The Tribune Democrat, Johnstown, PA

Local News

October 6, 2012

Harrisburg’s debt reveals faults in how state OKs borrowing

HARRISBURG — Harrisburg’s incinerator debt was tied to inaccurate cost and revenue estimates, as well as a state approval process for borrowing that did not examine the wisdom of the city taking on this debt.

This observation came out of a Senate Local Government Committee hearing last week on an audit of the failed incinerator project, which accumulated more than $300 million worth of debt.

And because of this fiscal crisis, the Department of Community and Economic Development, which oversees this approval process, could be revamped.

DCED’s role in the approval process is limited to the paperwork.

“Ultimately we verify that they have the proper paperwork and as was in testimony yesterday, the i’s are dotted and the t’s are crossed,” said DCED spokesman Steve Kratz. “The sworn statements that are submitted to the department that swear the information within those filings is, in fact, factual is essentially on what we base each evaluation.”

DCED approved at least nine borrowing requests for the incinerator throughout the 1990s and early 2000s based on sworn testimonies from consulting professionals on the finances of the incinerator.

And the city guaranteed the debt taken on by the Harrisburg Authority, triggering the approval process.

Former Mayor Stephen Reed testified Thursday that much of the problem was due to inaccurate cost and revenue estimates for retrofitting the incinerator. The debt was labeled “self-liquidating,” meaning the revenue from the project would cover operational expenditures and the debt service.

In hindsight, this was not the case.

State Sen. John Eichelberger, R-Blair, chairman of the Senate Local Government Committee, said DCED’s approval process will “absolutely” be reviewed in the wake of the incinerator incident. Following the hearings, the committee will consider new legislation on municipal borrowing, he said.

One idea would involve issuing penalties, such as fines or license revocations, to the third parties who draft inaccurate borrowing agreements and estimates.

“They drive that whole process, and they are definitely responsible,” Eichelberger said of consulting professionals.

Eichelberger said DCED’s review process should not be overhauled completely, which would be costly and time-consuming. A more tailored option would be to have the state pay more attention to unusual projects – such as an incinerator – that involve higher-risk financing.

“With this amount of money, if it wouldn’t have been self-liquidating, maybe there should’ve been more scrutiny,” Eichelberger said.

State Sen. Mike Folmer, R-Lebanon, who was also at the hearing, said DCED’s process should be evaluated.

“What do we need to do to change that process? What do we need to do to make it have more teeth?” Folmer asked.

“Because, what it seemed like to me from the answers was that they basically shuffle paper around.”

He also said he questioned the role of consultants. Folmer said he didn’t have much faith in the third-party professionals on the Harrisburg incinerator project, who signed off on high-risk financing deals and interest rate swaps.

“For the $328 million of debt, there’s almost $50 million of consulting fees,” he said. “What were they consulting?”

DCED consistently approves billions of dollars for hundreds of municipal borrowing projects on an annual basis under the state Local Government Unit Debt Act. In 2011 alone, approvals under the act totaled more than $6.5 billion on more than 1,000 projects.

But under the law, DCED is not responsible for overseeing the “wisdom of the debt,” according to DCED’s explanation of the law.

Legally, the department lacks the authority to offer any further assessment, Kratz said.

Steven Goldfield, a bond expert who authored a portion of the Harrisburg incinerator audit, testified Thursday that he was cautious about legislative fixes.

“You can’t legislate good financial taste. You can’t require professionals to do certain things,” he said. “I don’t know if this is going to come down to a legislative fix, until we hear from everyone else and get the rest of the documents.”

The next testimony on the Harrisburg incinerator audit will be Oct. 29. The list of testifiers has not been made public.

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