Collapse of the U.S. Economy

Last-Minute State Aid Helps Harrisburg, Pennsylvania, Make Debt Payment

Money Woes of Pennsylvania's Capital City Watched Closely by Bond Market

September 13, 2010

ABC News - The embattled government of Harrisburg, Pennsylvania's capital, will avoid default on a $3.3 million bond payment this week because of $4.4 million in last-minute state aid.

With Harrisburg's city council scheduled to meet Tuesday to explore filing for bankruptcy, Gov. Ed Rendell announced Sunday that he was speeding up state funds and grants to the financially-strapped capital.

Still, the capital city stands on precarious ground, with a $4.3 million deficit and crippling debt from a costly incinerator project. Of the last-minute state aid, half a million dollars are considered a loan and must be repaid.

"I see this as Wall Street versus Main Street," said city councilman Brad Koplinski. "The bondholders are not willing to budge and they expect us to completely take care of this on the backs of our city's taxpayers."

Newly elected Mayor Linda Thompson, who has feuded with the city council she once headed, opposes a municipal bankruptcy filing.

"It's the very last option after everything else has failed," she said.

Harrisburg, a city of 47,000 on the Susquehanna River where nearly 30 percent of the population lives below the poverty line, is deep in debt. Its divided government can't even agree on how to deal with the crisis: Lay off more city workers? Close firehouses? Sell fire trucks? Walk away from some of the debt?

The city's unusual decision to skip the general obligation bond payment is being closely watched by the nation's financial sector as a harbinger of troubles for the bond market.

"You do have a state capital choosing to pay employees over bondholders, and that idea is discussed across the country," said Matt Fabian, managing director at Massachusetts-based Municipal Market Advisors. "A lot of people are pointing to it as the first domino."

Harrisburg already has skipped millions of dollars in payments on bonds it backed for the costly renovation of a trash incinerator, which dates back to the 1970s. The incinerator is up and running but doesn't generate enough revenue to cover debt that has reached $288 million. This year, the city owes incinerator debt payments of $68 million, an amount that surpasses its annual budget.

"There are a handful of communities across the country that made a bad investment like Harrisburg did with the incinerator," Fabian said. "There are places that have made bad bets and are now struggling to pay."

Take the California city of Maywood, south of downtown Los Angeles, which in June laid off all its employees, eliminated its police force and contracted a neighboring city to run municipal operations. More than 100 city employees -- police veterans and crossing guards, street crews and parks workers -- received pink slips.

In Alabama's most populous county, Jefferson, the government is saddled with about $5 billion in debt stemming from the overhaul of its sewer system in the mid-1990s. Merit increases for county workers have been frozen, building and road repairs halted. A brand new jail is vacant because there are no funds to hire workers or pay utilities. As in Harrisburg, officials are exploring bankruptcy.

In the impoverished town of Central Falls, Rhode Island, near Providence, officials recently agreed for a receiver to take control of local finances and consider the rewriting of contracts and cutting of pension benefits. A city of 19,000, Central Falls has a budget of about $18 million and projects a $3 million deficit this year and a $5 million gap in fiscal 2011. The city also has $4 million in a pension fund that has $35 million in unfunded liabilities.

Addled by unmanageable debt, municipalities have turned to draconian service cuts and large tax increases. Experts believe some may default on loans because states are too strapped for bailouts; others face bankruptcy filings.

Since 1937, when federal law first allowed municipal bankruptcy, there have been about 600 bankruptcies involving municipal agencies and entities such as housing developments, according to the Washington D.C.-based National League of Cities. Municipal governments will probably come up $56 billion to $83 billion short between now and 2012, resulting in more layoffs, service cuts and canceled projects and contracts, according to the organization.

"If we are the first domino to fall, I know there are cities that are watching us and the bond market is watching, because if they make a deal with us, they'll have to make a deal with every other municipality that's having trouble right now," Koplinski said.

The $68 million owed by Harrisburg this year is but a fraction of $288 million in outstanding debt from the incinerator project. The Harrisburg Authority, the state body that issued the bonds for construction of the municipal trash incinerator, has been unable to make payments. The county, which picked up the bill last year, is now suing for the funds.

In addition to the incinerator debt, Harrisburg is coping with a $9 million deficit in the current budget. The city is considering layoffs, closing and leasing or selling a firehouse, and the selling of two fire trucks, among other measures. It has assigned volunteers to man police stations in order to have all officers on the streets.

Thompson insisted that bankruptcy is a last resort, though members of the city council aren't so sure. The political squabbling has practically paralyzed her government. She said she hopes an outside financial adviser will come up with a plan.

The city has even sifted through assets to see what can be sold, including western artifacts purchased by former Mayor Stephen Reed for nearly $8 million. Bought with public funds, the wagon wheels, rifles and other memorabilia were destined for a Wild West Museum that never opened.

"The reality check is that the stuff we were left with is junk," Thompson said. "It's not authentic. There are a few pieces that we might be able to salvage and get about $500,000."

Grim Expectations for Report on Poverty in United States

September 12, 2010

AP - The number of people in the United States who are living in poverty is on track for a record increase on President Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty.

Census figures for 2009 -- the recession-ravaged first year of Obama's presidency -- are to be released this week, and demographers expect grim findings.

The expected poverty-rate increase -- from 13.2 percent to about 15 percent -- would be another blow to Democrats struggling to persuade voters to keep them in power. Midterm congressional elections are only weeks away.

Interviews with six demographers who track poverty trends found wide consensus that 2009 figures will probably show a significant rate increase to the range of 14.7 percent to 15 percent.

Should those estimates hold true, some 45 million people in this country, or more than one in seven, were poor last year. It would be the highest single-year increase since the government began calculating poverty figures in 1959. The previous high was in 1980, when the rate jumped 1.3 percentage points to 13 percent during the energy crisis.

Among the working population ages 18 to 64, demographers expect a rise beyond 12.4 percent, up from 11.7 percent. That would make it the highest since at least 1965, when Democratic President Lyndon B. Johnson launched the war on poverty that expanded the federal government's role in social welfare programs from education to health care.

Demographers also are confident the report will show:

• Child poverty increased from 19 percent to more than 20 percent.


• Blacks and Latinos were disproportionately hit, based on their higher rates of unemployment.


• Metropolitan areas that posted the largest gains in poverty included Modesto, Calif.; Detroit; Cape Coral-Fort Myers, Fla.; Los Angeles; and Las Vegas.

Experts say a jump in the poverty rate could mean that the liberal viewpoint -- social constraints prevent the poor from working -- will gain steam over the conservative position that the poor have opportunities to work but choose not to because they get too much help.

To Douglas Besharov, a University of Maryland public-policy professor, the big question is whether there's anything more to do to help impoverished families.

Last year's forecasts are largely based on historical data and the unemployment rate, which climbed to 10.1 percent in October to post a record one-year gain.

The projections partly rely on a methodology by Rebecca Blank, a poverty expert who now oversees the census. She estimated last year that poverty would hit about 14.8 percent if unemployment reached 10 percent.

A formula by Richard Bavier, a former analyst with the White House Office of Management and Budget who has had high rates of accuracy over the past decade, predicts poverty will reach 15 percent. That would put the rate at the highest level since 1993. The all-time high was 22.4 percent in 1959, the first year the government began tracking poverty. It dropped to a low of 11.1 percent in 1973 after Johnson's war on poverty but has since fluctuated in the range of 12 to 14 percent.

Beginning next year, the government plans to publish supplemental poverty figures that are expected to show an even higher number of people in poverty than previously known. The figures will take into account the rising costs of medical care, transportation and child care, a change analysts believe will add to the ranks of both senior citizens and working-age people in poverty.