If the citizens of Harrisburg are not taking note of the financial crisis in their city, the national financial markets are.
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In the 'C Section' on September 1 of the Wall Street Journal, the article noted that Harrisburg was skipping a $3.29 milion municipal bond payment due in two weeks. A similiar article appeared in Bloomburg/Business Week as well. While the bond payment that is expected to be missed is expected to be covered by the bond insurer, the Wall Street Journal noted that this might feed worries in the $2.8 trillion municipal bond market.
In and of itself, a payment of $3.28 million and even to total debt of $288 million on the incinerator that is fueling this on-going problem. It is a miniscule part of the total market. Could this cause bond rating agencies and the overall market that funds such mundate activities as school construction, municipal sewer authorities and general obligations? Could this effect other municipalities end up paying more? Is this a trend?
The capital gains on municipal bonds are usually tax free and normally very low risk. They do not pay huge dividends, but have historically been as stable as sunrises and sunsets. As reported by the Journal, only $886 millin of general obligaton bonds were in default and of this only $32 million was not actually paid. This was according to Matt Fabian of Municipal Market Advisors in Westport, Connecticut.
To date, the payments on the incinerator have been covered by reserves from Dauphin County, which has guaranteed almost half of the $288 million debt obligation and by its bond insurer, Assurance Guarranty, Ltd. They have guaranteed $196 million of the debt. Another company, Ambac Assurance has insured general bonds with a facce value of $51.5 million that mature in 2022.
Meanwihle, Harrisburg Mayor Linda Thompson has engaged Chicago based consulting firm, Scott Baldice Strategies. The consultancy, which has been officially engaged has confirmed that the City's finances are in tatters, but how much and what to do about it is unclear.
While the plight in Harrisburg is unique, as it involves a separate entity, the municipal incinerator, this does shed light on the overall stress on the municipal marketplace and the funding apparatus, bonds, that help float this market. Only time will tell how much the overall market reacts and possibly punishes more innocent municipalities.