The sharks circling Harrisburg
Harrisburg, Pennsylvania is being smothered by its outstanding debt of $463 million. The sharks are circling and the city has only about $244 million in assets that can be liquidated easily. Let’s guess how this game will play out.
The debt consists of two buckets. The first contains publicly-issued bonds, capitalized leases and various other loans and obligations that are considered “general obligations” of the city. This debt totals about $130 million and is in the form of stadium, redevelopment, sewer and other sundry municipal debt. The city has been paying approximately $12 million a year, or 20 percent of its annual revenue, to service this debt.
The second and bigger bucket is for approximately $330 million of bonds and loans that the city did not directly issue but did guarantee to fund the local incinerator and sewer plants. Although the city is backstopping this debt, it has been unable to make these payments recently and they have been paid by the bond insurer, the county and Covanta, a private company which as a management contract to run the incinerator plant. These debt payments were about $14.6 million for 2010.
The city has not published a “CAFR,” or Comprehensive Annual Financial Review, since 2008 and I have not been able to find any useful budget documents with the exception of the 2011 Harrisburg Municipal Financial Recovery Act report, which the state assigned an overseer to compile. Basically, with the exception of the overseer’s report, it’s not clear what the financial picture is for Harrisburg.
Last week at the Bloomberg State and Local Finance conference I was able to email a question to Harrisburg mayor Linda Thompson to gauge what her approach would be to managing creditors looking for their piece of Harrisburg’s meager spoils. Working from the values I’d heard for the incinerator and parking garages, even if the city sells these assets it will still have about $180 million of stranded debt left to pay, including the general obligation bonds.
PANEL MODERATOR: I’ve actually got key two questions related to that that have come in from — by e-mail. One is, well, what about the stranded debt? If you sell or lease the parking garages and the incinerator, you still have, the questioner said, “around $180 million of stranded debt.” I don’t know if that’s a correct figure or not.
THOMPSON: Listen. A mayor’s got to do what a mayor’s got to do. And the fact of the matter is, I haven’t seen anyone to bring me a plan that demonstrates that there’s a check out there waiting for me to pay $310 million of debt.
Which is why I said we have a spirit of cooperation here against — with all stakeholders. AGM stands to lose on this. The county stands to lose. And so does the city of Harrisburg and our state government. So, we all have to be big boys and girls in the room and do what we do best, and that is to solve our challenges.
The stranded debt issue is what we’re at the table battling about, and I’ve made it no secret to the state, the county, AGM, and Covanta that I will not settle for a deal that will leave any amount of stranded debt on the table.
And again, I’m not quite sure if the person is correct about $100 million stranded debt. I have someone checking the numbers now so that when we go into the next meeting…
So less than a week ago the Mayor of Harrisburg was not sure about how much debt her city would have left after selling its best assets. The size of the debt load is the most important question in the fight for Harrisburg’s survival, but unfortunately the city’s financial situation is anything but straightforward. For instance, there are approximately $160 million of interest-rate swaps executed by the Harrisburg Authority (the incinerator entity) which may or may not be a liability of the city. Who knows? With so little current financial information in the public domain, it’s near impossible to find out.
I’d really encourage the mayor and city council to claw their way into federal bankruptcy court where they will have an opportunity to settle all creditor claims equitably. Bond insurers and other creditors that are owed millions know the numbers cold and will do anything to gain the largest settlement from this deal. They don’t view fairness, which is the mayor’s goal, as the endpoint in this game.