As city finance officials warned four years ago, a Philadelphia authority has defaultedon $46.3 million of insured tax-lien bonds it sold in 1997 as a way to raise cash.
Last month's default came on a balloon payment that was due June 15. According to cityController Jonathan Saidel's office, this was the last payment to be made on the debt,which is insured by MBIA Insurance Corp.
Saidel, who opposed the tax-lien deal, expects the default will have an impact on thecost of bond insurance for future Philadelphia issues because, it reflects poorly on thecity, overall.
"The reality is that, technically, it may not affect our rating, but the fact is that ifyou're in a car accident, and it's your fault, it's going to cost you more to get carinsurance," Saidel said.
During the administration of then-mayor Ed Rendell, Philadelphia bundled together andsold $106.3 million in delinquent real estate tax liens to the Philadelphia Authorityfor Industrial Development. In turn, PAID - a public agency created by the city butconsidered independent of it - issued $75.5 million in bonds to fund the purchase.
Debt service is covered through tax collections. The use of private collection agencieswas intended to increase collections and make more revenue available. Rendell, aDemocrat, is now governor of Pennsylvania.
There was no pledge of the city's credit on the deal.
Robert Fina, senior vice president at PAID, said he had few details he could offer onthe default and deferred questions to the city.
"We're just a conduit," he said. "We did it at the request of the city on behalf of thecity."
In a written statement, MBIA said it paid a $46.3 million claim under its guarantee ofthe PAID bonds, the remaining principal balance on the bonds, on June 15.
"MBIA had been working closely with senior officials of the city of Philadelphia forseveral years in an effort to rectify the situation prior to the maturity date of thebonds," the company said. "Based on its discussions with the city, MBIA believed thatadditional support would be provided for the bonds in order to avoid a claim. MBIA hopesto continue its dialogue with the city to reach a mutually beneficial resolution."
The bond insurer added that the payment would not impact second-quarter net income.
Cities such as New York, Jersey City, and Camden, N.J., have also done tax-lienfinancings, which were once hailed as an inexpensive method to generate money for urbandevelopment but for the most part have failed to live up to these expectations.
In April of 2000, Saidel submitted to Mayor John Street an audit of PAID and thePhiladelphia Industrial Development Corp. in which he called collections on the tax liensale to PAID "disappointing" and foretold of a $42 million shortfall.
Saidel also said that the city should have done an outright tax-lien sale to "transfercollection risk and transfer the unpopular task of lien enforcement."
Contributing to the dismal collection rates were politically motivated City Councilmembers who encouraged residents of their districts to have their properties exemptedfrom the tax-lien sale during an amnesty period.
Back in 1997, Moody's Investors Service's structured finance group - not its municipalfinance group - rated the bonds Aaa based on insurance. At the time, analysts wrote in areport that the small size of many of the liens in the pool, as well as the low assessedvalues were concerns. Neither Fitch Ratings nor Standard & Poor's issued ratings on thedeal.
Helen Chang contributed to this story.
