A Harrisburg scorecard
“Who benefits from all this tap-dancing? Who’s interest is the Commonwealth promoting? Not the public, not the city of Harrisburg. They are promoting the interests of the bond insurers.”
That is a quote from Mark D. Schwartz, the attorney for the city of Harrisburg, Pennsylvania who filed for Chapter 9 bankruptcy on October 11. Harrisburg is the center of a multi-year, multi-player fiasco over an enormous, under-utilized waste incinerator. The city stopped making payments ages ago on the incinerator bonds and is past due on about $85 million of principal and interest.
The missed payments were made up by the county and a bond insurer, Assured Guaranty, both of whom have sued the city. The city filed for bankruptcy, in part, to halt that litigation and work out their debts in an orderly process under the purview of a federal bankruptcy judge. It’s a creditor scrum and further complicated by efforts from some in the state legislature to take over the city and put it in receivership.
The hard facts of the story are these:
- Current city officials did not create the problem, but are simply attempting to clean-up a long festering mess.
- The mayor refuses to support the bankruptcy and uses the city website to promote her views.
- The city’s lawyer appears to have met the federal court’s requirements for filing a Chapter 9 bankruptcy case.
- There is a lot of disagreement in the municipal bond market about the lawfulness of the Chapter 9 filing.
- The city is currently being sued by six parties for non-payment on guaranteed bonds.
- The first bonds for the incinerator were issued in 1998 for $33M.
- The city guaranteed $242 million of incinerator debt/loans.
- State Sen. Jeffrey Piccola, who represents the county, is trying to get the state to take over the city. His attempts are being delayed.
- The city had a $72 million operating budget in 2010 and paid $27M of that in debt service.
- The city is clearly insolvent.
Meanwhile whoever writes the “Lex” column at the Financial Times seems to have had drinks with a representative of the bond insurer, Assured Guaranty, and gives a few lashes to city officials. Lex says:
But the [Harrisburg city] council’s refusal to sufficiently raise taxes or accept offers for assets, including the incinerator itself, has put its bond insurer Assured Guaranty in a ticklish spot. It is covering payments on the bonds, for which it received a tiny fee for insuring, even as it sues the town to force revenue increases. Any shortfall in revenue from the incinerator was in part a general obligation of the city.
Lex should look a little deeper before writing such rubbish. According to Harrisburg’s Act 47 plan (page 45) the city was responsible to pay 20% of their 2010 revenues for debt service. Unfortunately they were unable to meet all those payments. They are unable to sell assets unless the city council approves the state’s Act 47 reorganization plan. The council voted on the proposed plan three times and voted it down. As for raising taxes the city is very poor and had a median household income of $26,920 in 2010.
It’s very harsh to put more taxes on people at that income level so a bond insurer can be paid off at 100 cents on the dollar. What’s missing in Lex’s criticism is what poor underwriters Assured seems to be. Anyone looking at the financials of this city would have a stayed away. Assured’s whining seems like the perfect example of privatized gains and socialized losses. I thought that had gone out of favor?
The wild card in the story is the role of Sam Zell’s company, Covanta, which retrofitted the incinerator in 2007 and has a management contract to run the facility. [Correction: An earlier version of this post identified Covanta as a substantial creditor to Harrisburg including ownership of Harrisburg parking facility bonds. A company representative has pointed that this incorrect.]
In the end Harrisburg is insolvent and a debt reorganization must be made. The fight is if the city will do it in a bankruptcy court or if the state will take over the city and force a debt reorganization and asset sales. Mark Schwartz, the city’s attorney, says it best in an interview with Governing:
It’s all about process instead of substance. We can’t go into bankruptcy, but we can be put into receivership? There’s no practical difference. The bankruptcy is concerned about dollars, not politics.
Central Penn Business: Hbg. City Council authorizes Chapter 9 filing
Mayor’s Act 47 Recovery Plan: City of Harrisburg
Alleghany Institute: Chapter 9 Bankruptcy: What it Means for Pennsylvaniaís Municipalities
Cravath: Past pro-bono representation
Harrisburg bankruptcy on Twitter