In Harrisburg, the City Council voted down a proposal on Feb. 13 to sell assets, including an island in the Susquehanna River, to cover debt services on bonds issued to build the incinerator, some of which are insured by Assured Guaranty’s Financial Security Assurance unit.Continue Reading
The city guaranteed some bond payments, which total $68 million in 2010, or $4 million more than Harrisburg’s entire proposed operating budget. Officials have said they may not meet the obligation.
“There has never been a default like this in Pennsylvania municipal finance history,” Carol Cocheres, bond counsel for the Harrisburg Authority, told a City Council meeting Dec. 14. “This is all new territory.”
Harrisburg was downgraded to five levels below investment grade by Moody’s Investors Service on Feb. 9. The city’s general obligation bonds were cut to B2 from Ba2 and a negative outlook on the community of 47,000 was maintained.
Harrisburg Authority 5 percent bonds insured by Assured Guaranty Municipal Corp. and set to mature in 2021 traded at an average price of 98.46 cents on the dollar to yield 5.179 percent. The price reached a record low of 85.72 cents on Nov. 12.
Battles over debt payments were anticipated by Buffett, chairman of Berkshire Hathaway Inc. The billionaire investor set up a municipal bond insurance company in December 2007, as competitors were being threatened with the loss of their top ratings.
In early 2008, Omaha, Nebraska-based Berkshire Hathaway’s bid to take over $800 billion in municipal debt guarantees from the three biggest bond insurers, including Ambac, was rejected by the companies.
A year later, he reversed course, telling shareholders in his annual letter that municipal bond insurance “has the look today of a dangerous business.”
“If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow,” Buffett wrote. “What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?”