It has recently come out that Harrisburg may not have the cash on hand to make general obligation bond payments due in the middle of this month.
The city owes $3.3 million. Though the city has stopped making payments on debt related to its infamous incinerator project, the State of Pennsylvania has stepped in and ensured that payments were made on the GO debt. But now that cash has run out as well.
The State may intercede again, of course. The State has further tried to force better behavior by city management by removing the option of bankruptcy through new legislation two months ago. However, the city recently rejected a rehabilitation plan under Pennsylvania’s Act 47, the first time a municipality has done so. If I were a betting man, I’d guess that the most likely situation is a takeover of the city government by the State and a full payment to bondholders. However, there is the real possibility of a default without a bankruptcy filing.
How the non-bankruptcy default of a medium-sized-city plays out will be meaningful in the many states that do not allow municipal bankruptcies. A result that appears advantageous to the city may spark a series of changes in legislation around the country as States look to follow Rhode Island and make municipal bonds appear as safe as possible. We probably won’t find out if this happens soon, but as State budgets continue to be under pressure, expect more public discussions of how States should intervene in municipal financial crises.
