to default on $3 million of interest, a relatively small amount in a city with a budget of around $65 million. A $35 million principal payment is due in December.
City officials — all Democrats — are locked in a wrangle that pits Mayor Linda Thompson, who opposes bankruptcy, against a majority of council members who want to at least hire an attorney to consider the possibility. The independent city controller, Dan Miller, is also lobbying to consider bankruptcy, on the theory that it would create leverage with bondholders. “It could be worked out, but nobody is interested in that right now,” Miller said. “If bankruptcy were front and present, then maybe this could be worked out.”
Thompson has countered that bankruptcy under Chapter 9 would merely cost the city a lot in legal fees, and that it needs to consider, among other things, the sale of the city’s parking structures to pay down debt.
“There are still some bad options left and we’d like to review them all,” said Chuck Ardo, the mayor’s spokesman. Thompson also wants to get a no-bid contract with a consultant to examine how the city could save money, but no-bid contracts require council approval, which it refuses to provide.
Alarm Bells in the Bond Market
The announcement set off alarm bells within the nearly $3 trillion market for municipal bonds, which is nervously eyeing the precarious conditions of local finances around the country. “Harrisburg and its incinerator are a very small part of the municipal bond market,” John Mousseau, a municipal bond analyst with Cumberland Advisors, wrote in a research report. “However, the slowness with which the city, county, and state have addressed the Harrisburg incinerator problem is certainly troublesome on the Pennsylvania level.”
Ambac, the company that insured the bonds, will cover bondholders’ losses, according to Peter Poillon, managing director for investor relations at Ambac. He declined to discuss Ambac’s legal options, which include suing the city within 30 days to raise property taxes to get payment.
Pennsylvania Gov. Ed Rendell, who has a few more months in office, has tried to quietly move the process along. He directed Brian Hudson, head of the Pennsylvania Housing Finance Agency, to mediate between the mayor and council, and possibly negotiate a forbearance agreement with bondholders.
Publicly, however, most Pennsylvania politicians are keeping their distance.
“There’s no one who would benefit from getting close to Harrisburg,” said Chris Briem, a professor at the University of Pittsburgh’s Center for Social and Urban Research. “There’s no value added here.”