Buffet says ” when the tide goes out, you get to see who is swimming naked”.

Harrisburg bonds (41473EFH9) are a mess due to what appears to be wasteful spending. Is this representative of a nationwide muni default? In a word NO. So what happened in Harrisburg?

According to our sources, the Harrisburg incinerator that will likely burn bondholders was an mechanical engineering boondoggle dating back to its inception and went through several refits in an attempt to get it functioning to meet environmental standards. But by then it had acquired so much debt, it could not possibly cover its costs. So now the city and Dauphin County are on the hook for what amounts to about $10k per citizen!

Here is the list of this bond’s trades.

It hasnt traded Nov 2008. The lack of interest in trading this bear is no surprise since the Harrisburg municipality filed a July 2009 material events notice .

The former Mayor Reed – king of the city for 24 years may have tried to make the city a better place to live but the spending went far out of control. He spent tens of millions building the “national” civil war museum even thought Gettysburg is just a 45 minute drive from Harrisburg with it’s own museum run by the national park system. When it was obviously not performing, the Mayor argued it was because the city needed a critical mass of museums before it could be a success. So he planned 5 more including a wild west themed museum! He spent tens of millions on acquiring artifacts, the purchase of which he allegedly personally handled. When finally forced to sell these, the city got less than 20 cents on the dollar. Turns out he’s quite the history buff and many of the artifacts allegedly decorated his office while awaiting the building of the museums. Gee if a small business owner did that an IRS agent would have a field day. But since it was public monies that were spent, no crime but certainly a foul.

This is a case of public spending gone crazy. Where were the auditors? Lumped on top of this self created mess is the local government cant afford to continue to platinum healthcare & pension benefits to police, fire and teachers. In good times, fat pensions stress cities’ finances and increase our taxes. But In bad times , these debts break the camels back .

Good media sources on this topic include the excellent WSJ article “ Muni Threat: Cities Weigh Chapter 9 (2/18/10) Harrisburg Authority, city miss debt payment; Dauphin County pays”

Thats said, the Harrisburg bond problem doesnt seem representative of a nationwide muni default. With muni rates still low, the problem is a sick facility pushed over the edge due to unique bad economic times. What is interesting is cities may well choose, or be forced to use Chapter 9 causing sweet-hart city employee union contracts to be squeezed followed by layoffs. But bondholders will suffer too. Interest payments may be frozen, effected bonds prices will drop 50%+ and when the dust settles, private equity players will swoop in and buy the distressed assets on the cheap. Bahhh and good luck to all