Watching Harrisburg crash and burn
We are now watching Harrisburg crash and burn. The busted Pennsylvania capital of 49,000 is crushed by $463 million in city debt and an additional $282 million in debt for the public school system. The state senator representing the area, Jeff Piccola, used his power last June to pass state legislation (Act 47 amendments) that shackled Harrisburg with accepting a receiver appointed by the governor and barred the city from filing bankruptcy until June 30, 2012.
Adhering to the Act 47 requirement that the mayor work with the city council to approve a fiscal recovery plan, Mayor Thompson fought a months-long war that resulted in her plan being rejected three times and the governor’s appointment of a receiver, David Unkovic. After the Dauphin County court approved Unkovic last November, he tried to help the city balance the budget, sell assets and negotiate with bondholders. Amid all that action, a subset of the city council, against the mayor’s wishes, filed a Chapter 9 municipal bankruptcy petition that was ultimately rejected by a federal judge as a result of Senator Piccola’s Act 47 legislation.
Harrisburg’s biggest albatross is its responsibility for the debt of the Harrisburg incinerator – a monstrosity of design and a debacle of public financing. The responsibility for this debt first lies with the city and then with Dauphin County and bond insurer Assured Guaranty.
On Apr. 2 Unkovic inexplicably announced his resignation in a letter to the governor. This followed a dramatic press conference Wednesday in which Unkovic began to name names in the Harrisburg drama, beginning with State Senator Piccola, who recently announced his retirement from electoral politics. Also among those Unkovic named was the lobbyist who had worked with the staff of Governor Tom Corbett on the legislation to place Harrisburg into receivership and bar it from filing bankruptcy. Citizen journalist Tara Leo Auchey captured the Unkovic yarn-spinning at his hastily arranged press conference:
Which leads us to another player in the true Harrisburg debt story – Senator Jeff Piccola. During Unkovic’s press conference, he referred to the closing of the Dauphin Meadows landfill and Piccola’s position on that. Now, this is another history lesson but an important one. In 1990, Senator Piccola fought against the Incinerator and fought for use of the landfill for Dauphin County trash. The State agreed and all County trash went away from the Incinerator and to the landfill. When that happened, the Incinerator lost immense value over night.
Ten years later in 2000, Piccola switched sides, dramatically and flamboyantly. He decried the landfill [as] a nuisance and joined in a community-based lawsuit to shut it down. Piccola announced the Incinerator should be used for all Dauphin County trash.
And it was. Dauphin County entered into a municipal waste agreement with the City and The Harrisburg Authority. It is because of this agreement — and only because of this agreement — that the broken, deprived Incinerator was able to get financed to get fixed, since Dauphin County would guarantee the bonds. Piccola helped make it happen.
But Unkovic didn’t stop his list of naming names there. He called out the lobbyist Stan Rapp of Greenlee Partners, who is the lobbyist for both Dauphin County and for the bond insurer AGM [Assured Guaranty]. As we discovered last Fall, Stan Rapp was part of numerous meetings with the Governor and the Governor’s representatives about Harrisburg’s Act 47 process, which eventually became the City’s takeover by the State pushed by Dauphin County officials and Senator Piccola.
When I first wrote about Unkovic last November, I mentioned that he had worked for the law firm that represents Assured Guaranty, the city’s bond insurer, for 27 years:
The local paper has already highlighted that Unkovic has direct ties to some of the creditors in the Harrisburg case. The Harrisburg Patriot News reports:
The receiver Gov. Tom Corbett named to lead Harrisburg’s fiscal recovery is deeply connected to three firms that represented bondholders and Dauphin County in the incinerator debt crisis.
David Unkovic worked for Saul Ewing in Philadelphia for 27 years. Saul Ewing represents the biggest creditor of the incinerator debt, Assured Guaranty Municipal Corp., the company that insured much of the more than $300 million in incinerator debt.
There is also an excellent video of Unkovic responding to the conflict of interest question in the Roxbury News (clicking on the small picture on the upper left will launch a video). Reuters Legal also reported on the conflict story.
Harrisburg back to square one
Federal bankruptcy judge Mary France dismissed the Harrisburg City Council’s petition to file municipal bankruptcy last Thursday. According to Bloomberg her ruling stated:
“For Chapter 9 bankruptcy to work, all of the branches of the municipality must be on the same page,” France said. “Therefore I find that city council was not authorized to file the petition.”
Judge France has hit the nail on the head. The legislative and executive branches of Harrisburg’s government have been behaving like two sides of a family fighting over a deceased parent’s estate. The battle has been brutal and family members have talked past each other. Harrisburg mayor Linda Thompson seems to have little patience for others’ views, which is a tough way to govern.
So Harrisburg is cast into the arms of the soon-to-be-confirmed state receiver, who will have to return the city to fiscal solvency. But Harrisburg’s debts are just too high to pay off, and the incoming receiver has no authority to force bondholders and bond guarantors to take less than the face value of their paper. On Twitter Jim Warner, the CEO of the Lancaster County Solid Waste Management Authority, suggested that the leftover debt after the sale of the city’s main assets — its incinerator and parking garages — would be about $55 million.
But this doesn’t take into account the other debt of the city. My rough calculations show the city will have a debt load of about $224 million. And although it’s not consolidated, the city is also responsible for over $200 million of school debt.
This small city of 50,000 — where over 25 percent of residents live under the poverty line — is responsible for shouldering $425 million in debt. The new Harrisburg receiver needs to be Superman to bring this city back to fiscal solvency.
Harrisburg needs the bankruptcy option
Pennsylvania Governor Tom Corbett took the next step in the process of pushing the bankrupt capital of his state towards fiscal recovery today. Bloomberg reports:
David Unkovic, chief lawyer for the Pennsylvania Community and Economic Development Department, is set to run the finances of Harrisburg after Governor Tom Corbett nominated him as the state’s first municipal receiver.
Once approved by a state court, the overseer may act without the consent of the bankrupt capital city’s elected officials. Unkovic’s appointment may be reviewed as soon as Nov. 28.
Unkovic has 30 plus years of experience as a bond counsel. The governor has also hired a Washington law firm to assist Unkovic on his fiscal restructuring efforts. Harrisburg has an impossible pile of debt to service, and much of it needs to be discharged to make the city’s finances sustainable.
Fortunately the legislation that the receiver is working under relegates Harrisburg’s mayor, Linda Thompson, to a sideline advisory role. I’m sure the new receiver will have a few team photos taken with her and then promptly relegate her to parade and ribbon-cutting duty.
One of the biggest tasks that the soon-to-be-confirmed receiver has is to go down to the federal bankruptcy court on Walnut Street and withdraw the petitions that the mayor and state filed objecting to the city’s Chapter 9 bankruptcy filing. Bankruptcy should be the biggest tool in Unkovic’s toolkit to get Harrisburg to solvency.
The reason that Unkovic needs Chapter 9 is that as a state receiver he has no authority to “cram down” bondholders and bond guarantors. He has power to sell the assets of the city but it’s doubtful there will be enough to service the remaining debt even after a fire sale. It was always a little hard to figure this out because Mayor Linda Thompson had not presented a budget and there are no current financials for the city. It’s literally a fiscal mess.
Harrisburg’s leadership shortage
Harrisburg is a town that’s been crushed by debt and years of incompetent management. The city has been led by a mayor, Linda Thompson, who is unable to work with a majority of her city council and who will likely find her role greatly diminished as the state takes fiscal control of the insolvent city. I’m not sure that I’ve ever seen a politician who has so little control over the affairs of her city. Edith Honan and Kristina Cooke of Reuters did an outstanding backgrounder about the level of dysfunction among the Harrisburg’s political class:
Prayers notwithstanding, [Linda] Thompson and [Comptroller] Dan Miller, the city’s top financial official, refuse to speak to one another, even as the city they lead continues hemorrhaging money. Thompson characterized Miller as a “political opportunist who will stop at nothing to accomplish his self-centered ambitions.” Miller, who plans to challenge Thompson for mayor in 2013, said he considers Thompson “paranoid,” “not well educated” and “a phony.”
His words seem kind compared with those offered by four former Thompson aides. They told the local newspaper that the mayor isn’t fit to hold office.
As Harrisburg proceeds towards state receivership and Chapter 9 bankruptcy, the mayor rarely displays a full understanding of the financial condition of the city. I wrote previously about her lack of knowledge of the amount of “stranded debt” the city would have after selling its most valued assets. I’ve seen her resist numerous calls for the completion of a forensic audit of the city incinerator, which is where most of the debt has accumulated. This is important because it’s not clear that all the dealings around the project were on the up-and-up. The mayor’s campaign manager served as chairman of the incinerator authority until March 2010, and some have suggested that she may be trying to protect incompetence, or perhaps worse. In addition, his law firm had substantial billings to the incinerator authority.
Mark Schwartz, the attorney for the majority of the Harrisburg City Council, released documents today that show he has petitioned the SEC and IRS to investigate if the bonds issued for the incinerator really meet the conditions of a tax-exempt debt. It’s an interesting strategy because it pushes the facts and conditions about the incinerator debt and derivatives out into the open. When institutions operate in the dark, one never knows what may be found. Schwartz also released a long list of law firms that have been involved in underwriting the incinerator’s debt between 1993 and 2003. Seemingly every law firm in Harrisburg has been involved in these deals at one point or another.
Pennsylvania has a long and sordid history of political corruption. The governor, Tom Corbett, will soon approach the Commonwealth Court to seek appointment of a receiver to take over the city. This receiver would benefit from endorsing the Chapter 9 bankruptcy filing, which a majority of the city council filed in October. Chapter 9 protects the city from creditor lawsuits, and, more importantly, puts the bond guarantors — Assured Guaranty, Dauphin County and Covanta — in a subordinate position on their claims. Harrisburg is morphing from a minor debacle to a full-on money fight. The city and state need as much protection as they can get.
Further:
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.
Harrisburg is insolvent
The capital of the Keystone State is swirling with political infighting and power grabs over the issue of money. There is just not enough of it to pay all of Harrisburg’s creditors who have appeared at the door. Now that the county has said “Enough!” to providing more loans to cover debt payments, it’s the end of road and events are accelerating.
Harrisburg had already filed for municipal bankruptcy a week ago, but that didn’t stop the state from finalizing legislation that will put the city into receivership. Pennsylvania’s latest move adds another layer of complexity to the resolution process. The Harrisburg City Council responded to the state’s action with the following statement published in the Patriot News:
“First, they attempted to restrict the city’s ability to generate revenue and negotiate with its creditors, which were allowed in the Act 47 law, as well as penalize the city if it filed for bankruptcy. But that wasn’t good enough. Now, this takeover legislation gives a receiver unlimited power to sell any resource the city and its authorities have, without allowing Harrisburg an alternate source of revenue.”
“Wall Street can get paid 100 cents on the dollar and the people of Harrisburg will be subjected to exorbitant property tax and other increases so that we can pay our operating budget. And after all the city’s assets are sold and the city is on its knees, the receiver has the ability to file for bankruptcy to pick the bones of our city clean.”
Harrisburg mayor Linda Thompson rightly contends, in the Bloomberg video above, that the city is not technically in bankruptcy. This is true because the federal bankruptcy judge overseeing Harrisburg’s case has not yet ordered a public notice of the Chapter 9 bankruptcy filing to be publicized in the Wall Street Journal and Harrisburg Patriot News. But this is a mere technicality because Mayor Thompson’s city is drowning in debt and doesn’t have sufficient assets and annual cash flows to support that debt. In blunt terms Harrisburg is insolvent; there are three paths forward that it can travel.
The first option would be for the mayor and city council to work collaboratively in the next 30 days and approve a plan to sell assets, cut the city’s budget, raise taxes, appeal to the state for some form of “payment in lieu of taxes” (about half of the commercial properties in the city are owned by the state and pay no property tax), and negotiate with bond creditors and guarantors to reduce those liabilities. Given the animosity between the city council majority and the mayor the probablity of this course of action appears to be zero.
The second course is receivership, which was adopted by the state legislature yesterday. This path allows the receiver unlimited power to sell any asset of the city and its authorities. The problem with this path is that the assets of the city — principally the incinerator and the parking garages — are worth about $262 million net. The city needs to pay off approximately $314 million of liabilities related to the incinator. This leaves the city with an additional $52 million in “stranded debt” which will be added to other city debt of $130 million for a total of $182 million. The city council rightly objects to having to service this additional debt with no new revenues.
crazy stuff, and very interesting. what stops the legislature from simply revoking the municipal charter? why cities can seek federal bankruptcy court protection boggles the mind.
would be nice to know how much property tax is foregone due to state ownership of real estate. i would imagine what’s lost in property tax is indirectly recovered through the jobs offered by state gov.
Harrisburg has more than incinerator debt
The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.
The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.
Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.
We should step back, though, and take a broader view of events and discern some important lessons for municipal governance. For example, current news reporting has focused on the $320 million of debt owed for the unprofitable incinerator plant. But the city has an additional $143 million dollars of debt, which they either issued or guaranteed. Harrisburg is a city of 49,000 with a majority of low income residents who had a median household income of $26,920 in 2010. The city is way over it’s head in debt with municipal debt per household of approximately $23,734. It’s hard to see how this can be serviced.
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:
The Dummies Guide to the Pension Crisis
Hat tip to Ted Nesi of WPRI.com for pointing out this excellent union sponsored video that discusses the problems for the public pensions of Rhode Island. Although the details are specific to that state the structural problems apply to almost every state because public pensions across America are underfunded. Every state faces problems that are politically or financially difficult. Either taxpayers will be paying more to top pension plans or retirees will be receiving smaller pension payments. Pension reform is a complex topic and I hope we see more educational efforts like this video.
Further:
WPRI.com Judge Taft-Carter issues decision in pivotal RI pension case
Desperation costs are steep
Harrisburg, the state capital of Pennsylvania, has narrowly averted filing for Chapter 9 bankruptcy as their independent city Parking Authority has secured a loan to advance future payments to the city for use of city land. Unfortunately the unnamed lender will be charging the Authority 10.75% interest. The costs of desperation are steep. This one-off lease payment from the Parking Authority allows the city to make their September 15th bond payment on their crushing incinerator debt and avoid Chapter 9, but what about the next bond payment in 2012? They don’t seem to have any more assets to borrow against. So they’ve postponed the problem but not solved it. From Bloomberg:
The Parking Authority will borrow to make the payment, and some on the council balked at the interest rate of as much as 10.75 percent on the loan. About a third of the city’s 49,500 residents live below the federal poverty level. The lease covers land under several garages, and the loan costs may reduce the authority’s income, which provides revenue to the city.
Local governments’ tough choices between payrolls or bond payments?
Harrisburg walks the well worn path
The capitol city of Pennsylvania, Harrisburg, is functionally if not legally bankrupt. Yesterday the City council voted against the mayor’s rescue plan which would have brought them a small reprieve but would not have fixed their core financial issues. The city’s main problem is a grossly expensive incinerator project which has burdened the city with way too much debt. Their situation is similar to the sewer system woes of Jefferson County, Alabama on about one tenth the scale. Like Jefferson County, anger about bondholders being prioritized ahead of the needs of citizens was on display at yesterday’s city council meeting. From Reuters:
“Wall Street gets paid and Main Street gets the shaft,” Councilman Brad Koplinski, who voted against the plan, said during the angry, packed council meeting.
At the root of Harrisburg’s troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning incinerator that left the city saddled with a $300 million debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt. Harrisburg Authority is investigating how its debt load mounted up.
The municipal bond market has long been aware of the fiscal problems in Harrisburg. And like Central Falls, RI and Jefferson County, AL it’s been a struggle for public officials to try and make bond payments and continue operating government functions. There is just not enough money to go around. Because Harrisburg is the state capitol it is likely to be taken over by the governor. Stay tuned.
Regressive state taxes
In a Los Angeles Times opinion piece entitled “An undeserved attack on the ‘undeserving poor’” Michael Hiltzik battles back against the conventional wisdom that low income people are not helping support the government since they pay little or no federal income tax. He rightly points out that those in lowest income brackets pay higher amounts of their earning in local and state taxes. So they are helping carry the shared burden. From The LA Times:
-
Resident Muniland expert
-
