Harrisburg, Pa., will miss a general obligation bond payment for the second time this year, its state-appointed receiver said Tuesday. But the move surprised no one, nor will it send ripples through the bond markets, observers say.
“Harrisburg is one of those isolated cases, like Jefferson County, Stockton and even San Bernardino,” said Anthony Valeri, a market strategist at LPL Financial. “It’s a one-off, and not representative of the bond market.”
Receiver William Lynch announced Tuesday that Harrisburg would miss $3.4 million worth of GO payments due Sept. 15. The payments involve Series D bonds and Series F notes issued in 1997, both refundings, according to an official statement released at the time. They totaled $51.5 million.
Harrisburg also missed a $5.3 million payment on March 15.
“As many have already surmised due to the structural deficit in the city of Harrisburg, the [GO] debt-service payment will not be made for the next one due Sept. 15,” Lynch said in a statement. The city will use the funds instead to pay salaries.
“The appropriate notifications are being made by our counsel. The city will not be making the debt service payment but the bond insurer will do so,” Lynch added.
Ambac Assurance Corp., a division of Ambac Financial Group Inc. of New York, is the GO bond insurer. Ambac declined comment on Tuesday.
Pennsylvania’s capital city may know more about its fate by year’s end. A state-imposed restriction barring Harrisburg from filing for bankruptcy will end Nov. 30.
The state legislature in June extended the sunset provision for five months.
“I think it barely got noticed that last time they missed [a bond payment] and this one even less. The bigger question is what will happen later in the year,” said Alan Schankel, a managing director for Janney Capital Markets.
“It will be interesting to see whether the legislature will extend that provision. We might also know a lot more about the asset sales, which have been moving more slowly than expected,” he added.
“Look, Harrisburg’s in a groove now, missing several of those payments,” Schankel said. “Until the ship is righted, they’ll continue to miss those payments because Ambac is there to pick up the tab. The bondholders will not be hurt, at least in theory.”
Lynch’s predecessor, David Unkovic, began the sale process for the incinerator — the focal point of Harrisburg’s debt crisis — as well as the city’s sewer and wastewater systems and revenue-producing parking garages. Unkovic resigned in late March.
Valeri sees Pennsylvania officials holding the line against the Harrisburg City Council majority that favors bankruptcy as a way of benefiting local taxpayers in any asset fight with bondholders.
“The state’s wielding a pretty strong hand here,” he said.
Harrisburg is burdened by $320 million of debt that it cannot pay, mostly in bonds tied to an incinerator retrofit project.
It has not paid any incinerator-related bonds since 2009. Assured Guaranty Municipal Corp. is the insurer for the incinerator bonds.
“The pattern of the incinerator debt in Harrisburg makes for a great case study. Governments should not be in the business of running businesses,” said Anthony Figliola, vice president of Uniondale, N.Y., lobbying group Empire Government Strategies. “The metrics associated with these projects need to be like those in the private sector.”
City Council member Brad Koplinski supported Lynch’s decision to skip the GO payment.
“While we never want to not pay our debts, it is vital that we pay the hard working employees of this city who maintain the health, safety and welfare of our citizens,” he said.
Lynch, projecting a $12.6 million structural deficit, said last month that the city could run out of money by the end of September.
His financial recovery plan includes increasing the city’s earned-income tax to 2% to 1%, a plan to which the City Council has objected.
The Commonwealth Court of Pennsylvania in early October will reconsider its order for the council to adopt the measure.
“Increasing the property tax is like squeezing blood out of a rock,” Figliola said. “People don’t have the money. Harrisburg is poor and has been poor for a long time.”
