Dauphin County Wednesday authorized TD Bank to pursue legal action against Harrisburg, as Pennsylvania’s capital city said it will not meet payments due Dec. 15 on $35 million of incinerator bonds.

The county’s resolution comes as Harrisburg also plans to miss $3.3 million in debt-service payments on general obligation debt from 1997 due Sept. 15. Ambac Assurance Corp., insurer of the GO bonds, will meet payments to investors.

The Harrisburg Authority has $282 million of outstanding incinerator bonds. A portion of that debt, $35 million of Series 2007C and Series 2007D bonds, will mature on Dec. 15. The authority and the city — first ­guarantor of all the incinerator bonds — cannot meet the payment.

Dauphin County, where Harrisburg is located, is co-guarantor of much of the incinerator debt, including the $35 million of Series 2007 zero-coupon bonds due in December. The bonds do not carry insurance, though Assured Guaranty Municipal Corp. insures other Harrisburg Authority incinerator debt.

Dauphin County spokeswoman Amy Richards said the county budgeted for Series 2007C and Series 2007D payments, but wanted to direct TD Bank, trustee for the bondholders, to pursue litigation after the city failed to respond to an Aug. 20 letter in which the county said it would like to help refinance the Series 2007C and D bonds.

“We would prefer to negotiate, absolutely,” Richards said. “But we need to do what we can to protect county taxpayers. We’ve provided written notification that we’re willing to negotiate, but at this point we haven’t had a response.”

Bear Stearns in 2007 priced via private placement $20.9 million of Series 2007C bonds yielding 4.5% and $9 million of Series 2007D bonds yielding 6%. Wells Capital Management Inc. holds the bulk of the debt, $14 million of Series 2007C bonds and all of the Series 2007D bonds, according to Lyle Fitterer, managing director and head of tax-exempt fixed income at Wells Capital.

USAA Investment Management Co. holds $9.7 million of the Series 2007C bonds, as of March 31, 2010, according to Bloomberg LP.

Fitterer said Wells Capital is secure that in the end, the county will make good on the bonds.

“Since the county has actually put it and set it aside as a reserve on its books and since the rating agencies are looking at that when they rate the county, we’re pretty confident that the county will actually make the payment,” Fitterer said.

TD Bank declined to comment on the issue.

Chuck Ardo, spokesman for Harrisburg Mayor Linda Thompson, said litigation does not help to address the fiscal challenge.

“A suit is counterproductive. It takes money that could be better used and directs it to lawyers,” Ardo said. “It doesn’t produce a single dime towards solving the problem.”

Not all of the incinerator debt has the county’s guarantee. Officials used debt service reserves to meet a $2.1 million Sept. 1 payment to bondholders of Series 2003A, B, C and Series 1998A bonds, said Michele Torres, executive director of the Harrisburg Authority.

“The debt-service reserves are going to get hit again,” Torres said.

The next incinerator debt payment is $1.2 million due Nov. 1 that does not have the county’s guarantee.

“There are no debt-service reserves for those [bonds],” Torres said.

For several months, state, city, and county officials have been working with AGM to craft a forbearance term sheet that would give the city and the authority some breathing room to craft a refinancing plan. That agreement has yet to develop.

The city last month picked Scott Balice Strategies as its financial adviser to help address Harrisburg’s fiscal woes. The city has yet to formalize a contract with Scott Balice as it is still working out how to pay the consultant. Last week, Harrisburg officials met with Gov. Edward Rendell regarding the issue.

“The governor pledged to do his best to try to find enough money to get these people started,” Ardo said.

A resolution to formally request state funds to help pay for Scott Balice’s services sits in a City Council committee for discussion.

In looking at the city’s GO debt, Harrisburg will not meet a $3.3 million payment due Sept. 15. The bonds are insured by Ambac. Harrisburg has a $4.5 million shortfall in its $64.7 million current-year budget.

“Unfortunately, the city’s current financial situation precludes it from making any transfer of funds for these debt-service payments at this time,” Ardo said.

The city has $575.8 million of debt outstanding, as of Dec. 31, 2008, according to Moody’s Investors Service.

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