Last-Minute State Aid Helps Harrisburg, Pennsylvania, Make Debt Payment

Sept. 13, 2010— -- The embattled government of Harrisburg, Pennsylvania's capital, will avoid default on a $3.3 million bond payment this week because of $4.4 million in last-minute state aid.

With Harrisburg's city council scheduled to meet Tuesday to explore filing for bankruptcy, Gov. Ed Rendell announced Sunday that he was speeding up state funds and grants to the financially-strapped capital.

Still, the capital city stands on precarious ground, with a $4.3 million deficit and crippling debt from a costly incinerator project. Of the last-minute state aid, half a million dollars are considered a loan and must be repaid.

"I see this as Wall Street versus Main Street," said city councilman Brad Koplinski. "The bondholders are not willing to budge and they expect us to completely take care of this on the backs of our city's taxpayers."

Newly elected Mayor Linda Thompson, who has feuded with the city council she once headed, opposes a municipal bankruptcy filing. "It's the very last option after everything else has failed," she said.

Harrisburg, a city of 47,000 on the Susquehanna River where nearly 30 percent of the population lives below the poverty line, is deep in debt. Its divided government can't even agree on how to deal with the crisis: Lay off more city workers? Close firehouses? Sell fire trucks? Walk away from some of the debt?

The city's unusual decision to skip the general obligation bond payment is being closely watched by the nation's financial sector as a harbinger of troubles for the bond market.

"You do have a state capital choosing to pay employees over bondholders, and that idea is discussed across the country," said Matt Fabian, managing director at Massachusetts-based Municipal Market Advisors. "A lot of people are pointing to it as the first domino."

Harrisburg already has skipped millions of dollars in payments on bonds it backed for the costly renovation of a trash incinerator, which dates back to the 1970s. The incinerator is up and running but doesn't generate enough revenue to cover debt that has reached $288 million. This year, the city owes incinerator debt payments of $68 million, an amount that surpasses its annual budget.

"There are a handful of communities across the country that made a bad investment like Harrisburg did with the incinerator," Fabian said. "There are places that have made bad bets and are now struggling to pay."

Take the California city of Maywood, south of downtown Los Angeles, which in June laid off all its employees, eliminated its police force and contracted a neighboring city to run municipal operations. More than 100 city employees -- police veterans and crossing guards, street crews and parks workers -- received pink slips.