Contingent liabilities for nonessential, noncore enterprises pose huge credit risks for a smattering of local governments, Moody's Investors Service in a Monday report that cited Harrisburg.
Pennsylvania's 49,000-population capital guaranteed $310 million of debt on its incinerator, but escalating financing costs for the trash burner pushed the city to the brink of bankruptcy.
"Only a small percentage of local governments take on contingent liabilities for nonessential enterprises. But for those that do, the effects on those governments' credit quality can be devastating," said Moody's assistant vice president and report author Josellyn Yousef.
Moody's explains these enterprises are much riskier than general government and essential public services because of their limited abilities to increase revenue in a competitive market environment.
Guaranteeing the debt of nonessential enterprises became more frequent during the 2008-09 economic downturn and sluggish recovery, Moody's added.
Such enterprises have included sports and entertainment facilities, nursing homes, real estate developments and fiber-optic telecommunications systems, Moody's said.
Moody's said it evaluates the credit risk from contingent liabilities through examining three drivers: the likelihood of the enterprise's need for financial support, the local government's financial ability to cover the debt service and the local government's willingness to meet contingent obligations.
Harrisburg's emergence from state receivership awaits Commonwealth Court of Pennsylvania approval. The court in September ratified the so-called Harrisburg Strong recovery plan, which hinged upon the sale of the incinerator to the Lancaster County Solid Waste Management Authority and a long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority, both of which closed in late December.
