Pennsylvania's budget secretary ruled yesterday that a $125 million Philadelphia pension fund payment due this month would put the city in "imminent danger" of default, so city officials can wait until October to pay the bill.
Michael Hershock, the state budget secretary, made the ruling according to the provisions of legislation passed in Harrisburg earlier this month designed to address the city's cash flow crisis. That legislation, which also created a fiscal oversight board to issue deficit bonds on the city's behalf, provided for a pension fund deferral if state officials determined debt service was at risk.
Mr. Hershock said yesterday that even if the city defers the pension fund payment until October, its cash flow crisis would leave the city insolvent by mid-September unless the new authority is able to issue deficit bonds by then.
"Accordingly, it is imperative that the city, in full cooperation with the new authority, work quickly to reach a decision on the need for short-term financing or rapid issuance of the new authority's first series of bonds," Mr. Hershock said in a letter to David Brenner, Philadelphia's finance director.
Mr. Brenner said the new authority, which held its first meeting earlier this month, should be able to sell bonds by early September at the latest.
The pension fund payment, due June 30, will be made in October, Mr. Brenner added. But he said the city intends to pay 10% of the outstanding balance in each of the next three months under the terms of a tentative agreement with the pension fund board. The city will pay the fund 11% interest on the deferred payment, or about $13 million. That agreement is expected to be formalized shortly, Mr. Brenner said.
Mr. Brenner said even with the pension fund deferral, the city will still need a bridge loan of about $250 million from local lenders to meet other debt service obligations. That loan is needed to get the city through the next three months, until the new oversight authority is able to sell deficit bonds and the city's cash flow crisis eases.
Philadelphia, rated CCC by Standard & Poor's Corp. and B by both Moody's Investors Service and Fitch Investors Service, owes about $60 million in debt service over the next two months, Mr. Brenner said.
Negotiations to secure the temporary bridge loan are continuing with local lenders, and Mr. Brenner said he hopes to announce an agreement by early next week.