Credit ratings agency Moody’s Investors Service says a deal between the Commonwealth and its capital city to lower debt won’t quite cut it.
The state is committing nearly $65 million in public funds to help its cash-strapped capital with a lingering debt obligation.
But it won’t be enough, financial experts say.
Moody’s Investors Service detailed the Commonwealth’s pending lease of office space from the city of Harrisburg in its most recent national public finance report.
About 900 state Department of Public Welfare workers will relocate from the former Harrisburg State Hospital site on the city’s outskirts to Strawberry Square’s Verizon Tower downtown near the Capitol complex in 2016, when Verizon is due to move out.
Without rental income, the city cannot cover the $2 million in annual payments on debt tied to Strawberry Square. Harrisburg exited Pennsylvania’s first and only receivership in February, but remains in the state’s Act 47 program for distressed municipalities.
But the Commonwealth’s $3.8 million annual rent will be about $1.5 million short of what’s needed to run the building and cover debt service, according to the analysis.
State officials expect bond insurer Assured Guaranty Municipal Corp. to make up the difference at 6.07 percent interest, according to Harrisburg’s Act 47 recovery update filed last week. AGM declined to confirm that.
Without that added expense of paying AGM interest, taxpayers already were on the hook to spend $42 million through 2033 repaying the $7 million borrowed in 1998 by the Harrisburg Redevelopment Authority and guaranteed by the city.
That’s on top of $1.1 billion expected to be paid in the coming decades as part of last year’s resolution to other city debts by selling its incinerator and leasing its parking assets.
What it means
Moody’s analysts say the state lease – which took more than a year to negogiate – is “credit-positive for the city,” but also indicative of its continued “financial strain.”
Spokesman David Jacobson says the agency no longer rates Harrisburg, but follows “what’s happening in the city because these … defaults are few and far between.”
Steve Kratz, spokesman for the state Department of Community & Economic Development overseeing Act 47, says the city will file a disclosure with the Municipal Securities Rulemaking Board.
Harrisburg’s Financial Director Bruce Weber deferred questions to Steve Goldfield, the former receiver’s financial adviser who still is handling this matter as well as debt on the Harrisburg Senators’ stadium.
Goldfield says he can’t discuss much publicly until after the disclosure filing.
He did tell Bloomberg last week that cutting the building’s operating expenses could further limit AGM’s coverage.
Little room for error
Verizon’s rent was enough to cover debt service previously, but repayments are due only for some of the debt tied to the tower.
Goldfield, who led the audit team that in January 2012 first exposed some of Harrisburg’s worst financial problems and practices, also helped put together the city’s half-billion debt deal that closed last year.
Basically, the city repaid its then-creditors in December 2013 with proceeds from bonds issued and guaranteed by other public agencies, which will use parking, electricity and trash fees to repay the new obligations.
Lancaster County Solid Waste Management Authority, which got the incinerator out of the deal, issued about $130 million. The Pennsylvania Economic Development Financing Authority issued $290 million to pay up front for a four-decade lease of public parking lots, garages and spaces on streets downtown.
Dubbed “The Harrisburg Strong Plan” by its creators, the deal arranged for bond guarantees by some players – including AGM and Dauphin County – in the city’s years-old financial transactions. Those older deals are the subject of a state Attorney General grand jry investigation.
The plan left little room for error, however.
The thin margins of city government and parking system’s budgets sparked sharp criticism – but little in the way of alternatives besides bankruptcy – last year from some community leaders including former City Controller Dan Miller.
And the legislature has failed to move a package of bills introduced in March 2013 aimed at reforming Pennsylvania’s Local Government Unit Debt Act to prevent the financial chaos that ensued in Harrisburg and, to a lesser degree, other distressed municipalities across the Commonwealth.
Already watered down from their original forms, the measures are unlikely to come to a vote this year, according to Lee Derr, chief of staff for state Sen. John Eichelberger, R-Blair. Eichelberger is among the bills’ sponsors and chairs the Senate Local Government Committee.
Moody’s analysts say the state lease – which took more than a year to negogiate – is “credit-positive for the city,” but also indicative of its continued “financial strain.”Spokesman David Jacobson says the agency no longer rates Harrisburg, but follows “what’s happening in the city because these … defaults are few and far between.”