The Harrisburg Authority's incinerator debt has enough funds in its debt-service reserve accounts to meet a March 1 payment to investors, according to Assured Guaranty Municipal Corp.
AGM insures $195.5 million of outstanding Harrisburg Authority resource recovery facility revenue bonds. Of that amount, Harrisburg, Pa., and Dauphin County together guarantee $104.7 million, while the city is the sole obligor on the remaining $90.9 million.
The $2 million March 1 debt-service payment relates to debt backed with the city's pledge and not the county's guarantee, according to Harrisburg Controller Dan Miller. The March payment relates to Series 2003A bonds and Series 2003C bonds. The cover page of the offering document for these bonds said the city had pledged its full faith and credit to unconditionally guarantee the debt that was called "Guaranteed Resource Recovery Facility Subordinate Refunding Revenue Notes."
The authority issued the debt insured by Financial Security Assurance Inc. and secured with Harrisburg's pledge. AGM's parent, Assured Guaranty Ltd., finished its purchase of FSA on July 1.
"AGM does not expect to pay claims on the next debt-service payments, which are due March 1, 2010, as the relevant series currently have sufficient cash in their debt-service reserve funds to cover the March 1 payments," according to the insurer.
Harrisburg's City Council on Saturday approved a fiscal 2010 budget that did not include allocations for $68 million of total resource recovery facility debt payments due this year, including a working capital loan of $35 million that will come due in December. The $68 million of RRF debt payments surpasses the city's $65 million budget. The $35 million loan is not enhanced with AGM insurance, said Jay Wenger, managing director at Susquehanna Group Advisors Inc., Dauphin County's financial adviser.
The authority has $282 million of total RRF debt outstanding, according to Moody's Investors Service. Unlike Harrisburg, Dauphin County's fiscal 2010 budget incorporates its obligations on the RRF debt, including the $35 million capital loan.
"The county has budgeted for its full guarantee obligations under the guarantee agreement," Wenger said.
Joyce Davis, spokeswoman for Harrisburg Mayor Linda Thompson, did not return calls and e-mails seeking a comment regarding the RRF debt.
Absent any city and county payments, AGM is on the hook for $17.1 million of debt-service costs in 2010, of which $9.2 million is guaranteed by both the city and the county and $7.9 million is guaranteed only by the city, according to AGM. The bond insurer yesterday released a statement assuring bond holders of its obligations.
"AGM is working closely with all parties to effect a satisfactory solution to the debt problems of the authority and the city," according to a statement posted to its Web site. "If necessary, AGM stands ready to exercise its rights and remedies under the terms of the bond documents."
To date, AGM has made a debt-service reserve surety payment of $600,000 on one series of the bonds, the Web site said.
According to Moody's, the incinerator project built with the proceeds of the debt sale ran over budget and was not completed on time. To help meet costs, the authority in 2008 sought a $100-per-ton rate hike. Dauphin County has control over the facility's rate increases except in the case of "uncontrollable circumstances" and rejected the rate boost. The issue went to arbitration, with the rate increase set at $1.58 per ton, far below the $100 per ton the authority was seeking.
In 2009, debt-service reserve funds helped pay down principal and interest payments on the bonds and Moody's anticipates the debt-service reserve funds to be depleted in 2010. Moody's last week downgraded the city to B2 from Ba2. The outlook is negative.
"The city may not have sufficient funds to pay its guaranteed debt-service payments when due at various points in 2010," a Moody's report said. At the same, Harrisburg has a "highly leveraged and stagnant tax base," according to Moody's.
It will pay $12 million in debt service this year on its general obligation bonds, Miller said. The city has $575.8 million of outstanding debt and does not have any new-money bonding capacity.
Miller and city councilwoman Susan Brown-Wilson have said the city should add a potential bankruptcy filing to its list of options to address its financial challenges, including the incinerator debt. The city has begun an early intervention plan, a preliminary step before a local government can file for distressed city status under Pennsylvania's Financially Distressed Municipalities Act, known as Act 47.
Market analysts said the city took on more debt responsibility, in total, than it should have.
"What makes or breaks it for governments is how much leverage, how much debt they get themselves into, total liabilities — not just their GO debt, their guaranteed debt, their indirect debt, their liabilities from the pensions," said Richard Ciccarone, chief municipal research analyst at McDonnell Investment Management LLC. "All those things come together in order to compile the true picture. And if your economy is weak and going in the wrong direction, these serve to be onerous to government bodies to be able to withstand a problem they haven't made provisions for."
Matt Fabian, managing director at Municipal Market Advisors, said the state is unlikely to give the city a direct payment to help meet debt service costs on the incinerator bonds or sell state bonds to defease the RRF debt.
More likely, it will have to work out a solution by either selling debt with the state's authorization or selling assets like the city's parking garage to raise the funds to meet their obligation on the incinerator debt. In addition, the issue could set a precedent for other Pennsylvania municipalities.
"If the city can disregard this guarantee, the risk is that other communities in Dauphin County or elsewhere, who are influenced by the same political trends, will decide to do something similar," Fabian said.
