Harrisburg Fails to Get the Word

By Frederick J. Sheehan

Municipal bondholders have something else to worry about. If Occupy Wall Street has legs, and, if labor unions handcuff the protestors’ agenda ("Major Unions Join Occupy Wall Street Protest" – New York Times, October 5, 2011), will that effectively downgrade general obligation (G.O.) bonds another notch? That is unlikely. In fact, trends over the past few months have shown states and municipalities are more inclined to meet general obligation bond payments as long as they possibly can. Union workers who press municipalities into bankruptcy (the Harrisburg, Pennsylvania bankruptcy might be interpreted as such) should take heed.

States and municipalities are averse to filing for bankruptcy. If they wobble, the courts remind them of their priorities. The State of Minnesota could not reach a budget agreement this past fiscal year (ending June 30, 2011). In advance, a June 29, 2011, District Court expressed its opinion: "Only minimal levels of staff and operating expenses that are necessary" should continue. "All others are recommended to close." Of "activities recommended to continue" number one on the list (although it is not stated if the sequence is in order of priority) was "bond payments and related activities."

Minnesota political alliances belie such a full-throated bondholder decree. The attorney general petitioned the District Court for an Opinion; the governor opposed the attorney general’s Petition, arguing executive and legislative authority over budget priorities are not judiciable. In private, the political actors agreed that payments to bondholders were more important than paying a single salary. (The impasse, during which bondholders were paid and non-critical state employees were idled, lasted until July 20, 2011, when an agreement was reached.) Such a cordial behind-the-scenes concord can be expected in other states and municipalities. The consequence of not paying bondholders includes the assumption they will be unable to issue general obligation bonds for several years and, even then, at higher interest rates.

A second reason to remain current is to retain control. When a municipality enters bankruptcy, the court can exert enormous control over the legislative bodies. The court will decide who gets paid in the case of Harrisburg, leaving aside for the moment the Commonwealth of Pennsylvania’s legislative and legal attempts to thwart the bankruptcy filing, as well as the mayor of Harrisburg’s legal action against the city counsel’s decision to file. (Note: this discourse addresses situations when it is not necessary to default. There will be many situations when there is no choice.)

This "clearing of the decks" allows us to suppose the court adapts the "Municipal Financial Recovery Act Recovery Plan [for the] City of Harrisburg" submitted (by several concurring organizations) on June 13, 2011. Since Harrisburg’s finances are no better than four months ago (at best), the court may save itself some time by reviewing this 422-page, 11-megabyte plan.

Among its conclusions, the Plan states: "[T]he City must [note: "must"]… outsource [its] commercial sanitation collection; eliminate [its] Park Ranger program; combine Park Maintenance in the Department of Public Works…" These are only a few of many structural changes. Henry Kravis has a bigger heart.

The Plan does not shrink from expressing its disgust at backroom City deals by certain politicians: "The City must contain fast growing employee compensation by immediately challenging the extensions made by the previous Mayor immediately prior to his leaving office that increased compensation for employees despite the looming financial crisis…"

The nexus between previously negotiated employee compensation – particularly by unions – and the dwindling revenues to fulfill their legally negotiated pay and benefits (both parties signed), will be a battle royale. Although the Plan does not state a specific reduction, it is unambiguous in regard to which is Peter and which is Paul: "[T]he city is forced to reduce its existing operating budget by a minimum of $2.5 million to pay debt service and compensate for lost revenue…."

Although not generally mentioned, both the municipalities and the unions understand which comes first. The unions know it is better to press their demands up to the point before default and (possibly) bankruptcy. This puts them in accord with the politicians’ top priority: to make bond payments. A central figure in the mid-1970s, New-York-City negotiations recalls: "Union leaders need to look as tough as they can. When they have to back down, they vilify the city’s negotiators. It’s a macho thing."

Why, then, did Harrisburg file for bankruptcy, given that many parties did not think it was necessary? This is a big country and not everyone gets the word. Mistakes will be made. That’s why they are where they are.

Frederick Sheehan writes a blog at www.aucontrarian.com

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