Cumberland Advisors: The Harrisburg Mess – The First Inning
Posted By thestatedtruth.com on September 3, 2010
Very interesting,  but also a worst nightmare for tax payers……….Under Pennsylvania law, Ambac Assurance (which insures some of Harrisburg’s debt) can take Harrisburg to court to seek an order to raise property taxes to pay debt. This is the nature of “full faith and credit†of general-obligation bonds. So the tax payers are stuck for the dumb ass business decisions made by a few local  government (dopes) people! Say it isn’t so………….
The Harrisburg Mess – The First Inning
September 3, 2010
John Mousseau is a portfolio manager and heads the tax-free Muni section of Cumberland. He is a member of the Management Committee of Cumberland Advisors.Â
Harrisburg, Pennsylvania announced this week that it would skip $3.3 million in municipal bond payments due this month on the city’s debt.
The Harrisburg problem has been known for some time in the municipal bond market. It was caused by the city saddling itself with over $280 million of debt for a large trash incinerator that it did not need.
The city has said that it is trying to construct a plan to make payments “in the near future.â€
Ambac Assurance, a bond insurer whose own ratings have been downgraded in the past two years due to woes related to its insuring of mortgage-backed bonds, insures some of Harrisburg’s debt. AMBAC has said it will make coupon interest payments when due.
We will write more on this as things sort themselves out after the Labor Day holiday, but this is what we know now:
– Harrisburg’s problems have been mounting for some time. They have already missed payments on bonds related specifically to the incinerator.  This incinerator was ill-conceived and not needed. Part of that incinerator debt is also guaranteed by Dauphin County, where Harrisburg is located.
– Under Pennsylvania law, Ambac Assurance can take Harrisburg to court to seek an order to raise property taxes to pay debt. This is the nature of “full faith and credit†of general-obligation bonds.
– Seeking Chapter 9 bankruptcy is extremely complicated, legally, and it is costly. It points to woes that go beyond the problems with just the incinerator, and it certainly limits solutions to the incinerator debt problems.
– The Commonwealth of Pennsylvania, whose capital is Harrisburg, has been extremely slow in trying to foster a solution.
As we have said before, Harrisburg and its incinerator are a very small part of the municipal bond market. It is unrelated to the Kentucky Turnpike Authority, the State of Oregon, the Minnesota Housing Authority, or any of the other state and local governmental issuers of municipal bonds, almost all of which are functioning normally. However, the slowness with which the city, county, and state have addressed the Harrisburg incinerator problem is certainly troublesome on the Pennsylvania level.
We will keep readers apprised of developments.
John Musseau, CFA, Managing Director and Portfolio Manager
Please feel free to forward this Commentary (with proper attribution) to others who may be interested.
Copyright 2010, Cumberland Advisors. All rights reserved.
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