By Michael A. Fletcher
Washington Post Staff Writer
Wednesday, September 1, 2010; 7:22 PM
The city of Harrisburg has said that it will not make a $3.3 million municipal bond payment due in two weeks, a decision that could move the Pennsylvania capital closer to bankruptcy.
The city's decision, announced in a letter dated Monday, is highly unusual because it saves a relatively small sum of money while compromising Harrisburg's ability to restructure its overwhelming debt and raise money in the future.
"This shows that the city is failing to function," said Matt Fabian, managing director of Municipal Market Advisors, a Massachusetts-based research firm. "Now it seems that a municipal bankruptcy filing is almost a foregone conclusion."
The number of fiscally troubled municipalities, such as Harrisburg, is small but increasing. But Fabian said the pain and stigma of bankruptcy are simply too great for most local governments.
Harrisburg Mayor Linda D. Thompson has adamantly opposed declaring bankruptcy, while the move has been been advocated by the city controller and a growing bloc on the City Council.
"Her view on bankruptcy hasn't changed," said Chuck Ardo, the mayor's spokesman. "She still believes it should be the last option rather than the first. There are some members of council and city comptroller who view it as a silver bullet. But we think it is little more than a can of worms."
However, Harrisburg may be running out of options. Its missed bond payment is part of a $9 million budget deficit that city officials have been unable to close. The mayor and the City Council have been at loggerheads over how to handle the fiscal distress, and the deficit-ridden state of Pennsylvania has been reluctant to step in.
The budget deficit comes on top of $288 million in debt that the city faces in connection with an incinerator project that has become an expensive debacle. Officials said Harrisburg has already missed several payments on that debt and is unlikely to make a $68 million payment due later this year.
"Clearly, the city is having a challenge meeting its own obligations," Ardo said. "So, I think that the city's ability to fill the [incinerator's] debt hole are between nil and none."
The city's bond insurance company is expected to cover its upcoming $3.3 million bond payment. But some analysts say relying on that backstop could add to the mounting pressure on firms that provide insurance for the $2.8 trillion municipal bond market.
Traditionally, municipal bonds have been seen as safe for investors because municipalities, which can raise taxes, almost never default.
But with local governments increasingly under fiscal stress since tax revenues declined during the recession - which came after a borrowing binge - there is some concern that more hard-pressed governments will choose to skip payments.