NCPA - National Center for Policy Analysis

U.S. State Steps in to Meet City's Debt Cost

September 15, 2010

The state of Pennsylvania has stepped in to help its capital city, Harrisburg, avoid a default.  The state will advance next year's state aid so that the money can be used to make a $3.3 million bond interest payment due this week, says the Financial Times.

  • On Sunday, Ed Rendell, the governor of Pennsylvania, announced a $4.3 million cash transfer and said missing the bond payment was "not an option."
  • Harrisburg has already defaulted on $282 million of debt in an incinerator project that the city partially guaranteed.
  • The $3.3 million payment due on September 15 is an interest payment on the city's general obligation bond sold in 1997.
  • Such municipal debt is sought out by many investors in the $2.8 trillion U.S. municipal bond market because general obligation bonds have a reputation of being safer than many other types of bonds.

Politically, there can be incentives for cities not to pay bondholders if it means that services do not have to be cut, although many general obligation bonds are held by local residents who get tax breaks for buying such debt.

Source: Aline van Duyn, "U.S. State Steps in to Meet City's Debt Cost," Financial Times, September 12, 2010.

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