Harrisburg defaults; bankruptcy ahead?
PA state capital can't pay its general obligation bonds
David Unkovic, the veteran bond lawyer assigned by PA Gov. Tom Corbett as receiver to keep Harrisburg paying its bills, says he's skipping $5 million in general obligation bond payments due in March, because the city can't afford to pay them. More here, hit 3/09 button.
In a statement, Unkovic said he still plans to seek state approval to sell city parking garages, parks or other assets to reduce its debt load. But he said the city could no longer afford its regular bond service if it is to continue paying police and other basic services.
The city faces more than $300 million in bond obligations from a failed trash incinerator and other projects, and suffers from a lack of properties it can tax under Pennsylvania's property-tax municipal finance system, plus resistance by suburban lawmakers to sales or wage taxes as an alternative.
"This should come as no surprise to anyone," said Mark Schwartz, who represented Harrisburg city council in an unsuccessful attempt to file for municipal bankruptcy and avoid state control earlier this year. He predicted Unkovic's office will strip Harrisburg's assets and leave it broker than before, after paying millions in profesisonal fees: "It's all about control."
In a statement, Unkovic said he still plans to seek state approval to sell city parking garages, parks or other assets to reduce its debt load. But he said the city could no longer afford its regular bond service if it is to continue paying police and other basic services.
The city faces more than $300 million in bond obligations from a failed trash incinerator and other projects, and suffers from a lack of properties it can tax under Pennsylvania's property-tax municipal finance system, plus resistance by suburban lawmakers to sales or wage taxes as an alternative.
"This should come as no surprise to anyone," said Mark Schwartz, who represented Harrisburg city council in an unsuccessful attempt to file for municipal bankruptcy and avoid state control earlier this year. He predicted Unkovic's office will strip Harrisburg's assets and leave it broker than before, after paying millions in profesisonal fees: "It's all about control."
Update: Harrisburg is the first of 9,700 towns currently rated by Moody's to default on its general obligation bonds in at least the past three years, notes Tom Kozlik, muni analyst at Janney Capital Markets in Philadelphia. Since Moody's has been cutting credit ratings four to five times faster than it's been boosting the ratings, doesn't that mean more and more towns are headed toward default?
Not necessarily, says Kozlik. Towns like Harrisburg; Central Falls, Rhode Island; Stockton, California; and Jefferson County, Alabama, which defaulted on other bonds, are well known as "outliers" among U.S. muni issuers, Kozlik told me. Yes, some "retail" small bond investors are concerned. But towns and counties have cut spending instead of defaulting, mostly.
Not necessarily, says Kozlik. Towns like Harrisburg; Central Falls, Rhode Island; Stockton, California; and Jefferson County, Alabama, which defaulted on other bonds, are well known as "outliers" among U.S. muni issuers, Kozlik told me. Yes, some "retail" small bond investors are concerned. But towns and counties have cut spending instead of defaulting, mostly.
Total U.S. municipal bond issuance, much of it at near-record-low interest rates, totalled over $300 billion last year -- down from over $400 billion in 2010 and down also from the $382 billion ten-year average; but 2010 was boosted by the federal stimulus tax breaks of the "Build America Bonds" program, which has been stopped by Republicans in Congress, Kozlik noted.
Democratic vistories in this fall's election are more likely to lead to government programs that ease tax and financing pressure on municipalities, making it easier to borrow more, he added; by contrast, any federal financing action "relating to 'recovery' is almost dead-on-arrival, as far as Republicans are concerned." Of course, economic recovery would be the best thing for municipal borrowers, as well as borrowers generally, Kozlik concluded.