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Harrisburg To Get State Help On Debt

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HARRISBURG, Pa. (AP) — Gov. Ed Rendell said Sunday that the state would speed $4.5 million to help this city avoid a rare default on a general obligation bond and help it right its troubled finances.

The governor insisted that the aid is not a bailout, and consists largely of pension contributions and other payments due to Harrisburg, Pennsylvania’s capital.

Mr. Rendell warned that if the city leaders did not begin working together, its problems could drag it into bankruptcy.

Harrisburg recently rattled the nation’s municipal bond market when it announced it would skip a $3.3 million bond payment due Wednesday.

Mr. Rendell said he began assembling the aid package after a call Thursday from Harrisburg’s mayor, Linda D. Thompson, and said a Harrisburg default could damage the ability of all Pennsylvania municipalities to borrow money.

Looks like the US is slowly slipping into the abyss of debt.

Luckily it's all contained otherwise I'd be starting to get worried. Believe the media it's all fixed and there's nothing to worry about.

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Interesting, because US states cannot legally default on debt, so poor quality (Harrisburg) debt is being bailed out from default by the raising of NEW debt by the state (Pennsylvania) - even if it is by the backdoor.

This makes a joke of the risk/reward theory; again another piece of evidence proving that risk is being massively mis-priced.

Moral hazard has been thrown away to keep the system alive (we knew that, right!) The market is utterly dysfunctional.

chris c-t,

I thought that there was no bankruptcy procedure for a state. I dont know what you mean about not being able to legally default. If you cant pay, you just cant pay, you dont need a law to say that you cant.

I find it bizarre that they are lending more money to Harrisburg, who clearly cannot pay what they owe, in order that they can continue to borrow money. You couldnt make this stuff up.

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In a move that is sure to backfire, Last-Minute State Aid Helps Harrisburg, Pennsylvania, Make Debt Payment

The embattled government of Harrisburg, Pennsylvania's capital, will avoid default on a $3.3 million bond payment this week because of $4.4 million in last-minute state aid. Of the last-minute state aid, half a million dollars are considered a loan and must be repaid.

With Harrisburg's city council scheduled to meet Tuesday to explore filing for bankruptcy, Gov. Ed Rendell announced Sunday that he was speeding up state funds and grants to the financially-strapped capital.

"I see this as Wall Street versus Main Street," said city councilman Brad Koplinski. "The bondholders are not willing to budge and they expect us to completely take care of this on the backs of our city's taxpayers."

Newly elected Mayor Linda Thompson, who has feuded with the city council she once headed, opposes a municipal bankruptcy filing. "It's the very last option after everything else has failed," she said.

Harrisburg already has skipped millions of dollars in payments on bonds it backed for the costly renovation of a trash incinerator, which dates back to the 1970s. The incinerator is up and running but doesn't generate enough revenue to cover debt that has reached $288 million. This year, the city owes incinerator debt payments of $68 million, an amount that surpasses its annual budget.

In Alabama's most populous county, Jefferson, the government is saddled with about $5 billion in debt stemming from the overhaul of its sewer system in the mid-1990s. Merit increases for county workers have been frozen, building and road repairs halted. A brand new jail is vacant because there are no funds to hire workers or pay utilities. As in Harrisburg, officials are exploring bankruptcy.

In the impoverished town of Central Falls, Rhode Island, near Providence, officials recently agreed for a receiver to take control of local finances and consider the rewriting of contracts and cutting of pension benefits. A city of 19,000, Central Falls has a budget of about $18 million and projects a $3 million deficit this year and a $5 million gap in fiscal 2011. The city also has $4 million in a pension fund that has $35 million in unfunded liabilities.

"If we are the first domino to fall, I know there are cities that are watching us and the bond market is watching, because if they make a deal with us, they'll have to make a deal with every other municipality that's having trouble right now," Koplinski said.

In addition to the incinerator debt, Harrisburg is coping with a $9 million deficit in the current budget. The city is considering layoffs, closing and leasing or selling a firehouse, and the selling of two fire trucks, among other measures. It has assigned volunteers to man police stations in order to have all officers on the streets.

Mayor Linda Thompson is a fool as is Governor Ed Rendell.

Harrisburg is bankrupt. Period. Wasting 10's of millions of dollars will not change that simple fact. Harrisburg would be much further ahead had it skipped bond payments years ago. Now that is money down the drain.

Harrisburg cannot afford a $500,000 loan from the state to pay bills it should not pay. It has no means of making the next bond payment. While cutting city services may be a good thing to do, cutting city services to pay bondholders, when city residents get nothing out of it but higher taxes is point blank stupid.

There is no deal to work out with the bondholders other than default and bankruptcy court.

Governor Ed Rendell is acting in the interests of the bondholders not in the interests of Harrisburg. The move is so foolish I have to wonder what the governor's connection to the bondholders is. The city council should reject this offer.

Mish's view on this.

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They will have to go for QE2, or QE3, or...

There's about another $1.6T in MBS that would probably fix the situation if they were bought up by the Fed. I just can't seem them doing it. They've doubled the balance sheet and the monetary base... I'm not so sure that any more than this was in their plans.

Edited by AvidFan
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  • 3 weeks later...


Pennsylvania’s capital city of Harrisburg, faced with $43 million in bond payments due before year-end, rejected a state-funded financial adviser and plans to seek advice on entering bankruptcy court protection.

The City Council’s 5-2 vote last night to hire bankruptcy advisers resisted a personal plea from first-year Mayor Linda Thompson. Harrisburg needed state aid two weeks earlier to avoid becoming the second-largest borrower to default on a general- obligation bond this year.

“The whole world is watching Harrisburg,” Thompson said in a 40-minute speech to the council, where she sat until becoming mayor in January. “Our bondholders are looking to make us the poster child of the world to municipalities in financial difficulties. And they don’t plan on losing.”

Harrisburg, with 47,000 residents, has missed about $8 million in debt-service payments this year on more than $200 million of bonds issued in connection with a trash-to-energy incinerator. The seat of the sixth most-populous U.S. state’s government faces lawsuits over the debts from its home county of Dauphin and Assured Guaranty Municipal Corp., a bond insurer.

Councilor Brad Koplinski, who proposed considering bankruptcy and voted in favor of hiring advisers, said it would take a “devastating tax increase” to cover the debts.

Bankruptcy Not Fatal

“I’m not going to have that $210 million payment on the backs of taxpayers,” he said in an interview after the vote. “Bankruptcy, I don’t think, would kill our city. I think the tax increases would kill our city.”

Council President Gloria Martin-Roberts said she feared that bankruptcy would prompt retaliation from Hamilton, Bermuda- based Assured Guaranty and holders of the debt.

“I’m very concerned that bondholders are going to get sick and tired of what they think is a shell game, and lower the boom on us,” said Martin-Roberts, who voted against the proposal to hire bankruptcy advisers.

The end game is looming???

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Harrisburg, the capital of Pennsylvania, dodged financial disaster last month by getting money from the state to make a payment to its bondholders.

It did so even though the state warned that the money had to be used for city workers’ pensions.

Now Harrisburg is calling on the state again. On Friday, the city said it could not meet its next payroll without money from the state’s distressed cities program.

Across the country, a growing number of towns, cities and other local governments are seeking refuge in similar havens that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities and smaller communities in its distressed-cities program if Harrisburg receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. This is on top of troubled housing, power and hospital authorities.

The increasingly common pleas for state assistance — after two relatively quiet decades — reflect the yawning local budget deficits that have appeared in the last two years.

As tax revenue has fallen, the cost of providing labor-intensive government services, like teaching and policing, has proved hard to reduce.

The programs, which vary by state, generally allow troubled communities to tap emergency credit lines while restructuring their finances with some form of state oversight.

Many places may indeed bridge shortfalls and make necessary changes in services.

But some public finance experts worry that the states, mired in their own financial problems, will not force communities to attack their problems head-on and solve them. If states let towns keep borrowing, without acknowledging the magnitude of the towns’ existing debts — like the pensions they owe retired public workers — they might never solve their problems and just keep drawing on the states. They could end up like miniature versions of Fannie Mae and Freddie Mac, stuck in conservatorships under government oversight with no clear way out.

“It’s like throwing you a life preserver but never pulling you into the boat,” said Daniel Miller, a certified public accountant and the city controller in Harrisburg. He says he believes that the city might be better off in federal bankruptcy court.

Worse yet, the municipal requests for state assistance could spell problems for already beleaguered state finances. One head of a municipal bond trading desk at a major Wall Street firm said he worried more about problems bubbling up from the local level than he did about the possibility of a sudden state collapse.

If the downturn is prolonged and deep, and local governments fail to act aggressively, he said, dozens of small communities could be pushed into the arms of a state, weighing it down so much that it, too, would need a bailout. Something like that happened in Arkansas during the Great Depression, causing the only default by a state on general-obligation bonds in United States history.

Harrisburg’s problems have been building for years. The mayor wants assistance from the state, while a majority of the City Council wants to explore federal bankruptcy. Because of the disagreement, the city has not raised taxes enough or cut services enough to address its budget gap. Meanwhile, the city is being sued for failing to honor its guarantee of bonds issued by an incinerator authority.

Using the pension money to pay bondholders last month has increased the city’s total debt burden, by the state’s calculation. The city’s audited financial statements are a year late, and the most recent one gives four-year-old pension data, showing a surplus before the recession and the financial crisis took its toll.

How long will they keep bailing Harrisburg out for? They certainly haven't taken long in requiring another bailout.

Still at least the stock markets are recovering....

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