Pennsylvania Gov. Ed Rendell announced that the state will provide $4.4 million in expedited state funds and grants to enable cash-strapped Harrisburg to avert default on $3.3 million of general obligation bond payments due Sept. 15.
The state will accelerate $2.6 million in funds earmarked for pension assistance and $987,000 for fire protection.
Rendell wanted to make it clear that this should not be considered a bailout, but an effort to provide the state capital with “breathing space.” He added that the state was simply “front-loading” payments that were already designated for the city.
Initially, Harrisburg reported that it would not make the Sept. 15 payment, and state officials indicated that they were not inclined to backstop the city.
Long-term plan needed
Although welcome, it should be noted that this is only a temporary solution, and a long-term plan needs to be established to ensure that interest payments will continue to be made on a timely basis. The next payment is due in March 2011.
Mayor Linda Thompson said she knows the community has been “hollering for a plan,” and has pledged to follow through on the available options.
A blow to the doomsayers
The original announcement that Harrisburg would miss the September payment was met, almost gleefully, with dire predictions by self-proclaimed seers suggesting that this was the tip of the iceberg, and financial obligations of debt-laden municipalities would be tumbling like dominoes. We continue to disagree.
Echoing our thoughts, the Bond Buyer reported that Dominic Frederico, Chief Executive Officer of Assured Guaranty, the last remaining “AAA” bond insurer, said the bond insurance industry’s alleged problems with existing portfolios are overblown and unsupported by recent data.
As we have, he took exception to “gloom and doomers” who predict a wave of municipal defaults. In particular, he chastised Warren Buffett for warning of “a terrible problem” ahead for municipal and state finances.
Reality check
“We keep hearing about this impending crisis, but there is no evidence if you break down the numbers,” Frederico said.
Statistics reflect there have been 60 defaults in public finance this year through July 30, totaling $2 billion. That is less than 0.1% of outstanding municipal bonds. Of the $2 billion, $1.8 billion were defaults of bonds that were unrated or rated below investment grade.
We applaud Mr. Frederico for suggesting that investors look beyond the “headline hysteria” of the financial media that attracts viewers and sells newspapers.
It has always been our contention that the reason defaults on general obligation debt have been historically rare is the long-term consequences of this type of event. The need for a city to access markets for future funding cannot be overstated.
Reiterating this message, Gov. Rendell emphasized that a Harrisburg default would have serious ramifications for municipalities “all over the length and breadth of this Commonwealth.”