Pennsylvania Gov. Edward Rendell extended the city of Harrisburg a lifeline Sunday to prevent it from defaulting on its general obligation debt and help pay Scott Balice Strategies to craft a long-term fiscal plan for the capital city.
With just four days to go before that obligation comes due, Rendell stepped in and announced a plan to save the city from financial disaster. The state will speed-up nearly $3.6 million of pension assistance and fire protection payments it must make to the city later this year. Harrisburg will receive the $3.6 million “almost immediately,” Rendell said.
Harrisburg has a $3.3 million payment due Wednesday on Series 1997D and Series 1997F bonds, insured by Ambac Assurance Corp. City officials last month said they could not meet that payment.
“A default here would have serious ramifications," Rendell said during a press conference Sunday with Mayor Linda Thompson. “And it would have serious ramifications for municipalities in central Pennsylvania — and for that matter, all over the length and breadth of this Commonwealth.”
The state will extend a $500,000 loan to help pay Scott Balice for its services to develop a financial plan for the city. Rendell said proceeds from the sale of city assets will pay down that $500,000 loan. Harrisburg will also receive $250,000 from the state’s early intervention program and another $100,000 grant, giving the city a total of $850,000 to pay for outside financial help.
Thompson reached out to the governor Thursday morning regarding the potential default and the city’s inability to make payroll this coming week. Rendell and his team met that evening in his office with the mayor and her staff to cobble together a plan.
The governor said the municipal bond market would respond to a GO default by increasing the cost of borrowing for local governments in Pennsylvania.
“Once there’s a default on a municipal general obligation bond, it would at least raise the interest rates or even make it difficult, if not impossible, for other cities to sell their bonds,” Rendell said.
Rendell stressed that the state assistance is not a bailout and that a general obligation default to bondholders would create a negative ripple effect across the city; the school district; Dauphin County, where Harrisburg is located; and the rest of the state.
“Much of the same tax base would be involved in a school district or county borrowing,” Rendell said.
Missing the Sept. 15 payment could prompt Ambac to file suit against Harrisburg, which has pledged its full faith and credit to repay bondholders. A potential suit could be very costly to the city.
The next payment to investors on the Series 1997D and Series 1997F bonds is March 1 for $5.32 million, according to the official statement for the bonds. Rendell said city officials will need to move forward on a long-term fiscal plan by the end of January, at the latest, for Harrisburg to meet its obligations to bondholders at that time.
The Thompson administration has said for months that a long-term strategy should include the sale or lease of city assets, including the city’s parking garage, to help generate needed funds.
“My goal is to put in effective government reform so that we don’t continue to come back and be in these types of crisis,” Thompson said during the press conference.
The mayor anticipates signing a contract with Scott Balice on Monday. The firm has already begun working with the city on a pro-bono basis. The mayor announced her selection of Scott Balice last month and has been working towards finding state funds to help pay the financial adviser.
Harrisburg is operating with a budget deficit. The mayor is trying to close a $4.3 million shortfall in the city’s $64.7 million fiscal 2010 operating budget through potential layoffs, furloughs, the closing of a fire station, and tax and fee increases. Fiscal 2010 began Jan 1. The $4.3 million shortfall is on top of $4.5 million of savings the mayor found earlier this year through hiring reductions, limiting overtime, and cutting other expenditures.
In addition, the city guarantees $282 million of incinerator debt sold by the Harrisburg Authority, which has been unable to pay debt service on the bonds. The city’s fiscal 2010 budget does not include incinerator debt service payments. Debt-service reserve funds, co-guarantor Dauphin County, and Assured Guaranty Municipal Corp., insurer of the bonds, have been meeting payments to bondholders.
The city is also seeking some sort of financing to help it meet payroll for the remainder of 2010. Once Thompson began talking about a potential deficit borrowing or short-term loan, Rendell immediately stepped in to address that issue. It is unclear whether that loan would be a tax and revenue anticipation note sold in the capital markets or a bank loan.
“We’re going to try to persuade lending institutions or an institution to yield to the city that short-term credit," Rendell said, "but I think their willingness to do so will be influenced by whether they see a sense of cooperation that can lead to a plan that’s going to give the city the necessary cash to repay the Trans itself and to get out of its debt.”
Harrisburg does not have an underlying credit rating.
The city's financial challenges have been exacerbated by a political standoff between the mayor and city council, which rejected Thompson’s efforts to increase property taxes and other city fees to help raise additional revenue. The council has yet to approve one additional board member to the Harrisburg Authority, and give that panel the quorum it needs to formally act.
The council meets Tuesday night, but has not released a meeting agenda. It's not clear whether its members intend to vote on a potential board member for the authority.
The authority needs a quorum to work on a forbearance agreement that will give the authority some breathing room to address its incinerator debt woes, including $35 million of uninsured privately-placed bonds due Dec. 15.
Rendell stressed that Harrisburg officials — the mayor, the city council, and the controller — must come together, make compromises, and agree on a plan to get the city and the authority back on a steady fiscal path.
For months, talk of a bankruptcy filing or obtaining state oversight through its Act 47 program has surrounded Harrisburg. Rendell urged city officials to shun both paths to retain control over its fiscal decisions.
“If the city goes into Act 47, it will be the Act 47 administrator who will decide,” Rendell said. “If the city goes into bankruptcy, it will be the bankruptcy judge who decides. And those steps are to be avoided so that Harrisburg and its elected officials can control their own destiny. But to control that destiny and make this work, they’ve got to put aside their differences and work together.”
