It Begins: Cash Strapped Cities Begin To Crumble John Carney | Feb. 4, 2010, 10:25 AM | 3,493 | 30 PrintTags: Financial Services, Debt Our nascent economic recovery may come too late to save many American cities from bankruptcy, which in turn will deal heavy losses to municipal bond investors and the companies that insure munis.
The latest fright comes from Harrisburg, the capital of Pennsylvania. The city is considering seeking bankruptcy protection—as well as tax hikes and asset sales—to address $68 million in debt service payments due this year.
Harrisburg does not stand a chance at making its payments. The $68 million in debt service payments is four times what the city expects to raise through property taxes and $4 million more than the city’s entire operating budget.
Ironically, the debt burden that is trashing Harrisburg was incurred to build a waste incinerator.
Bloomberg reports:
Carol Cocheres, bond counsel for the incinerator’s operator, the Harrisburg Authority, told the city council at a Dec. 14 hearing that the city is already in danger of legal action for payments that were missed last year on $288 million in debt it has guaranteed with its full faith and credit.
“There’s never been a default like this in Pennsylvania municipal history,” she said. “This is all new territory.”
Cocheres told council members that by skipping payments that are made on behalf of the authority, the city risks being sued and ordered to raise taxes or fees by Assured Guaranty Municipal Corp., formerly FSA Insurance, which has insured the bonds, or by the deal’s trustee, TD Bank.
Not that long ago, journalists and some regulators were arguing that municipal bond insurance was something of a scam because munis had such a low historical default rate. That now looks like the same kind of turning a blind eye to risk that led to the housing-led financial crisis.
