The big muni finance news this week was the bankruptcy declaration by Harrisburg, PA, which has long been at the vanguard of cities in financial distress.
The fact that such a well-known big city filed for Chapter 9 has of course brought back all of the maybe Meredith Whitney was right chatter.
As a refresher, 2011 has not been a bad year at all for muni finance. Below is the iShares S&P National Municipal Bond Fund (MUB), which took a dip over the 2010-2011 winter, but has overall been a big gainer this year.
So is Harrisburg a harbinger of doom?
To answer that, you must go read this post by Bond Girl at Self-Evident, examining the roots of Harrisburg’s woes.
Essentially it boils down to a trash incinerator that the city built in the 1970s, and a series of mis-steps made by the city government to keep it going past its lifespan, resulting in hundreds of millions of dollars ultimately wasted. The whole thing has been a gigantic money pit, made worse by the fact that the city tried to cut corners to save money (by going with cheapo contractor), ultimately of course costing it even more money.
And even once the plant was rebuilt…
[The contractor] Barlow “finished” the project by April 2006, four months late. After the plant opened, the city discovered that there were major problems with the plant’s ash-handling systems and that the third boiler was not entirely finished. Without the third boiler, the plant could not generate enough revenue to make the required debt service payments and offset operating expenses. (As far as I can tell, it would cost the city another $50 million for the plant to be fully functional.) The plant’s deficits became a burden to the city, which cut staff, increased property taxes, and increased waste bills. Even still, the city was unable to make its promised payments on the bonds and the county and Assured have had to make payments instead. (The city has avoided defaulting on its general obligation bonds, however, due to the up-front payment it received on a parking lease.) Last I read, the city had paid for a forensic audit of the authority’s finances in order to have a better understanding of how the project’s costs escalated so rapidly. They have also sued Barlow. Both of these actions are moot, of course, because Barlow filed for bankruptcy.
Muni crises like this are idiosyncratic, and not reflective of a broader wave of trouble on the horizon.