UPDATE 4-Harrisburg, Pa. to skip two debt payments

Sat Mar 10, 2012 1:54am EST

By Hilary Russ

March 9 (Reuters) - Pennsylvania's distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services.

Pennsylvania's capital of 50,000 people is mired in $326 million of debt due to the expensive retrofits and repairs of its troubled trash incinerator.

"Although this default on general obligation bonds is unfortunate, I don't think it's going to hold up the process for proceeding under the recovery plan," Receiver David Unkovic said.

The state tapped Unkovic to serve as receiver, and he devised a recovery plan that includes the proposed sale or lease of the city's major assets, including parking garages and the incinerator itself.

Commonwealth Court President Judge Bonnie Leadbetter on Friday approved the plan, noting that it may change with more investigation from the receiver.

Holders of the affected bonds and notes do have some protection because principal and interest payments are insured by Ambac Assurance Corp., Unkovic said.

So far in 2012, there have been 21 defaults on muni debt totaling $978 million, according to Richard Lehmann, publisher of Distressed Debt Securities Newsletter, who expects the pace of defaults to increase.

"For cities and counties it's starting to happen now because they're running out of cash," he said, noting that Stockton, California, announced a default last month.

During the same period in 2011, there were 28 defaults totaling $522 million, while the full-year total was a whopping $25.2 billion, which included defaults on $18 billion of tobacco bonds that occurred when reserve funds for the issues were tapped, Lehmann said.

In a sign that Harrisburg's financial crisis was expanding to affect additional types of debt, Unkovic noted that this is the first time the city has defaulted on its general obligation debt. It has previously defaulted on revenue bonds tied to its incinerator project, and continues to not make those payments.

The payments that will be skipped consist of: $2.735 million due on the city's general obligation refunding bonds, Series D of 1997, and $2.53 million due on the city's general obligation refunding notes, Series F of 1997, Unkovic said.

The city filed a rare municipal bankruptcy, but a judge threw out the case last year.

Unkovic has said that five to 10 companies are interested in purchasing city assets. He hopes to name winning bidders by June.

The plan has its critics. An attorney representing the city council president and Harrisburg's treasurer and controller has blasted the plan as a fire sale.

Even though it will not make the two payments on its general obligation bonds, the city is still falling at least $5 million short on its budget, Unkovic said.

Harrisburg Mayor Linda Thompson, in a comment, said Unkovic "is charting the best fiscal recovery course given the current situation."

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (20)
trajan2448 wrote:
Rampant pension scamming, Democratic vote buying, and union corruption have been key factors in bring many local, state, and even the Federal Government to insolvency. If these issues are not rectified, the end game will be currency collapse and hyper stagflation. We are already seeing the beginnings of this in 5 dollar gas and food prices. it can get much, much worse.

Mar 11, 2012 9:06pm EDT  --  Report as abuse
trajan2448 wrote:
Rampant pension scamming, Democratic vote buying, and union corruption have been key factors in bring many local, state, and even the Federal Government to insolvency. If these issues are not rectified, the end game will be currency collapse and hyper stagflation. We are already seeing the beginnings of this in 5 dollar gas and food prices. it can get much, much worse.

Mar 11, 2012 9:06pm EDT  --  Report as abuse
MadCharles wrote:
I see Harrisburg is also unionized. You got what you voted for…

Mar 11, 2012 11:32pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

How to get out of debt

Financial adviser Eric Brotman offers strategies for cutting debt from student loans and elder care -- and how to avoid money woes in the first place.  Video