Garbage In, Garbage Out

Harrisburg, PA declares bankruptcy largely due to a trash-to-energy incinerator project.

In what might be best described as a cautionary tale about over-borrowing for green energy "solutions" to municipal problems, Harrisburg, PA filed for bankruptcy last week. The city council voted 4-3 against a plan in which the city would sell or lease some of it assets to pay down its debt. The Chapter 9 filing reflected a divide between the council and state lawmakers who were expected to finalize legislation amounting to a state takeover of the city's financial recovery plan. "There is definitely a sense of us versus them,'' said Mark Schwartz, the Harrisburg City Council's lawyer, who prepared the filing. "There are members of the city council who don't want to be pushed around anymore." Despite the bankruptcy, the mayor's office announced that bondholders and city workers would continue to be paid.

Harrisburg has a total of $458 million in outstanding claims, but the largest chunk of that debt by far comes courtesy of the project derisively referred to as the "incinerator from hell," the waste-to-energy facility that has amassed $310 million of it. The total debt is five times what the city has in its general fund, according to Stateline newspaper.

How did it happen? The history of the trash-to-energy incinerator is a saga of lofty intentions undone by incompetence. Former Mayor Stephen Reed, turned out of office in 2010 after 28 years, was largely responsible for the debacle, which began in 2003. The Harrisburg Authority, the public entity charged with providing solid waste management services for the city, approved a plan to retrofit Harrisburg’s incinerator for $120 million. It was a response to the reality that the original facility, built in 1972, frequently broke down. Furthermore, tests revealed that the facility's lone smokestack, whose dark colored output occasionally floated over the city, contained highly toxic mercury and dioxin contaminants.

When Reed became mayor, the facility built to turn garbage into energy -- and a municipal expense into a profit -- was losing money. Reed stopped the bleeding and turned the incinerator into a profitable enterprise by hiring a professional management staff, and, in the early 1990s, selling it to the Harrisburg Authority, whose board was appointed by the mayor. The move brought money into the city coffers and insulated city politicians from any blame for rising trash disposal rates. Rates which are now some of the highest in the nation.

The amendment of the Clean Air Act imposed more stringent emission standards on the incinerator, and when one of its two boilers failed to meet EPA dioxin standards, environmental officials shut the facility down in December of 2003. At that point the city still owed $104 million on it. They decided the lesser of two evils was to issue $120 million in new debt and upgrade the facility, rather than close it and take the loss, hoping the improvements would garner enough of a profit to cover both the old and new debt. Barlow Projects Inc., based in Fort Collins, CO got the contract, primarily for being the cheapest bidder by far--and despite the fact they had never built anything that large. Their low-ball bid, $40 million less than the others, concerned many city officials, but reality intruded: there was no way the city could afford anything more expensive.

It was a fatal mistake greatly exacerbated by the failure of the city to get a performance bond--because Barlow didn't qualify for one. City officials cobbled together a workaround in lieu of a bond which, according to former council member and current Mayor Linda Thompson, the city council never knew about. “Countless hours of tapes prove that the council went through very intensive public hearings,” she claimed. “How that got away from us is mind-boggling to me.”

In 2006, Barlow's ineptitude became impossible to ignore. The city fired the company and brought in Covanta Energy. What they found was shocking: Barlow had “completely scavenged” a third boiler to maintain two others, despite the fact that boiler number three was the critical element needed to pay off the borrowed money. Without it, the facility was operating at two-thirds capacity and losing around $1 million per month.

In 2007, the council stripped the mayor’s previously used authority to appoint the Harrisburg Authority’s board, precipitating a lawsuit by Reed (which he eventually won) and the seating and unseating of several subsequent boards. The ensuing political standoff made it impossible to pursue other ways of raising revenue, such as Reed's proposal to sell city-owned garages for 75 years in order to net $100 million.

In 2009, Thompson announced she would run against Reed. She subsequently won the Democratic nomination and was elected mayor, largely riding on the coattails of Barack Obama to a narrow 800-vote victory. Yet the political dysfunction remained, and the effort to sell city assets went nowhere. In 2010, the city and authority failed to make payments on the then-$288 million of debt, which forced its other guarantors, Dauphin County and bond insurer Assured Guaranty Municipal Corp., to make millions of dollars in payments on its behalf. Dauphin County commissioners, furious about Harrisburg’s failure to craft a solution to the crisis, authorized Assured Guaranty Municipal to file a lawsuit against the city. They did, along with Covanta, and bond trustees TD Bank and M&T Bank Corp. (MTB). On September 15, 2010, the city averted general obligation bond default when the state accelerated $3.6 million in funds earmarked for pensions and fire protection to cover that payment.

It didn't matter. In June of 2011, the city council voted 4-3 to prepare for bankruptcy even as it continued to take testimony from consultants regarding Act 47, a Pennsylvania "distressed cities" program which called for the sale of municipal assets, dismissals and changing workers’ contracts. In September, the House chamber of the state legislature voted 185-9 to approve a bill allowing for a state takeover of any municipality which fails to adopt Act 47. The state Senate votes on October 17th, where it is expected to pass, and after which Republican Governor Tom Corbett is expected to sign it. It would allow the governor to maintain vital city services and appoint a "receiver," subject to Commonwealth Court approval. Upon approval, the receiver would be given broad powers to implement necessary reforms.

In an effort to maintain control over their own city, Harrisburg declared bankruptcy to avoid that takeover. "This is the only option," said Council member Brad Koplinski, one of the four who voted for the measure and who faces reelection in four weeks. "The taxpayers and the city have been pushed against the wall by the bondholders and the state and to some extent by the administration. We know it's not popular," he added. "We felt it was the best thing to do." City council lawyer Schwartz agreed. Calling the pending bill "a political grab" he contended that it was nothing more than an attempt to insulate the bond insurers form their losses. "You got paid your premiums, OK?" he contended. "So pay your losses. This was a great lucrative game."

Mayor Thompson strongly disagreed, calling the filing "shameful" and blaming "petty politics" for the decision. She insisted the problem would be better solved by an overall debt-reduction plan requiring concessions from lenders, labor unions, contractors--and taxpayers. She might get concessions from the first three, but in a city of 49,500 people--29 percent of whom live below the official poverty rate--raising taxes may be highly problematic.

It may also be moot. A spokeswoman for Republican Gov. Tom Corbett, elected in 2010, indicated he has no intention of backing down. "From our perspective, [declaring bankruptcy] is an illegal action," she said. "It won't stand." A spokesman for Mayor Thompson, Robert Philbin, agreed. "There are procedural matters the solicitor objects to, as far as how the resolution was handled, and the quote-unquote hiring of counsel," said Philbin. "The solicitor also says only the mayor, in conjunction with the solicitor, can file for bankruptcy on behalf of the City of Harrisburg."

The bigger picture? The municipal bond market itself, which contains $2.9 trillion in investor assets. George Rusnak, national director of fixed income for Wells Fargo Private Bank, calls Harrisburg's declaration of bankruptcy an "isolated event," while other analysts are confident that any "contagion," while possible, would not stretch beyond the state's borders. Municipal bankruptcies are indeed relatively rare, with only a few dozen filed in the last thirty years. Yet so was the failure of major banks until Bear Stearns and Lehman Brothers collapsed in 2008.

As for Harrisburg itself, the confusion surrounding the current dilemma was best expressed by resident Stanley Gruen. “The choice is fiscal suicide or a state takeover. I don’t know which is better,” he said. That odious choice, has been engendered by the outstanding debt of an incinerator which by itself, divided by the total population, comes to over $6200 for every man women and child in the city. A city with a 29 percent poverty rate. Perhaps the first topic of conversation that needs to be addressed in Harrisburg--along with countless other cities and towns around the nation--is what constitutes anything remotely resembling fiscally responsible governance.

Tags: Bankruptcy, Pa.