Bill limits municipal debt guarantees
HARRISBURG - Protecting taxpayers is the goal of a Senate bill to strictly limit the ability of a local government to guarantee debt of a municipal authority.
The Local Government Committee held a hearing last week on this bill introduced as part of an effort to curb excessive municipal debt that can put local taxpayers at risk for tax and rate hikes. If enacted, the bill could have an impact on the financing of future public water, sewer, parking garage and other infrastructure projects.
The measure provides that a municipality or county could only guarantee debt for a municipal authority tied to a federal loan or state PennVEST loan to finance a water or sewer project. The proposed restrictions are viewed as prospective in applications and would not affect existing loan guarantees, lawmakers said.
Pennsylvania is one of the few states that allows a local government to guarantee the debt of another local government unit and even charge a fee for that purpose. The bill bans local governments from charging such fees in the future.
In Northeast Pennsylvania, the city of Scranton's guarantee of debt undertaken by the Scranton Parking Authority drew attention last year when the financially troubled authority was placed under receivership.
The catalyst for this legislation is a $300 million debt tied to a Harrisburg incinerator upgrade project that helped put Harrisburg in fiscally distressed status. Harrisburg and Dauphin County both issued guarantees of Harrisburg Authority debt for the incinerator project and charged fees. The municipal guarantees enabled the troubled project to obtain refinancings that built up the debt, according to a memo by four bill sponsors - one of whom is Sen. John Blake, D-22, Archbald.
The senators think a public project should stand on its own merits to obtain financing rather than on a debt guarantee from another municipality.
"Having municipal guarantee in Pennsylvania means not having a project stand on its own merits," said Sen. John Eichelberger, R-30, Hollidaysburg, the committee chairman. "Why does Pennsylvania continue to put the taxpayers in harm's way?"
Financial-related firms are skeptical of the bill.
The bill would remove a powerful financial obligation that local governments have used to reduce project financing costs for four decades, said Attorney David Twaddell who represents the Pennsylvania Association of Bond Lawyers.
Defaults on municipal obligations have been rare in Pennsylvania and usually involve a temporary shortfall in revenue to pay debt service rather than a permanent loss, he said. Mr. Twaddell mentioned the example of a municipal water or sewer system losing a major commercial customer or having a pumping station failure, and as a result, having to approve a rate increase that will take several months to produce sufficient makeup revenue. A municipal guarantee can cover that temporary revenue shortfall.
Likewise, a parking authority may rely on municipal guarantees during the early years of a parking garage before it can generate enough revenue from customers to fully self-liquidate construction debt, he said.
"PABL believes that despite the rare instances in which local governments have had to pay under guarantees, the value the market confers on guaranteed revenue debt outweighs this risk and denying this benefit to the vast majority of local government units for the sake of avoiding this risk is unwarranted," said Mr. Twaddell.
The 2008-09 financial crisis led to increased credit requirements for lenders and investors, thereby making a local government guarantee more valuable in making capital available to public projects, he said.
Municipal guarantees have been used successfully for projects in southeast Pennsylvania to purchase open space and build a parking garage so a major employer would remain in town, said Michael Wolf, managing director of Boenning & Scattergood Inc., West Conshohocken.
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