Nov. 25 (Bloomberg) -- Harrisburg left potholes unfilled and raised income taxes as it sank into debt from an incinerator that was supposed to reap millions. Now, residents of Pennsylvania’s capital are days away from shedding the facility that drove the city to insolvency.
The Lancaster County Solid Waste Management Authority said it would issue $132.3 million in tax-exempt revenue bonds as early as next week to finance its purchase of the incinerator, according to deal documents and William B. Lynch, the city’s state-appointed receiver. Proceeds would go toward creditors owed $362.5 million, or about seven times the city’s general-fund budget.
“When the incinerator is actually sold, an enormous burden is lifted from the city,” Lynch said by telephone today. “It marks the start of a new beginning.”
The sale marks one toward fiscal stability. Another municipal-bond offering that will finance the lease of the city parking system, also to go toward incinerator claims, will occur in December, Lynch said. Harrisburg must then deal with other challenges, such as a limited tax base and a poverty rate more than twice Pennsylvania’s.
The plight of Harrisburg, a city of about 50,000 on the Susquehanna River, stems from the borrowing binge of former Mayor Stephen Reed. Over his 28-year tenure, the municipality spent millions of dollars on projects from a minor-league baseball team to a Wild West museum that was never built.
The trash-to-energy facility, which dates to 1972, fell out of compliance with federal regulations in the 1990s. In 2003, Harrisburg decided to overhaul and expand the plant that already had over $100 million of outstanding debt, according to an audit released last year. City officials and advisers knew there was “substantial risk” that the facility wouldn’t repay its debt and proceeded with bond deals anyway, the report said.
Costs ran over estimates, the contractor was fired, and taxpayers ended up owing more than $300 million for a project that was supposed to cost $64.2 million and generate a total surplus of $57.4 million by 2028, according to a 2001 projection cited in the audit.
Dauphin County and bond insurer Assured Guaranty Municipal Corp. made incinerator debt payments after the city started skipping them in 2009. Harrisburg unsuccessfully filed for bankruptcy in 2011 and that year was placed in receivership, Pennsylvania’s only one for a municipality.
Under Lynch’s recovery plan, proceeds from the bonds financing the plant’s sale will go to the county and Assured, a unit of Hamilton, Bermuda-based Assured Guaranty Ltd. The county and company will also receive cash from the lease of the parking system.
The Lancaster authority buying the facility is selling the bonds in two series. The largest, at $108.29 million, received a grade of AA-, fourth-highest, with a stable outlook from Standard & Poor’s, deal documents say. The second piece, at $24 million, is rated one step higher at AA and is guaranteed by Dauphin County, the documents show. The final maturity of both deals is 2033.
The agency, which handles trash in Lancaster County, will give the plant a new name -- the Susquehanna Resource Management Complex. Harrisburg will pay tipping fees of $190 per ton annually through 2019, increasing to $195 in 2020, documents show.
Guggenheim Securities, LLC, Janney Montgomery Scott LLC and Wells Fargo Securities are underwriting the incinerator obligations.
A Harrisburg Authority incinerator bond backed by Assured Guaranty Municipal traded Nov. 22 at an average yield of 5.5 percent, or about 162 basis points above benchmark debt, data compiled by Bloomberg shows. The average yield premium was 214 basis points on June 20.
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