By Hilary Russ
(Reuters) - Pennsylvania's distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services.
Pennsylvania's capital of 50,000 people is mired in $326 million of debt due to the expensive retrofits and repairs of its troubled trash incinerator.
"Although this default on general obligation bonds is unfortunate, I don't think it's going to hold up the process for proceeding under the recovery plan," Receiver David Unkovic said.
The state tapped Unkovic to serve as receiver, and he devised a recovery plan that includes the proposed sale or lease of the city's major assets, including parking garages and the incinerator itself.
Commonwealth Court President Judge Bonnie Leadbetter on Friday approved the plan, noting that it may change with more investigation from the receiver.
Holders of the affected bonds and notes do have some protection because principal and interest payments are insured by Ambac Assurance Corp., Unkovic said.
So far in 2012, there have been 21 defaults on muni debt totaling $978 million, according to Richard Lehmann, publisher of Distressed Debt Securities Newsletter, who expects the pace of defaults to increase.
"For cities and counties it's starting to happen now because they're running out of cash," he said, noting that Stockton, California, announced a default last month.
During the same period in 2011, there were 28 defaults totaling $522 million, while the full-year total was a whopping $25.2 billion, which included defaults on $18 billion of tobacco bonds that occurred when reserve funds for the issues were tapped, Lehmann said.
In a sign that Harrisburg's financial crisis was expanding to affect additional types of debt, Unkovic noted that this is the first time the city has defaulted on its general obligation debt. It has previously defaulted on revenue bonds tied to its incinerator project, and continues to not make those payments.
The payments that will be skipped consist of: $2.735 million due on the city's general obligation refunding bonds, Series D of 1997, and $2.53 million due on the city's general obligation refunding notes, Series F of 1997, Unkovic said.
The city filed a rare municipal bankruptcy, but a judge threw out the case last year.
Unkovic has said that five to 10 companies are interested in purchasing city assets. He hopes to name winning bidders by June.
The plan has its critics. An attorney representing the city council president and Harrisburg's treasurer and controller has blasted the plan as a fire sale.
Even though it will not make the two payments on its general obligation bonds, the city is still falling at least $5 million short on its budget, Unkovic said.
Harrisburg Mayor Linda Thompson, in a comment, said Unkovic "is charting the best fiscal recovery course given the current situation."
(Reporting By Hilary Russ; Additional reporting by Mark Shade in Harrisburg and Karen Pierog in Chicago.; Editing by Chizu Nomiyama and Jan Paschal)