Harrisburg, Pennsylvania’s Debt Driven Up by Profit From Fees, Lawyer Says

Harrisburg (9661MF)’s incinerator debt, which pushed Pennsylvania’s capital into insolvency, generated $49.1 million in fees to raise $310 million, a sign that the sales were at least partly driven by the profit they generated, said Mark Schwartz, a bankruptcy lawyer for the City Council.

Documents provided by Schwartz that summarize some of the debt sales tied to the trash-to-energy plant from 1998 to 2007 show the Harrisburg Authority paid $39.7 million in fees, including premiums for bond insurance. He said he has additional evidence showing that the total surpassed $49 million.

“Clearly it was the obvious profit motive of the participants which drove these public-finance transactions,” he wrote in a report to the council. The payments went to bankers, consultants, lawyers and others connected to the sales.

Typically, municipal-bond sales incur fees of less than 2 percent of the money raised, excluding insurance costs, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott in Philadelphia. Schwartz’s report indicates the fees reached almost 16 percent for the Harrisburg Authority.

“Forty-nine million is ridiculously high,” said Christopher Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007. “You’re sitting there with excessive profit, no doubt about it.”

Harrisburg itself, as well as Dauphin County, which includes the city, each received fees for guaranteeing some of the debt, which Taylor called uncommon.

Auditors Examining

Schwartz produced his report as the incinerator financings are being audited by the Harrisburg Authority, the municipal agency that owns the incinerator.

David Unkovic, the city’s state-appointed receiver, has called the fees “disturbing” and has asked lawyers to assist in the authority’s examination of the deals.

Unkovic has until Feb. 6 to produce a plan for Harrisburg to cope with its debt, which amounts to five times its general- fund budget. The proposal may call for sales of assets, including the incinerator.

Harrisburg, a city of 49,500 on the Susquehanna River, in 2003 overhauled the waste-burning plant that was in violation of environmental rules. While now running near capacity, it doesn’t produce enough revenue to cover its costs including the debt.

Schwartz said debt continued to be piled on the project even though the incinerator was operating in deficit and there was no performance bond to protect the city. He flagged a 2007 deal in which $28 million was used to pay fees and less than $2 million went into project accounts.

“This issue showed the degree to which THA, the city and the county were addicted to incurring debt to pay for anything,” Schwartz said in the report, referring to the Harrisburg Authority. “It is also testimony to Wall Street’s ability to market any piece of junk.”

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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