Harrisburg to Run Out of Money in October; Inside America's Most
Indebted City; Labyrinth of Fraud
Location: CA
Date: 2012-09-04
Congratulations to Harrisburg, the capital of Pennsylvania, for
having the highest per capita debt of any city in the country.
The town's 50,000 citizens are on the hook for $1.5 billion
according to the NPR article
Inside America's Most Indebted City.
The city has delayed payments to light bulb venders and paper
sellers. Restaurants have hired their own security. A local
strip club paid to keep the street light on. The city is
projected to run out of money entirely in October.
A judge has recently ordered a 1% income tax hike on the people
still left in Harrisburg. But the city council has promised to
fight it.
$1.5 Billion Does Not Include Schools, Pensions, Unfunded
Liabilities
The Patriot News notes
Harrisburg's eye-popping debt total is just one piece of city's
bleak financial puzzle
It’s almost impossible to say exactly how much money the elected
and appointed officials of Harrisburg have borrowed.
Missing financial audits, complicated transactions and
intertwining finances create a labyrinth of money that stretches
decades into Harrisburg’s history.
At best estimates, based upon reviews of independent reports and
audited financial statements, the amount of debt owed by the
city and its affiliated entities — with interest — stands
somewhere north of $1.5 billion.
That’s roughly $30,285 for each of the 49,528 men, women and
children living in the city and almost twice the income of the
average city resident.
While the amount of debt is eye-popping, it is only one piece of
the jigsaw puzzle that is the city’s bleak financial background.
It does not account for past-due debt payments or unfunded
pension and healthcare obligations. Nor does it include the
estimated annual deficits in the city’s and school district’s
budgets, which this year are so far estimated at $6.8 million
for the city and at least $7 million for the school district,
even with drastic cuts such as eliminating kindergarten.
A declining tax base contributes to the overall problem —
between 2009 and 2012, the assessed value of property in the
city dropped by more than $30 million, according to a school
district report.
Meanwhile, each time property taxes increase, fewer people pay
them. According to a school district report, property tax
collection rates have fallen from 87 percent to 83 percent.
The Domino Effect
City schools may find themselves in a similar situation.
In 2009, the district refinanced almost $280 million of
outstanding debt to exit swap agreements and lower debt payments
over the first few years by securing lower interest rates. It
also borrowed an additional $10 million for building projects
and equipment purchases.
In his recovery plan, former Receiver David Unkovic noted that
according to the last completed financial audit of the city —
and the letter of the law — the city could borrow still more
money.
According to his office’s calculations, the city could legally
borrow up to an additional $117 million.
Whether anyone would agree to offer the city another loan,
however, is an entirely different question.
Labyrinth of Fraud
Whenever you see stories like this, you can bet your last dime that
massive amounts of fraud are in play.
The NPR article profiled David Unkovic, the man appointed by the
state of Pennsylvania to fix the Harrisburg debt problem.
Unkovic resigned in May, then completely vanished from public life
after scrawling out a hand-written letter of resignation.
Months later, NPR tracked him down and now Unkovic believes there is
something more sinister than gross mismanagement at play.
From NPR
"Illegal conduct occurred," Bill Cluck, who serves on the board
that runs Harrisburg's incinerator, told me. "I think false
statements were submitted under penalty of law to the state
government in connection with the financing."
Stephen Reed was the mayor of Harrisburg from 1980 to 2009.
People in town famously say he never met a bond he didn't like.
He used the money borrowed on the incinerator to do all sorts of
things.
He bought strange artifacts from all over the country, dreaming
of building a Wild West museum. The city borrowed money to buy a
baseball team and build a stadium; the team was later sold at a
loss.
"The fundamental problem is he was borrowing more than he was
really allowed to under state law," Unkovic says.
In 2007, Harrisburg filed a document called an 8110 b
certificate. It was a promise, Bill Cluck says, that all the
previous debt borrowed on the incinerator was still
self-liquidating — that the incinerator would bring in enough
money to pay the money that had been already borrowed on it.
"They knew it wasn't true when it was submitted, and it's never
been corrected to this day," Cluck says.
And that, according to Cluck, was a crime.
There were 17 different revenue projections showing that the
incinerator could never earn back all the money that had been
borrowed.
So how was it that nobody — none of the law firms, none of the
financial advisers — raised questions about the wisdom of this
loan?
We asked, but they refused to respond on the record. And, Cluck
notes, all those advisers made hundreds of thousands of dollars
in fees from the loan.
Almost none of the $30 million the city borrowed in 2007 went to
the actual incinerator upgrade. It went to pay back old debt,
and to pay fees to the many firms that set up the deal in the
first place. The same firms ended up on virtually every deal,
Cluck says.
To make matters worse, the city ultimately was on the hook. If
the incinerator couldn't make the money back, it would fall to
the taxpayers of Harrisburg. And this makes Bill Cluck crazy.
"Where's the advocate for the city to say, 'Hey, you're getting
screwed by the terms of these deals,'" he says. "It never
happened."
Where Did the Money Go?
Stories like this irritate me because they always seem to stop
short. Citing Cluck, NPR says money went to "pay fees to the many
firms that set up the deal in the first place. The same firms ended
up on virtually every deal".
I can certainly believe that. Indeed I would be shocked to find out
otherwise. But where is the list of names? What banks and
politicians profited from these shady deals? Inquiring minds and
taxpayers have a right to know.
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