Pennsylvania’s debt-laden capital city violated federal antifraud rules for securities issuers by repeatedly giving misleading information that created risks for bond investors at a time the city’s finances were rapidly deteriorating, the U.S. Securities and Exchange Commission said Monday.
Harrisburg, dragged to the brink of bankruptcy by a massive debt on its municipal trash incinerator, is also having trouble paying its day-to-day bills while it puts off payments on its general obligations bonds. As a result, it is Pennsylvania’s only municipality that is under a state takeover.
The SEC said the charges against the city of about 50,000 represent 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 a number of 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 city officials were a 2008 audited financial report that didn’t mention a downgrade by Moody’s of Harrisburg’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 the city’s finances, while for more than two years, from 2009 to March 2011, the city simply stopped filing annual audited financial statements to municipal securities agencies, the SEC said.
On Dec. 31, 2007, the city’s bonds and bond guarantees for its agencies totaled about $500 million, many times the city’s revenue of about $61 million, the SEC said.
However, the SEC cited cooperation by Harrisburg 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, but the SEC did order it to cease and desist from violating disclosure rules again.
“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” George S. Canellos, co-director of the SEC’s Division of Enforcement, said in a statement.
Mayor Linda Thompson, who took office in 2010, said her administration had cooperated fully with the SEC’s investigation and that she is committed to ensuring the city provides accurate, timely and complete financial information to investors and the public. The SEC’s allegations “are what they are,” she said.
The law firm Pepper Hamilton LLP handled the case for the cash-strapped city. The city’s incinerator debt is now approaching $350 million, according to state officials overseeing the city’s takeover.
During the financial crisis, the SEC aimed to make sure that states and municipalities were adequately disclosing their public employee pension liabilities as many were unable to fully fund them. The size of a state or municipality’s unfunded pension liability can affect its bond rating, and make it more or less expensive to borrow money. A larger unfunded pension liability means more risk for investors.
About the Author
