Harrisburg, dragged to the brink of bankruptcy by massive debt on its municipal trash incinerator, is having trouble paying day-to-day bills while it puts off payments on general obligations bonds. It is Pennsylvania’s only municipality that is under a state takeover.
The SEC said the charges against the city of about 50,000 people mark the first time a municipality has been accused of misleading statements that were not included in securities disclosures. The charges come as the SEC scrutinizes state and municipal governments around the country in connection with offerings in the $2.7 trillion municipal bond market.
Among the misstatements or omissions by Harrisburg officials were a 2008 audited financial report which didn’t mention a downgrade by Moody’s of the city’s general obligation debt and a mid-year financial report in 2009 that didn’t mention $2.3 million in debt guarantee payments made for the incinerator, the SEC said.
In addition, the mayor’s “state of the city” annual public address in 2009 did not mention the incinerator debt or its impact on city finances, while from 2009 to March 2011 the city simply stopped filing annual audited financial statements to securities agencies, the SEC said.
On Dec. 31, 2007, the city’s bonds and bond guarantees for its agencies were about $500 million, many times the city’s revenue of about $61 million, the SEC said.
However, the SEC cited cooperation by city officials in the investigation and its remedial actions to create new policies and procedures to ensure its financial statements are accurate in the future. As a result, the SEC did not impose a financial penalty and the city did not admit to the SEC’s accusations. The SEC did order it to cease and desist from violating disclosure rules again.
During the financial crisis, the SEC aimed to make sure that states and municipalities were adequately disclosing public employee pension liabilities as many were unable to fully fund them. The size of an unfunded pension liability can affect its bond rating and make it more or less expensive to borrow money.
New Jersey, the first state ever charged for violations of the securities laws, in 2010 settled SEC charges of failing to inform bond investors that it hadn’t met obligations to its largest employee pension plans. In March, Illinois settled similar charges. No financial penalty was levied.
Last week, the SEC filed charges against Victorville, Calif., a city official and a local agency, accusing them of misleading investors by inflating property values to issue bonds five years ago. The city and the agency dispute the allegations.