Feb. 10 (Bloomberg) -- Pennsylvania’s capital of Harrisburg was downgraded to five levels below investment grade by Moody’s Investors Service, as the city considers bankruptcy in the face of $68 million in debt payments this year.
Moody’s lowered its grade on Harrisburg’s general obligation bonds to B2 yesterday, from Ba2, and kept a negative outlook on the city of 47,000, according to John Cline, a Moody’s vice president for ratings communications in New York. He declined to discuss reasons for the move in an e-mail today.
The cut is Moody’s second for Harrisburg since October, when the assessment was reduced from investment grade to two levels below. Issuers or bonds rated B “demonstrate weak creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues,” according to an explanation on Moody’s Web site.
Harrisburg’s city council and controller, Dan Miller, have said Chapter 9 bankruptcy protection is one option under consideration as the city contends with debt payments this year that exceed the size of its general fund budget for services such as police and parks.
“I don’t know what may happen,” Miller said in a telephone interview yesterday. He said the city may not have the money to meet $2 million in debt service payments March 1 that it has guaranteed on behalf of the Harrisburg Authority, operators of a trash-to-energy waste incinerator.
2010 Budget
City Council members are considering a 2010 budget that would attempt to raise $69 million for bond payments on the incinerator this year by selling assets such as an historic downtown market, an island in the Susquehanna River that includes the city’s minor-league baseball stadium, and the city’s parking, sewer and water systems.
Lower bond ratings often lead to higher borrowing costs as investors seek more yield to compensate for greater risk.
A $24.3 million 30-year Harrisburg Authority bond maturing in 2034, which is one of the bonds Harrisburg is scheduled to make a payment on March 1, was sold to yield about 5.7 percent Feb. 8, the most recent customer sale listed on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access site. The average 25-year municipal revenue bond yielded 4.96 percent Feb. 4, according to the Bond Buyer 25-year index.
All Options
Council members, who rejected the asset liquidation plan last year, will consider bankruptcy along with tax increases, asset sales and enrollment in a state monitoring program called Act 47, according to Susan Brown-Wilson, chairwoman of the Budget and Finance Committee. The council is scheduled to consider final adoption of their 2010 budget tomorrow.
The $68 million in debt payments Harrisburg faces this year is four times what the city expects to raise through property taxes, and $4 million more than the city’s entire proposed operating budget.
Harrisburg skipped more than $3.5 million in debt-service and interest-rate swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located. The county has sued the city to recover its payments.
Harrisburg faces a $164 million deficit over the next five years, mostly because of debt created by the incinerator, according to Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances as part of a state review.
--Editors: Mark Tannenbaum, Pete Young, Stacie Servetah
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