Who could have seen this coming? Besides me and every other survivalist out there:

NEW YORK (CNNMoney.com) — The capital city Pennsylvania is broke and will be skipping this month’s multi-million dollar bond payment.

On Sept. 15, Harrisburg, Pa., was scheduled to make a $3.29 million payment on the bonds it issued to build a trash plant. But, the cash-strapped city doesn’t have the dough.

“The city’s budget is in deficit,” said Chuck Ardo, spokesman for Harrisburg Mayor Linda Thompson. “We’re looking for ways to trim the budget just to keep services going.”

“Now the chickens have come home to roost,” the mayor said in a statement released Wednesday.

In May, Moody’s knocked the rating on its general-obligation bonds three notches to B2 — five steps below investment grade. To put that into perspective: Moody’s rating on Greece’s government debt sits at A3 — still investment grade.

“It’s a warning to holders of bonds issued by financially stressed state and local governments,” said John Lonski, chief economist for Moody’s Investors Services. “Credit crisis is still with us.”

And in, fact, many on city council have been floating the idea of bankruptcy.

The worthies of Pennsylvania are, of course, claiming that if only they can raise taxes they could plug the whole. I guess they never heard of the Laffer Curve.

Harrisburg is not the only city in trouble obviously. This is just the first of many defaults to come, and the problem with that is that investors will begin to see municipal bonds for what they are: a bottomless money pit from which you will never get your returns. They are literally ponzi schemes where people make money by getting out before the last few suckers are left holding the bag.

If you’re in muni please do the research. There are very few cities which have the goods, financially speaking, and too many of them have financial problems that make them unreliable long term investments.

CNBC has a list of 12 cities that are the worst investments.

Market Watch has this to say about the default:

The decision by Harrisburg, Penn., to default on some of its general obligation bonds coming due raises questions for bond insurers more than municipal-bond investors, said Domenic Vonella, a municipal-bond analyst at Thomson Reuters. The city has well-known financing issues so it wasn’t a surprise that caused waves in Wednesday’s muni market, he said. Also, the bonds were insured, meaning investors will get paid anyways. But it could raise questions about how issuers choose which debt to default on — and if they favor defaulting on insured debt, he said. “The market wants some clarity on whether there will be some repercussions from insurances agencies,” though it’s unclear what those may include, Vonella said.

In a way Harrisburg was smart to be one of the first defaults because it can rely on the insurers to bail them out. Forbes’ Marilyn Cohen says the larger muni bond market may stay afloat, but not for reasons that will make most investors comfortable:

So with sales tax, income tax and property tax revenues declining, can we expect more defaults like Harrisburg, Vallejo and Central Falls Rhode Island?  As long as the municipal bond market continues to be so forgiving and allow refinancing and new issuance to come so cheaply—and—as long as the retail feeding frenzy continues, then defaults will continue to be rare.

And that’s not a sure set of circumstances. The article also speculates on what other major cities will default:

The City of Los Angeles – Former Los Angeles Mayor Richard Riodan has said in Wall Street Journal  editorials that the only way out of its financial difficulties is for the City of Los Angeles to file for bankruptcy sometime in the future.

The Metropolitan Pier & Exposition Authority of Illinois has seen revenue deterioration and according to Moody’s is “no longer able to meet debt service requirements and has caused the authority to tap into sales tax revenues.”  But all sales tax revenues throughout the county are deteriorating;  that’s not a sure safety net.

San Diego, CA, – San Diego’s name continues to float in and out of the bankruptcy banter but always loudly protests.

As more cities default bond insurers will be unable to pay everyone so if you’re investing keep that in mind.