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Financially ailing Harrisburg, the capital of Pennsylvania, filed for municipal bankruptcy today (Oct. 12). According to Reuters, the city now faces a showdown with the state over control of the city.

Municipal bankruptcies are rare: Orange County filed for Chapter 9 in 1994 and Vallejo, California filed in 2009. Central City, Rhode Island, filed earlier this year. Last month, Alabama's Jefferson County dodged bankruptcy by settling with creditors.

The city council vote to file was 4-3. The mayor opposed the move. Police and firefighters are expected to battle municipal bondholders. Some challenge the legality of the filing. Pennsylvania's state senate will vote on a bill next week calling for an eventual state takeover of Harrisburg, according to Reuters.

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Comments

Fred Williams Oct. 16, 2011 @ 1:33 a.m.

Don, in Makopolis' book, "Nobody Would Listen", he mentions in passing that municipal finance is the next Madoff-like event...

http://www.amazon.com/No-One-Would-Listen-Financial/dp/0470553731

There are many others who agree:

“The finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe."

http://www.moneyandmarkets.com/warning-muni-bond-chaos-imminent-41757

Moody's said that it was assigning a negative outlook to the entire $2.6 trillion (£1.8 trillion) US municipal bond sector – operated by local town, city and state governments – because of the combined collapse in the financial and housing markets.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5127023/Shock-warning-on-US-municipal-bonds.html

We both know that after the SEC investigation and Kroll copy/paste job on San Diego's bond fraud, that the only thing that's really changed is that they're installing an SAP based system to monitor the city's finances:

http://www.zdnet.com/blog/projectfailures/san-diego-fires-axon-over-erp-implementation-problems/1960

http://www.kpbs.org/news/2011/sep/26/san-diegos-legal-costs-mount-with-software-settlem/

http://www.sddpc.org/ (says how wonderful they are)

According to dice.com, a reliable high-end IT jobs site, they're still looking for key team members to work on this SAP project:

http://seeker.dice.com/jobsearch/results/US/SAP/206/858/San+Diego+Data+Processing+Corp

Enough background, next post = implications.

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Don Bauder Oct. 16, 2011 @ 8:19 p.m.

Yes, there is a lot of conjecture about muni bonds. As someone whose portfolio is loaded with munis, I am watching. Best, Don Bauder

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Fred Williams Oct. 16, 2011 @ 1:45 a.m.

Implications:

The failure of the SAP implementation was very predictable. Vague requirements from the city were met with an insistence by the vendor that only rare customizations be made to the standard SAP system. The city staff then made everything "rare" and the work fell to pieces. The vendor sued and got a settlement.

So SAP itself was brought in to rescue this turkey, and they're still working on it.

Now that the OneSD project cost and schedule has multiplied many times, there's a strong likelihood that it will be "ninety percent done" indefinitely (you geeks know what I mean).

Key facts:

  • It's in the interests of the people building the system to make the project last forever. You can't get paid more than when working for government IT projects.

  • It's in the city staff's interests to keep this project running forever, as long as they delay it they keep their jobs intact and have more opportunities to insert inefficiencies into the system.

  • It's in the city management's interests to delay implementation as long as possible. If this SAP system actually works, and is set up honestly, it will show that the city finances are even worse than has already been reported.

Yet eventually, enough of the system will be cobbled together (geeks can be determined, just wanting to make stuff work) to start showing results that will be leaked to investors, who will dump San Diego issued muni bonds.

This will finally force the long delayed accounting San Diego's so-called leadership so dreads.

I don't know WHEN this will happen, but I'm pretty sure it will involve these elements in the overall tragic story of San Diego's economic implosion.

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Don Bauder Oct. 16, 2011 @ 8:22 p.m.

Another point: remember all the discussion of San Diego's structural deficits? The subject seems to have been swept under the rug. Best, Don Bauder

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tomjohnston Oct. 16, 2011 @ 4:22 p.m.

"Municipal bankruptcies are rare" I suppose that depends upon your definition of rare. There have been about 625 muni bk's since 1937. Tha would average out to about 8 per year. Since 2009, I believe there have been 17 or 18. Again, I guess that depends upon ones definition of rare.

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Don Bauder Oct. 16, 2011 @ 8:24 p.m.

Certainly, they are rarer than residential foreclosures or personal BKs. Best, Don Bauder

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tomjohnston Oct. 17, 2011 @ 1:32 a.m.

My first reaction to your comment is "duh". since there are fewer municipalities than there are individual residences and individual debtors, that makes it only logical from a statistical point of view. My second reaction is that family members I have in SD, and there spouses and spouses families. probably 150 or so in total, none have ever filed BK. And of the close to 300 or couples and individuals on or christmas list and in our phone book, I don't recall any of them filing bk either. In other words, residential foreclosures/ personal bks anf muni defaults/bks completely different things; it's not even apples and oranges. It's more like apples and broccoli. And based on what I've read, I wouldn't be suprised if the filing is be rejected. This seems to be similar Bridgeport, Connecticut's filing, Where I believe it was a question of whether they were really authorized to file Ch. 9. It appears to me that Harrisburg's city council isn't authorized to do so on their own and that their filing is more about about politics. Supposedly, the city council has said they are “tired of being humiliated and denigrated” by the state’s plan for a takeover, and said Chapter 9 is “a much better forum if you really want to address the financial problems of the city.” Not really a smart thing to say if that's what you're really trying to do.

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Don Bauder Oct. 17, 2011 @ 9:03 a.m.

The BK numbers by chapter -- 7, 9, 10, 13, etc. -- are available. Muni BKs are rare. The question is whether they will continue to be. Best, Don Bauder

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tomjohnston Oct. 17, 2011 @ 11:50 a.m.

Again, that depends upon your point of view. To me, once in a blue moon is rare. To me something that happens on an average of 5-10 per year on a regular basis is not rare. If my math is correct, there have been 245 Ch 9 filings since 1980. That's an average of almost 8 per year, right on the historical average. My above estimate if 17-18 since 2007 was incorrect; there have been 27 thru Q3 of this year, again right on the historical average. In the last 20 yrs, only 3 times have there been less than 5. Since you retired from the UT, there have been 62 filings. Webster's defines rare as seldom occurring. As I said, to me something that occurs on a regular, consistent basis would not be considered rare. Just my opinion. Opinions vary.

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SurfPuppy619 Oct. 17, 2011 @ 3:20 p.m.

One thing is for sure,the filings have all gone up recently and the number is likely to even escalate more. Much more.

I was trying to find the sopurce of the muni BK numbers online and it looks to be from one person, a BK lawyer who has followed and documented the number of filings. I would not put all my eggs in his basket until I knew more about him and how he tracked the muni BK cases.

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tomjohnston Oct. 17, 2011 @ 4:35 p.m.

try looking in the WSJ archives. You should find what you need. also a group called American Bankruptcy Institute. most of their data appears to come from Administrative Office of the U.S. Courts

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