Pennsylvania's Capital City Is Broke ... Lots of Others Are Approaching or Already In Bankruptcy Too

Harrisburg, Pennsylvania is the state's capital. It's also broke.

Bottom Falls Out of Debt-Ridden City summarizes the dismal situation for the city and its citizens:

Closed out of the municipal-debt market, Harrisburg, Pa. is struggling to pay for upgrades to aging pipes that contributed to sinkholes.

"With midnight approaching on New Year's Eve, Sherri Lewis and her two children knelt to pray for a better year ahead.

A few minutes later, she heard a rumbling that sounded like fireworks. The ground outside her apartment had opened up, showing a municipal disaster that shows how far this city's finances have sunk.

A sinkhole, measuring about 50 feet long and eight feet deep, had swallowed Ms. Lewis's street, damaging water and gas pipes and forcing more than a dozen residents to evacuate one of the city's poorest neighborhoods. "I thought the world was ending,'' says Ms. Lewis, 42 years old.

Harrisburg officials have identified at least 40 other sinkholes around the 50,000-person city. The combination of particularly sandy soil and leaky pipes under Harrisburg's streets make it susceptible to sinkholes, city officials say. But Harrisburg has a bigger problem: The Pennsylvania capital can't afford to replace many of the aging pipes, some of which date back to the 19th century.

Harrisburg is in default on its debt and has been effectively shut out of the municipal-debt market, which cities and states use to finance everything from building schools to paving roads.

Harrisburg's misery is familiar to many U.S. cities trying to climb out of debt used to finance convention centers, hotels and employee pensions. Some governments are cut off now from funding for necessities such as repairing infrastructure. . . .

Harrisburg's latest problems started when city officials agreed to guarantee a large portion of the $350 million in debt used to retrofit a state-of-the-art trash incinerator. The project generated millions in fees for Wall Street bankers and lawyers, while leaving taxpayers with a mortgage they can't afford.

Amid this borrowing spree, city and state officials say, Harrisburg neglected to invest enough in its aging water pipes.

Today, Harrisburg is struggling to upgrade other critical infrastructure, including a sewage treatment facility that sometimes dumps untreated wastewater into the Susquehanna river.

"We can't do anything right now because no one will lend to us,'' said William Cluck, chairman of the Harrisburg Authority, the city agency overseeing the water-treatment facility.

Harrisburg has weathered frequent financial turmoil since the incinerator debt deals, but the city has hit a particularly rough patch at the start of 2013. . . .

Throughout the fall, representatives for the city went door-to-door looking for a lender. But RBS Citizens Financial Group, M&T Bank Corp. and PNC Financial Services Group all turned them down, said people familiar with the discussions. Some of the bankers were worried Harrisburg might seek bankruptcy protection, one of the people said. PNC and Citizens declined to comment on the talks. M&T had no immediate comment.

A state court has appointed a receiver to oversee Harrisburg's finances. The receiver, William Lynch, says he would like to avoid bankruptcy.

The receiver's financial team prepared "Plan D," which essentially involved the city borrowing the money from itself. Harrisburg obtained a $4 million line of credit from fee revenue collected by the sewer and trash departments, the very funding source that is supposed to be used to upgrade underground pipes.

The city had no choice, said Steven Goldfield, a senior counselor at Public Resources Advisory Group and a financial adviser to the receiver. "When you have to patch up deficits year after year like this, and defer capital expenditures, that's when bad stuff happens, like sinkholes," Mr. Goldfield said. . . .

Since the New Year, Mr. Goldfield and other advisers to the receiver have been negotiating almost daily with the city's debtholders and public-employee unions, seeking concessions.

Not every creditor will budge. Rosemawr Management LLC is charging the parking authority as much as 10.75% interest on about $10.5 million in bonds. The receiver's team has asked the New York investment firm to forgive a $3 million penalty the authority has to pay if it pays back the bonds early. Rosemawr has refused, according to people familiar with the matter.

Work crews are replacing pipes under North Fourth Street, but many of the city's other sinkholes have temporary patches. It would cost almost half of the city's $50 million budget to permanently fix them, a city engineer estimates. The city is seeking state grants to pay for some of the work."

Summing Up

The capital city of Harrisburg is broke.

Thus, it is seeking grants from the state of Pennsylvania.

But the state isn't exactly a pillar of financial strength, so a grant from the state to its capital city would perhaps trigger the need for a federal grant to the state.

But as we know, Washington isn't chock full of money to grant to the individual states, so maybe China will loan us some more money. Or will they?

It's a house of cards. A shell game.

Get the picture? If so, good. The same money can't be spent twice nor can the same money be loaned to multiple borrowers.

Let's hope that lots more of our fellow citizens start to see and acknowledge this simple reality as well.

Then maybe the local, state and national politicians will one and all wake up. It's past time to do so.

The unfunded liabilities of our cities and school districts for public sector pensions are merely the tip of the nation's financial iceberg, albeit a really big 'tip' at that.

Thanks. Bob.