Harrisburg joins Jefferson County with muniland securities fraud charge
The near-bankrupt city of Harrisburg, Pennsylvania was charged this week by the Securities and Exchange Commission with securities fraud. Here is the official language (emphasis mine):
The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.
An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.
The charge adds weight to my concern about the veracity of the statements made by public officials in stressed fiscal situations. These officials have had essentially no responsibility to make accurate statements concerning financial issues. For bond investors there are often no current financials on file for the issuer. Hopefully this SEC order sets a higher bar for disclosure.
Often I think public officials have little understanding of complex financial issues, and sometimes they are just misrepresenting the truth for political purposes. Occasionally there may also be illegal activities (see Jefferson County, Alabama). In Harrisburg I think we may have seen all three: A lack of understanding, political games and illegal activities. The SEC crackdown is a good start to clean up the first two parts of the problem. Here is what I wrote about Harrisburg’s lack of disclosure in 2011:
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.
Here is what the SEC order provided as an example of fraud:
According to the SEC’s order, another public statement available to investors on the city’s website was the annual State of the City address delivered on April 9, 2009. The address only discussed the municipal resource recovery facility as a situation that was an “additional challenge” and an “issue that can be resolved.” The address was misleading because it failed to mention that by this time, Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt. It also omitted the total amount of the debt that the city would likely have to repay from its general fund. By this time, Harrisburg knew that the Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor.
Harrisburg’s 2009 State of the City address was delivered by Stephen Reed, the mayor prior to Linda Thompson. Potential illegal practices around the city’s finances that were led by former mayor Reed have not been resolved. There have been indications that serious problems related to the city’s debt issuance existed. The Patriot News wrote about the former state-appointed receiver David Unkovic’s concerns last December:
Yet during all those years, according to Harrisburg’s former receiver, David Unkovic, Reed used fiscal sleight of hand — or worse — to build a house of cards. Today, Unkovic said, the house is about to collapse.
“There is so much corruption in this city. The city has been mismanaged for 20 years,” Unkovic said recently before abruptly resigning March 30.
The SEC cannot file criminal charges, but it refers cases to the Department of Justice. There was a raft of characters involved in the multiple rounds of Harrisburg’s bond financing. The corruption in Harrisburg is likely as large as the corruption in Jefferson County. Stay tuned.