Harrisburg to Run Out of Money in October: Inside America's Labyrinth of Fraud

Mike Shedlock
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Posted: Sep 03, 2012 12:01 AM

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, NRR 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.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com