Harrisburg Defaults as Localities Struggle
By Romy Varghese
September 1 (The Wall Street Journal)
Pennsylvania's capital of Harrisburg said it will skip a $3.29 million municipal-bond payment due in two weeks, marking the second-largest general-obligation municipal-bond default this year.
The city's inability to make the payment, which is expected to be covered by its bond insurer, may feed worries about parts of the $2.8 trillion municipal-bond market, particularly bonds issued by smaller entities that may have fewer resources than states or larger governments.
Paying bondholders is typically a top priority for governments, which want to ensure investors will lend to them the next time they seek to borrow.
But sharply lower tax revenues in the recession—after accelerated municipal borrowing over the past two decades—has made payback more challenging for some governments.
Smaller bond offerings like Harrisburg's tend to be sold primarily to individual investors and are thinly traded.
A missed payment is "a bad signal," said Alan Schankel, managing director at Janney Montgomery Scott in Philadelphia, adding that it raises the concern that some distressed issuers may be more likely to skip bond payments guaranteed by insurance companies.
"Once that starts, it gets easier to default on something else," he said.
Still, the default rate on municipal debt remains minuscule compared with investment-grade corporate bonds. Some $886 million of general obligation municipal bonds, a fraction of the overall market, have experienced "credit impairments" this year, such as dipping into reserve funds or tapping bond insurance.
Bond holders failed to be paid on only $32 million of that total, said Matt Fabian of Municipal Market Advisors in Westport, Conn. He expects Harrisburg's default to have a modest effect on the overall market, saying low supply of new tax-free municipal bonds and high demand from investors should support munis.
As for Harrisburg, its official notice that it will default on its debt is a sign its financial problems are growing beyond a failed incinerator project that led some city officials earlier this year to raise the idea of filing for a rare municipal bankruptcy.
The city hasn't formally pursued that option, and Gov. Ed Rendell, a Democrat, has publicly discouraged the idea. But Harrisburg officials haven't budgeted $68 million in payments due later this year for the $288 million debt on the incinerator project.
They did include payments for the general-obligation debt this year, but still fell short. In a report as of June 30, Harrisburg officials projected a $4.3 million general-fund deficit at the end of the year.
A spokesman for the mayor, speaking about the city's fiscal situation, said the city is "working feverishly to address the issue, and hopefully it will find a way to meet that challenge.
The incinerator is owned by a municipal entity, the Harrisburg Authority, that is separate from the city, but the city is the first guarantor of the debt.
This year's incinerator payments have been covered by reserves; by Dauphin County, which is the guarantor behind the city on almost half of the debt; and by bond insurer Assured Guaranty Municipal, a unit of Assured Guaranty Ltd. that has guaranteed $196 million of the debt.
A different company, Ambac Assurance, has insured the two general-obligation bond series of 1997 that Harrisburg said this week it would default on. Those securities have a face value of $51.5 million and mature in 2022. Ambac officials didn't return calls for comment.
The city's interim chief of staff and business administrator, Robert Kroboth, broke the news of the default in a letter dated Aug. 30 to the paying agent, BNY Mellon.
"Unfortunately," he wrote, "the City's current financial situation precludes us from making any transfer to fund for these debt service payments at this time."
The mayor, Linda Thompson, recently picked a financial adviser to help the city repair its finances. But its contract has yet to be finalized, said her spokesman Chuck Ardo, and the team isn't being paid as it does "outreach."
The biggest general-obligation bond default this year was $227 million in warrants of Jefferson County, Ala., which carry bond insurance, said Mr. Fabian of Municipal Market Advisors.
September 1 (The Wall Street Journal)
Pennsylvania's capital of Harrisburg said it will skip a $3.29 million municipal-bond payment due in two weeks, marking the second-largest general-obligation municipal-bond default this year.
The city's inability to make the payment, which is expected to be covered by its bond insurer, may feed worries about parts of the $2.8 trillion municipal-bond market, particularly bonds issued by smaller entities that may have fewer resources than states or larger governments.
Paying bondholders is typically a top priority for governments, which want to ensure investors will lend to them the next time they seek to borrow.
But sharply lower tax revenues in the recession—after accelerated municipal borrowing over the past two decades—has made payback more challenging for some governments.
Smaller bond offerings like Harrisburg's tend to be sold primarily to individual investors and are thinly traded.
A missed payment is "a bad signal," said Alan Schankel, managing director at Janney Montgomery Scott in Philadelphia, adding that it raises the concern that some distressed issuers may be more likely to skip bond payments guaranteed by insurance companies.
"Once that starts, it gets easier to default on something else," he said.
Still, the default rate on municipal debt remains minuscule compared with investment-grade corporate bonds. Some $886 million of general obligation municipal bonds, a fraction of the overall market, have experienced "credit impairments" this year, such as dipping into reserve funds or tapping bond insurance.
Bond holders failed to be paid on only $32 million of that total, said Matt Fabian of Municipal Market Advisors in Westport, Conn. He expects Harrisburg's default to have a modest effect on the overall market, saying low supply of new tax-free municipal bonds and high demand from investors should support munis.
As for Harrisburg, its official notice that it will default on its debt is a sign its financial problems are growing beyond a failed incinerator project that led some city officials earlier this year to raise the idea of filing for a rare municipal bankruptcy.
The city hasn't formally pursued that option, and Gov. Ed Rendell, a Democrat, has publicly discouraged the idea. But Harrisburg officials haven't budgeted $68 million in payments due later this year for the $288 million debt on the incinerator project.
They did include payments for the general-obligation debt this year, but still fell short. In a report as of June 30, Harrisburg officials projected a $4.3 million general-fund deficit at the end of the year.
A spokesman for the mayor, speaking about the city's fiscal situation, said the city is "working feverishly to address the issue, and hopefully it will find a way to meet that challenge.
The incinerator is owned by a municipal entity, the Harrisburg Authority, that is separate from the city, but the city is the first guarantor of the debt.
This year's incinerator payments have been covered by reserves; by Dauphin County, which is the guarantor behind the city on almost half of the debt; and by bond insurer Assured Guaranty Municipal, a unit of Assured Guaranty Ltd. that has guaranteed $196 million of the debt.
A different company, Ambac Assurance, has insured the two general-obligation bond series of 1997 that Harrisburg said this week it would default on. Those securities have a face value of $51.5 million and mature in 2022. Ambac officials didn't return calls for comment.
The city's interim chief of staff and business administrator, Robert Kroboth, broke the news of the default in a letter dated Aug. 30 to the paying agent, BNY Mellon.
"Unfortunately," he wrote, "the City's current financial situation precludes us from making any transfer to fund for these debt service payments at this time."
The mayor, Linda Thompson, recently picked a financial adviser to help the city repair its finances. But its contract has yet to be finalized, said her spokesman Chuck Ardo, and the team isn't being paid as it does "outreach."
The biggest general-obligation bond default this year was $227 million in warrants of Jefferson County, Ala., which carry bond insurance, said Mr. Fabian of Municipal Market Advisors.