Harrisburg, Pa., other cities overwhelmed by economic downturn and debt

Tuesday, June 22, 2010
By Paul Martin

By Michael A. Fletcher
Washington Post.com

HARRISBURG, PA. — This city has a $68 million bill coming due before year’s end, an impossible sum that is larger than its annual budget. It’s a predicament caused by extravagant borrowing and spending, and now there are only unpleasant fixes: steep tax increases, severe layoffs and crippling service cuts, even bankruptcy.

It’s a story that could be repeated across the country as cities and towns deal with the lingering consequences of the economic downturn and mounting debt.

The obligations of state and local governments have doubled in the past decade, to $2.4 trillion, according to a recent Federal Reserve report, a figure that excludes more than $1 trillion in unfunded pension and retiree health-care liabilities.

Generally, economists are not alarmed by increasing government debt during recessions because it stokes much-needed economic activity. But this time, concerns are deepening that the debt burden is too large for some municipalities to handle, forcing them into draconian service cuts or large tax increases, both of which would be a drag on the sputtering recovery. Beyond Harrisburg, other cities might have to default on their loans because most states are too strapped to bail them out.

Harrisburg’s crisis has been precipitated by a malfunctioning municipal incinerator, whose ill-fated expansion was promoted as a potential moneymaker. But after seven years of cost overruns, construction delays, design problems, financings, refinancings and more refinancings, the city is on the hook. The $68 million bill is part of $288 million in outstanding debt related to the project.

The debacle is pushing the 150-year-old state capital toward default. The fiscal crisis has shaken the city, which over the past decade has spruced up its riverfront downtown and created tourist attractions in large part through low-cost financing afforded by municipal bond sales. In one notorious example, former mayor Stephen R. Reed spent nearly $8 million from the public authority that owns the incinerator to buy wagon wheels, rifles and other memorabilia for a Wild West museum that never opened. And like a homeowner who binged on cheap financing, this city is underwater financially.

“The truth is, we are already insolvent,” City Controller Dan Miller said.

Harrisburg is among an increasing number of municipalities showing signs of extreme fiscal stress. Squeezed by rising unemployment, plummeting tax revenue and growing employee costs, Vallejo, Calif., filed for bankruptcy two years ago. Jefferson County, Alabama’s largest county, teeters on the edge of bankruptcy after a complex interest rate swap on a $3 billion sewer project went awry.

Last month, Central Falls, R.I., an impoverished city not far from Providence, put its finances in the hands of a receiver, who might have to rewrite contracts, cut pensions and restructure debt. Meanwhile, the nation’s leading debt-rating agencies have relegated seven cities — including Detroit, Harvey, Ill., and Woonsocket, R.I. — to junk bond status, vastly increasing their borrowing costs.

A ‘terrible problem’

Citing the growing amount of money owed by local governments, noted investor Warren E. Buffett (a director of The Washington Post Co.) this month told a federal commission examining the roots of the financial crisis that coming years will bring a “terrible problem” for municipal debt.

“Clearly, there are budget issues, and they are probably worse now than they were six months ago. And they will get worse,” said Matt Fabian, managing director of Municipal Market Advisors, a Massachusetts firm tracking the municipal bond market. “To this point, cities and states have gone after other stakeholders for relief — employees, taxpayers, contractors — and they have not moved to take assets away from investors.”

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