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.

In Alabama's most populous county, Jefferson, the government is saddled with about $5 billion in debt stemming from the overhaul of its sewer system in the mid-1990s. Merit increases for county workers have been frozen, building and road repairs halted. A brand new jail is vacant because there are no funds to hire workers or pay utilities. As in Harrisburg, officials are exploring bankruptcy.

In the impoverished town of Central Falls, Rhode Island, near Providence, officials recently agreed for a receiver to take control of local finances and consider the rewriting of contracts and cutting of pension benefits. A city of 19,000, Central Falls has a budget of about $18 million and projects a $3 million deficit this year and a $5 million gap in fiscal 2011. The city also has $4 million in a pension fund that has $35 million in unfunded liabilities.

Addled by unmanageable debt, municipalities have turned to draconian service cuts and large tax increases. Experts believe some may default on loans because states are too strapped for bailouts; others face bankruptcy filings.

Since 1937, when federal law first allowed municipal bankruptcy, there have been about 600 bankruptcies involving municipal agencies and entities such as housing developments, according to the Washington D.C.-based National League of Cities. Municipal governments will probably come up $56 billion to $83 billion short between now and 2012, resulting in more layoffs, service cuts and canceled projects and contracts, according to the organization.

"If we are the first domino to fall, I know there are cities that are watching us and the bond market is watching, because if they make a deal with us, they'll have to make a deal with every other municipality that's having trouble right now," Koplinski said.

The $68 million owed by Harrisburg this year is but a fraction of $288 million in outstanding debt from the incinerator project. The Harrisburg Authority, the state body that issued the bonds for construction of the municipal trash incinerator, has been unable to make payments. The county, which picked up the bill last year, is now suing for the funds.

In addition to the incinerator debt, Harrisburg is coping with a $9 million deficit in the current budget. The city is considering layoffs, closing and leasing or selling a firehouse, and the selling of two fire trucks, among other measures. It has assigned volunteers to man police stations in order to have all officers on the streets.

Thompson insisted that bankruptcy is a last resort, though members of the city council aren't so sure. The political squabbling has practically paralyzed her government. She said she hopes an outside financial adviser will come up with a plan.

The city has even sifted through assets to see what can be sold, including western artifacts purchased by former Mayor Stephen Reed for nearly $8 million. Bought with public funds, the wagon wheels, rifles and other memorabilia were destined for a Wild West Museum that never opened.

"The reality check is that the stuff we were left with is junk," Thompson said. "It's not authentic. There are a few pieces that we might be able to salvage and get about $500,000."