Greater Harrisburg's Community Magazine

Following standstill, Harrisburg plans to continue debt negotiations in 2019.

A nine-month effort to reduce interest rates on a large portion of Harrisburg’s debt looks likely to continue into the new year.

City Council is expected to vote this month on a new contract with Marathon Capital Strategies, a New Jersey-based financial advisory firm that represents Harrisburg in discussions with creditors.

The city hired Marathon under a $75,000 contract in March. Since then, the firm has negotiated on Harrisburg’s behalf with Ambac Financial Group, which insured bonds that Harrisburg issued in 1997.

When Harrisburg defaulted on those bonds in 2012, Ambac paid out $21.5 million to the city’s bondholders over four years. The city must pay that sum back at a 6.75 percent annual interest rate.

Harrisburg could avoid those costly rates by paying Ambac ahead of schedule with cash. But the city can’t fork over $21.5 million of its own money without depleting its cash reserves. Since it’s shut out of credit markets, it also can’t borrow a new, lower-interest loan to wipe out its debt to Ambac.

But reducing the interest it pays to Ambac could save Harrisburg tens of thousands of dollars over a decade-long repayment period, according to city officials.

Twenty percent of the city’s annual budget currently goes to debt service. The less money Harrisburg spends on interest, the more it can funnel back to salaries, programs and capital improvement projects.

Under its repayment agreement with Ambac, Harrisburg could pay a maximum of $5.4 million per year to them in debt service from 2023 to 2032. The real figure will likely be lower because Harrisburg didn’t draw on its all available credit from Ambac, but it could be lower still if Marathon secures better interest rates.

Marathon initiated talks with Ambac in April and continued them through July, according to consultant Dan Connelly. He told council last night that they haven’t reached a resolution yet, but he thinks they can with a little more time.

“[It was] a mixed bag, but I think we can be optimistic,” Connelly said. “Ambac was very clear that they want to continue negotiations.”

City officials and consultants said that negotiations this year were complicated by questions about Harrisburg’s long-term financial stability. Drafts of the city’s Act 47 exit plan published this summer called for reductions to local services and earned income tax rates, which would have strained the city’s operating budget.

The release of that report, coupled with the failure to guarantee special taxing provisions for Harrisburg in June, led Mayor Eric Papenfuse to declare a fiscal emergency and a freeze on hiring and spending.

The city dodged financial meltdown in October when state lawmakers passed legislation allowing it to retain its current taxing authority for five years under a newly formed oversight committee.

Connelly said that the legislation could provide additional assurance to Ambac that Harrisburg will meet its debt obligations.

“There’s things to work with now that put negotiations into context and that I think can drive a solution,” Connelly said.

Harrisburg spent just $40,000 of the $75,000 budget for Marathon’s services in 2018 budget. Consultant fees range from $175 to $275 per hour, according to their contract.

City officials want to appropriate another $75,000 for Marathon to continue talks with Ambac in 2019. They expect a larger bill this year, since they’re also asking Marathon to develop a strategy to improve the city’s credit rating.

That strategy will be included in the five-year financial plan that Harrisburg must adopt with its oversight board in 2019.

“Hopefully, in that plan, we can find a path back to the bond market, which is one of the things we all need to get back to normalcy outside of Act 47,” city Solicitor Neil Grover said.

City officials said that the five-year time limit on Harrisburg’s current tax rates makes it even more important that the city build its savings and credit score now, while it can still count on a healthy revenue base.

Any savings generated from a reduced interest rate will likely be returned to Harrisburg’s general fund, council budget and finance chair Ben Allatt said.

“Any debt resolution will help us put money back in our operating budget that we’ll need most likely in the future, when we’ll see a potential reduction in tax revenue,” Allatt said.

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