September 15, 2010
by Cathy Cuthbert, NEO Board of Directors
You may not have noticed but the City of Harrisburg PA had been threatening to default on a bond payment of $3.3 million come Sept 15th. Over the weekend, the city was rescued by the state. Even though the bond insurer Ambac said that it would cover the bondholders’ losses, the State of Pennsylvania stepped in to make bondholders (and Ambac) whole by bailing out Harrisburg--for now.
Apparently Harrisburg has already missed $8 million in payments this year. Another missed payment threatened to send the city to bankruptcy court.
According to Bloomberg:
"Harrisburg's default would boost borrowing costs or make credit unobtainable for other Pennsylvania municipalities and school districts, and jeopardize the city's attempts to devise a recovery plan, [Governor] Rendell said."
Harrisburg is small potatoes in the muni bond market. Yet one small city of less than 50,000 souls could dry up credit for the whole state, or so we are told. This demonstrates how important the bond market is to public finance and that these payments must continue.
But what happens when the state doesn't have the money for the next threatened default? We can envision this kind of scenario in California, New Jersey, or Illinois where budgeted state payments to municipalities are currently being withheld. Of course for a while Ambac may fill in, but for how long?
Unless tax revenue stops its free fall, be on the lookout for an innovative mayor in some distressed city to suggest cutting non-essential services to meet debt payments. Mayor Thompson of Harrisburg wants to sell the city parking garage. But why sell a producing asset? Better to improve the municipal income stream by divesting of a fiscal black hole--you know, a large line item that sucks inordinate amounts of money while returning little or nothing to the community. We suggest selling the schools.