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Moody’s: Politics May Hurt Harrisburg’s Bond Plans

Harrisburg’s debt woes are exacerbated by the political impasse between Mayor Linda Thompson and the City Council, which could hinder its ability to utilize the capital market in the future, according to a Moody’s Investors Service analysis of Pennsylvania’s capital city.

Harrisburg is set to miss a debt-service payment of $3.3 million due Sept. 15 to bondholders of Series 1997D and Series 1997F capital appreciation bonds. Ambac Assurance Corp., insurer of the GO bonds, will meet payments to investors. The city’s next debt-service payment on the 1997 GO bonds is $5.32 million due March 15, according to the official statement of the Series 1997 bonds.

Harrisburg’s GO debt problems follow months of trouble concerning $282 million of outstanding incinerator debt that the city guarantees. The facility does not generate sufficient revenue to pay down the incinerator bonds, leaving the city responsible for the debt.

The City Council opted not to include debt-service payments on incinerator debt in its $64.7 million budget for fiscal 2010, which began Jan. 1. That spending plan has a $4.5 million shortfall.

“While local governments across the nation are facing budget shortfalls similar to Harrisburg’s, the political stalemate created by the failing incinerator is aggravating efforts to fix the city’s financial operations in the current year,” the Moody’s report said. “And may continue to do so in subsequent years.”

Analysts said Harrisburg’s financial operations will continue to deteriorate without a solution to the incinerator debt problem. However, the political standoff between the mayor and council is not limited to the debt.

Thompson earlier this year proposed tax increases to help generate additional revenue for the city’s coffers, but council members rejected that plan.

The Harrisburg Authority, issuer of the incinerator bonds, is working without a proper board because it’s one member shy of the required quorum. Council members have rejected or tabled Thompson board nominees in hopes of pressuring the mayor to reappoint former board member Neil Grover, whom they favor.

In June, the Pennsylvania Supreme Court determined that Harrisburg’s mayor nominates board members to the Harrisburg Authority — not the City Council. Harrisburg’s incinerator troubles are not unique in and of themselves, according to the Moody’s report, which noted that finding a solution to the debt problem becomes more difficult once it’s coupled with political strife.

“Without a viable solution to the issue of the incinerator debt, we expect the city’s financial operations will continue to deteriorate, increasing the potential for future missed debt-service payments on both the authority’s and the city’s debt,” the Moody’s report reads. “Continued delinquency of debt-service payments will also impede the city’s access to the capital markets going forward.”

Moody’s no longer rates Harrisburg. In early April it withdrew its B2 rating on the city’s Series 2005A capital appreciation bonds as the remaining maturities had been refunded and escrowed to maturity.

In looking at the incinerator bonds, debt-service reserves, bond insurer Assured Guaranty Municipal Corp., and Dauphin County, which serves as second guarantor on much of the incinerator debt, have been making payments to investors.

Last week, Dauphin County officials approved a resolution that allows TD Bank, trustee for the incinerator bonds, to file suit against Harrisburg as the county is now on the hook for $35 million of privately placed debt that comes due Dec. 15.

Thompson last month picked Scott Balice Strategies as Harrisburg’s financial adviser to help craft a restructuring plan, which may include leasing or selling of city assets.

A contract has yet to be signed as Harrisburg is seeking state funds to help pay for the outside consultant.

Gary Tuma, spokesman for Gov. Edward Rendell, said that while the state has its own fiscal challenges, the governor is looking for funds to help Harrisburg afford professional financial guidance.

“He is looking at ways right now to help them pay for that,” Tuma said. “We’re studying what kinds of economic development money might be available. So we hope to have a decision on that and be able to help them out with the financial consultant within a couple of weeks.”

In addition, Ambac Financial Group, the parent company of Ambac Assurance, may be looking at a bankruptcy filing. Ambac Assurance insures Harrisburg’s GO debt. Ambac Financial has been warning investors since November that it may have to seek bankruptcy protection as early as 2011.

The looming bankruptcy worried holders of structured finance assets backed by Ambac Assurance, which is based in Wisconsin.

Last week a group of hedge funds — including Aurelius Capital Management, Fir Tree, and Stonehill Capital Management, who together hold more than $1 billion of assets guaranteed by Ambac Assurance — filed a motion in the circuit court of Dane County, Wis., to block the insurer unit from paying dividends to the parent company.

Ambac Financial’s solvency is dependent on those dividends. The hedge funds are concerned the insurer could siphon money off from its parent to ward off bankruptcy.

However, the insurer’s own financial condition is so poor that Wisconsin regulators opted in March to segregate and administer its most risky assets.

Meanwhile, Ambac Financial called it “highly unlikely” that the insurer would be able to make dividend payments “for the foreseeable future,” according to its most recent 10Q filing with the Securities and Exchange Commission.

The hedge funds also allege that Ambac Assurance funneled more than $230 million in dividends to Ambac Assurance and preferred shareholders in 2008 and 2009. A spokesman from the insurer Tuesday declined to comment.

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