This article originally appeared in Business Insider
October 10, 2011
By David Johnson, ACM Partners
Harrisburg, PA has filed for bankruptcy. The beleaguered city has been in financial distress for some time now. A financial travesty of an incinerator project burdened Harrisburg with a crushing debt load (currently $300 million), and advisors, city officials, the Pennsylvania legislature and even Pennsylvania’s governor have all been involved in crafting a solution.
Sadly for Harrisburg, it has been attempting to struggle out of its financial troubles outside of bankruptcy. In my opinion the next few years will see a severe weakening of the taboo against municipal bankruptcies, as local government officials face the reality that a chapter 9 bankruptcy filing is in some cases the only way to right-size burdensome liabilities.
In a development that would shake municipal investors if they were paying attention, the city council appears to have chosen to pursue bankruptcy as the less onerous option (following the city council’s rejection of a rescue proposal put forward by mayor Linda Thompson, the threat of a takeover by the state has been much discussed). City Controller Dan Miller approved of the 4-3 city council decision, noting of previously rejected rescue plans: “They wanted to sell all of our assets and make Harrisburg destitute for decades to come”.
City Councilman Brad Koplinski has suggested that $100 million in concessions will be required of bond insurer Assured Guarantee Municipal Corp (support for my contention that the terms of the Jefferson County restructuring have essentially set a floor for all municipal debt negotiations). Bondholders take note: financially strained local governments are reaching the point of needing to choose between making good on their financial obligations and continuing to provide services. When the decision becomes that stark, bondholders will lose every time. There is no action by state legislatures that will induce voters to prefer the uninterrupted servicing of bondholder debt over the provision of police, fire and other local government services.
Those who look to the ability of governments to levy taxes understate the political environment. Just as local governments have the ability to tax, taxpayers have the ability to vote. This situation is not so much black and white as it is a shade of grey.