Harrisburg deserves a bright future

A debt recovery plan for Harrisburg, Pennsylvania was filed on Monday after a year of negotiations with creditors, unions and other stakeholders. The plan’s most important attribute is that it saves Pennsylvania’s capital city from declaring bankruptcy and it may fiscally stabilize the municipality for years to come.

The plan includes an extension of maturity of general obligation bonds and a reduction in labor costs through 2016. The city will still be responsible for substantial payments on its general obligation bonds. In 2013, the debt payment is set at $5,970,000 and at $7,670,000 for every year from 2014 through 2016.

The receiver has estimated that the city will also pay $3 million per year from 2013 through 2016 on existing loans or leases for equipment and short-term borrowings. This equals about 17 percent of the estimated general fund revenues of $60 million for 2014. This is a crushing debt burden for any municipality, but projections show it is sustainable through 2016 (page 73).

The plan is expected, starting in 2014, to receive general fund savings of approximately $2.4 to $2.7 million per year in labor concessions for the police union and AFSCME. This is a substantial concession, though the firemen’s union has not yet agreed to participate.

According to the Patriot News, “residents of Harrisburg would see no tax increases other than their already-increased Earned Income Taxes remaining at the 2 percent rate approved last year by City Council. They would also see metered and garage parking rates go up. Metered rates would increase to $3 per hour from the current $1.50 per hour.”

Free speech or securities fraud?

Mark Funkhouser, the director of the Governing Institute and a former mayor and auditor of Kansas City, took a few swings at the SEC for its securities fraud prosecution of Harrisburg, Pennsylvania. Funkhouser has three concerns with the SEC’s case.

First, he correctly points out, as the SEC case contends, that the city of Harrisburg did not issue any financial statements between January 2009 and March 2011. The SEC says that because of this, investors had to seek out other statements made by public officials that included material misstatements. Funkhouser blames it on investors for poor diligence. He says:

You’d think it would be obvious to potential investors that if there’s not much current information available about a city’s finances they might want to think twice about buying its securities. But investors don’t always exercise proper diligence, and it wouldn’t have hurt for the SEC to have driven home that point.

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.

What Harrisburg learned while waiting to file for bankruptcy

Last year, muniland watched as the mayor, city council members and state legislature went through a tortuous period of fighting over filing municipal bankruptcy for Harrisburg, Pennsylvania. The city council filed a bankruptcy petition, but the mayor objected. Then the legislature passed a law that denied Harrisburg the right to file until November 30, 2012. The bankruptcy judge threw out the bankruptcy petition and the governor appointed a receiver to take control of the city’s finances.

The first-state appointed receiver, the seasoned bond attorney David Unkovic, worked for about six months and then resigned from his position because he felt he was being obstructed in his efforts. He testified to the state senate about the substantial problems with the city’s debt issuance. Roxbury News captured his testimony about the cronyism and his recommendations to legislators:

The delay that occurred last year gave Unkovic enough time to review the bond offerings that pushed the city into insolvency. Unkovic said in his testimony:

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.

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.

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.

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.

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.

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.”

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