Petersburg Narrowly Avoided Debt Default

petersburg_city_hallby James A. Bacon

The city of Petersburg’s financial woes are so bad that it nearly defaulted on a $4.5 million Revenue Anticipation Note (RAN) due June 30, but was saved at the last minute by a team of auditors dispatched by Secretary of Finance Richard D. “Ric” Brown. “It was questionable up to June 29,” whether the city would be able to pay off the note on time, Brown told the Richmond Times-Dispatch.

The revelation of the near-default occurred deep in the T-D story tracing how Petersburg came close to financial collapse, but the story provides no details on how the default was averted.

The article does provide considerable new detail on how problems have been festering for years. The emergency auditors found that the city needs to close a $12 million budget gap this year even as it addresses $19 million in unpaid bills.

The city has been running structural deficits for years. Auditors with Davenport & Co., which has advised the city on-again, off-again for several years, issued recommendations in 2012 for shoring up the city’s finances but the city took no action. As the city’s finances deteriorated, S&P, the bond-rating agency, downgraded its debt to BBB, a below-investment grade rating.

One way Petersburg papered over the shortfalls was by draining its reserve accounts. “Strongly rated Virginia governments will have an unassigned cash balance in the 15% range, even higher. That’s a good target,” David P. Rose, senior vice president with Davenport, told the T-D.

Bacon’s bottom line: Let Petersburg be a warning to all other cities — and to citizens who take an interest in their local governments. In previous posts, I have alluded to the tricks to which fiscally stressed localities often resort to “balance” the budget: (1) short-changing pension payments, (2) under-investing in maintenance, and (3) slow-paying creditors. We can now add a fourth: (4) depleting cash reserves. I am sure there are others.

The comforting news (comforting to those of us not living in Petersburg) is that S&P was paying close enough attention to the evolving situation to lower its bond rating. Nearly all Virginia localities have investment-grade bond ratings — several have AAA ratings — so there may not be much to fear. Still, we should remember: bond-rating agencies have been caught napping before.

In related news… While Wall Street is urging state and local governments to take advantage of record-low interest rates and issue bonds to repair aging roads, bridges and buildings, most are resisting the siren call of piling on more debt. New government bond issues have dropped to the lowest level in 20 years — about $140 billion last year, about 53% lower (adjusted for inflation) than in 2006. (The pace of borrowing has picked up modestly this year.)

S&P Global ratings analyst John Sugden said told the Wall Street Journal that the reluctance to add debt often “reflects good budget management” by governments whose revenue projections leave no room for additional debt payments or upkeep costs for newly constructed projects.

Here’s the question: Are state and local governments spending enough to maintain their infrastructure, or is the condition of roads, bridges, water & sewer plants, commuter rail lines slowly deteriorating — a hidden form of structural deficit?

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6 responses to “Petersburg Narrowly Avoided Debt Default

  1. The odd part about this blog posting is that it puts the cart before the horse.

    Budget fanatics can beat up on Petersburg all they want. The surrounding localities have strong balance sheets. Even Richmond has good credit.

    The real issue is the lack of funding for infrastructure, which is very badly in need of a rebuild. We should be spending more, not less.

    Example: last week, I took Amtrak to DC from Richmond. The return trip was an hour late. They had to stop the train about 200 feet from Staples Mill Road station so someone could hop out of the locomotive and manually throw a track switch because the automatic function wasn’t working.

    And this is 2016.

  2. a couple of questions:

    1. – was there enough transparency for the good citizens of Petersburg to know something was wrong?

    2. – who would they hold accountable?

    3. – how would they hold them accountable?

    4. – how would you fix the problem?

    • 1. I don’t know if there was full transparency, but there were clear warning signs. A falling bond rating is a dead giveaway that something is wrong.

      2. Who would they hold accountable? City council.

      3. How would they hold them accountable? Vote them out.

      4. How would you fix the problem? Start by gaining clarity as to the scope of the problem. Then chop all non-essential programs and services, starting with the municipal golf course! That’ll only take you so far. Then consider the unimaginable like privatizing and outsourcing various functions.

  3. we agree. Now – how come the folks who were in a kerfuffle over email with the mayor were not involved much earlier and action taken to vote those folks out?

    I love the fact that the State auditors say they are “working with the City Council to … resolve…. ”

    hmmm….

    okay – but back to your solutions:

    how do they get “clarity ” if the current elected knew about the problems themselves and, to date, have done nothing?

    Do you expect the folks currently in charge to do what they should have done quite some time ago and chose not to?

    I have my doubts that most citizens are paying that much attention to start with. I wonder if the same thing happened in Henrico if you and others would have noticed BEFORE it was too late.

  4. I hope someone is watching the City of Hopewell. It has not yet produced a CAFR for FY 2015 and it is currently under a watch by the bond rating agencies. Maybe the next Peterburg???

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