Yesterday, Pennsylvania Gov. Ed Rendell threw the debt-laden capital city of Harrisburg a lifeline — but the lifeline is made of razor wire.
To help Harrisburg avoid a default on a general-obligation debt payment this week, Rendell will advance the city aid payments due from the state later in the year. The state will further lend and grant Harrisburg money to hire an independent adviser to “craft a long-term fiscal plan,” according to The Bond Buyer.
In justifying his actions, Rendell said they don’t constitute a bailout, and that an acute situation makes them necessary.
“A default [by Harrisburg] would have serious ramifications,” the governor said (as quoted in the same article). “It would have serious ramifications … all over the length and breadth” of Pennsylvania, raising interest rates”for other municipalities and school districts “or even mak[ing] it difficult, if not impossible, for other cities to sell their bonds.”
Problem is, Rendell’s actions will have serious ramifications, too:
First, for Harrisburg itself. Rendell seems to think that the solution to too much debt is more debt, this time owed to the state. By contrast, any “long-term fiscal plan” for Harrisburg should at least consider debt restructuring, including losses of principal for bondholders.
Even a cursory look at the city’s budget and its previous emergency financial plans makes this clear. Against a $65 million operating budget this year, Harrisburg is supposed to pay $68.7 million in annual debt-service costs.
Sometimes, you’ve borrowed so much on such a bad schedule that you just can’t repay it — and borrowing even more money won’t help and instead will hurt.
Indeed, Pennsylvania wants Harrisburg to repay some of the money the state is advancing it by selling off assets. This comes on the heels of an earlier emergency adviser’s advice to do the same. Of course, potential asset purchasers will know that the city is desperate, and bid accordingly. If you can’t pay the mortage on your McMansion, you probably shouldn’t sell the car that gets you to work.
The independent adviser’s other ideas, proffered earlier this year, included “deferring planned capital expenses” — also not a great way to maintain or improve the tax base.
Second, for the health of municipal-bond markets. Rendell is only “helping” Harrisburg to pay its nominal general-obligation debt — not the debt that the city owes on a poorly planned and executed incinerator project.
But this distinction is political and arbitrary, because Harrisburg pledged its general-obligation credit to the incinerator debt.
General-obligation bondholders are not victims here. Sophisticated general-obligation bond underwriters and insurers should have long ago questioned why the city had weakened its general-obligation credit in making a promise on the incinerator debt that it would not be able to keep. If advisers and investors had done so, perhaps they would have prevented Harrisburg from incurring such an onerous debt burden in the first place.
Allowing issuers and their rescuers to pick and choose which general-obligation pledges they will honor certainly doesn’t strengthen the municipal-bond market.
Third, for other cities, towns, school districts, and states. As for the idea that a Harrisburg default would raise borrowing costs for other municipal borrowers: maybe, and good.
Many municipalities — including municipalities in New York — can borrow too easily largely because bondholders think in the back of their minds that if something bad happens, the state will bail them out. In turn, state bondholders figure that if something bad happens to them, the feds will step in.
Enabling states, cities, and towns to borrow too much, too cheaply doesn’t help borrowers — or taxpayers — in the long run.