The Bond Buyer (Posted 02/28/03)
In its most recent debt debacle, Wilkes-Barre, Pa., has narrowly averted defaulting on $34.7 million in general-obligation backed insured pension bonds by borrowing $1.8 million in tax anticipation notes to help make a debt service payment due today.
The emergency loan, negotiated privately with PNC Bank at a rate of 2.46%, was approved Wednesday by Wilkes-Barre's City Council. On Friday the city wired a $2.2 million payment to the Bank of New York, the paying agent for the bonds issued in 1998.
"The economy is hurting everybody, everybody's slow paying [taxes], and it trickles down to the lowest level, which is us," said James Hayward, the city's director of administration.
The sale is the second time the city has used Tans to pay debt service on the pension bonds. Also, by selling the notes, due May 1, the city averted a second default of bonds backed by the city's full faith and credit and taxing power.
Only three months ago, the rust-belt city of 43,000 located in the northeast section of the state, failed to make a $226,411 interest payment on $5.4 million of insured taxable guaranteed revenue bond issues that were sold in 1998 by the city's redevelopment authority.
Ambac Assurance Corp. made the Dec. 15 payment and was reimbursed by the city four days later. Ambac insures all of the city's $40 million outstanding debt, which carries no underlying rating. The default, albeit for four days, put Wilkes-Barre in the rare company of municipalities that have defaulted on debt.
The city's acute cash-flow problems have been exacerbated by the use of $4 million in general fund revenue for capital projects and health department payments in anticipation of state aid that was late in coming, Hayward said.
But City Council members, in a long-running feud with Mayor Tom McGroarty, have accused the administration of mismanagement, and say McGroarty has spent precious general fund dollars on failed pet projects.
As of today, the city has not yet completed its 2001 audited financial statements. With an aging population and a declining tax base, Wilkes-Barre, like Scranton, its neighbor to the north, has suffered acute financial stress. Although the assessed value of property in Wilkes-Barre has declined from $78 million to $75 million from 1998 to 2001, city officials have not increased taxes in 12 years, said city Controller Bernard Mengeringhausen. Meanwhile, city expenses continue to increase.
In 1998, Wilkes-Barre issued taxable bonds to fund its unfunded pension liability, amortizing the debt through 2014. Officials now concede the debt should have been pushed out further.
Additionally, officials said the deal was poorly structured, with debt-service payments not matching the city's tax collection schedule. Wilkes-Barre collects 80% of its property taxes in a rebate period, which begins March 24, three weeks after interest payment on the bonds are due.
Last year, the city also was forced to use about $2 million in Tans to make the debt- service payment on the pension obligation bonds, but was unable to pay them off on time. The city defaulted on a balance of $1.4 million in notes, was sued, and was then forced to raise the repayment as part of a $3.8 million note sale in January.
Still, city officials said they were confident they would repay both January's and last week's short-term loans by their due dates.
Mengeringhausen also said he expected the city to make a $466,441 payment on its June 15 debt service payment on the redevelopment authority bonds. The bonds were used to build an 80,000 square foot office building and rehabilitate a 540-space, six-story parking garage. The deal fell apart because the city has not received lease payments from a prime tenant, Customer Satisfaction, which has since moved out. The city is suing the company that leases the building.
City officials said they would work with Ambac in developing a plan to restructure the pension obligation bonds, stretching out maturities about 25 years and reducing annual debt-service payments.
"We cannot afford, credit-wise, to default on anything else," Mengeringhausen said. He said the city would also look to push back the date debt-service payments are due to match the city's tax collection schedule.
David MacDougall, managing director of public finance surveillance for Ambac, said he was willing to work with city officials to refinance the pension obligation bonds.
"But we would only do it in the context of a sound long-term financial plan that would include the resolution of some outstanding significant issues," MacDougall said. "We remain very concerned about the financial management issues we have seen at the city, ranging from the Tan default in 2002 to the bond default in December and some of the cash-flow issues that have become apparent."
Mayor McGroarty's decision to run for re-election and the political discord between the City Council and the Mayor make the city's fiscal problems more difficult to resolve, he added.