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Forum Post: Harrisburg, PA has a debt of over $30,000 for each of it's 49,500 Citizens

Posted 10 years ago on Sept. 2, 2012, 9:11 a.m. EST by Uneasy (19)
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Harrisburg's eye-popping debt total is just one piece of city's bleak financial puzzle NICK MALAWSKEY, The Patriot-News

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.

By comparison, in suburban Lower Paxton Township, which has roughly the same population as Harrisburg, the debt per resident — including their portion of Central Dauphin School District — is about $5,000 per person.

The bill won’t come due tomorrow, or even next year. But it represents a slow drain on the city’s coffers that stretches out for another 20 years or more.

Some of the outstanding debts — for parking garages, sewage systems and building projects — are designed to pay for themselves through fees, leases or public-use costs.

In other cases, the bills cannot be paid.

Rally Against Proposed Harrisburg School District Funding Cuts

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.

The schools are facing unprecedented cuts as the district tries to close a massive budget deficit, while the city is running out of cash and could do so before the end of the year.

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.

Huge swaths of the city are owned by tax-exempt organizations — including state government. Together they account for 49 percent of the city’s tax base.

Against that backdrop, for decades the entities that comprise the city’s government borrowed money to improve schools, to renovate City Island and build and maintain parking garages. Water and sewer projects were also funded by debt, as they would be in any other municipality.

The city’s authorities — semi-autonomous agencies — borrowed on behalf of local businesses, often with good results. Authority-backed money built homeless shelters, offices and hotels.

But sometimes good intentions go awry, and eventually city officials began borrowing money to pay off borrowed money, deferring payments for as long as possible. And behind the scenes the city’s financial advisers, lawyers and bond issuers racked up millions in fees, skimmed off the top of each bond issue.

THE HEART OF THE CRISIS

Increased borrowing on top of bad debt and a botched retrofit project caused the Harrisburg incinerator debt to spiral to nearly a quarter of a billion dollars.

It stands at the heart of the city’s fiscal crisis, carrying about $326 million in debt, according to state Department of Community and Economic Development estimates.

But while the incinerator has received the most attention, it is not the only millstone hanging around the city’s neck.

In other cases debt was issued not for construction, renovations or other physical expenses, but to end interest rate swap agreements — complicated financial instruments often layered onto existing debt — started by one of the authorities or the school district.

Most often in swap agreements a major international bank agrees to pay a certain amount of money annually to a municipality. In exchange, the municipality pays, or swaps, the bank a second fee, determined by fluctuating interest rates.

The goal is for the bank’s payment to exceed the municipality’s and thus the deal generates revenue.

But it doesn’t always work that way.

Swaps layered onto Harrisburg Authority debt added millions to the costs associated with the incinerator project in fees and other charges. Swaps were also layered onto school district debt, parking authority debt and city debt.

Just getting out of a deal can cost millions and in several cases Harrisburg entities borrowed money not to pave roads or build schools, but specifically to refinance loans and pay their way out from under swap deals gone sour.

As budgets became tighter, money was also borrowed by one entity to pay another group’s bills.

In 2006, the Harrisburg Redevelopment Authority issued $7.2 million in debt to lease office space from the city.

After paying the city, the redevelopment authority turned around and leased the building back to the city, which in turn agreed to a long-term lease designed to cover the redevelopment authority’s debt payments.

The city received its cash up-front, which was used to pave over potholes in the city’s finances.

But mostly, it appears money was borrowed simply to pay for borrowed money.

Although it hasn’t issued bonds in almost a decade, the city is still paying interest and principal that traces its roots back further still.

In several cases in the mid-1990s, the city issued new debt whenever old debt came due. It was a process similar to continually re-financing a home loan without ever really paying off the principal amount.

The situation became worse this year, when the state-appointed receiver cut off legally-questionable money transfers that in turn left another $7.5 million hole in the city’s budget.

Faced with choosing to pay its creditors or its employees, the city defaulted on a portion of its debt in March. It is projected to do so again in September.

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.

Last year, debt payments accounted for $14 million of the $132 million the district paid in expenses.

Payments are scheduled to balloon in 2017.

In the four years between 2017 and 2021, the district will have to find more than $100 million to pay principal and interest bills. Ultimately those payments are projected to total more than $471 million by the time the debt is paid off in 2034.

The authorities also hold millions in U.S. securities, bought with borrowed money and placed in trust funds to pay for other outstanding bond issues.

In between the lines of credit are guarantee agreements, passed back and forth between the city, the various authorities and Dauphin County.

It is these agreements, which require someone, if not the issuing authority, to pay, that have caused the incinerator debt to domino outward from the city.

Dauphin County guaranteed debt related to the incinerator and other projects in the city and has found itself on the hook after the city defaulted on payments.

And Harrisburg guaranteed everyone’s debt — in exchange for upfront cash.

Financial strings tie the city to the authority’s incinerator project, to the parking authority’s parking garages, to the water and sewer lines and to debt issued by the redevelopment authority.

There are supposed to be limits built into the state laws that govern municipal debt.

According to the state framework, a municipality should only be able to borrow a limited amount of money, calculated as a multiple of its annual income.

But there are also loopholes in that law that allowed Harrisburg officials to dodge the borrowing caps.

Specifically, a key provision states that debt that is “self-liquidating” doesn’t count toward a municipality’s debt limit.

Self-liquidating debt is a bond or loan that is designed to be paid through fees or revenues earned by a project, rather than taxes.

When issued, almost all the debt the city guaranteed was certified self-liquidating.

But in some cases, money was borrowed on top of previous debt that hadn’t paid for itself in almost a decade, but was still certified as self-liquidating.

And despite everything — the more than one billion of total debt and interest, the annual operating deficits, the city’s state-takeover — those loopholes remain open.

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.

http://blog.pennlive.com/midstate_impact/print.html?entry=/2012/05/harrisburgs_eye-popping_debt_t.html

18 Comments

18 Comments


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[-] 2 points by PublicCurrency (1387) 10 years ago

For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other non-profits that interest rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008. The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers.

In an interest-rate swap, two parties exchange payments on an agreed-upon amount of principal. Most of the swaps Wall Street sold in the municipal market required borrowers to issue long-term securities with interest rates that changed every week or month. The borrowers would then exchange payments, leaving them paying a fixed-rate to a bank or insurance company and receiving a variable rate in return. Sometimes borrowers got lump sums for entering agreements.

Banks and borrowers were supposed to be paying equal rates: the fat years would balance out the lean. But the Fed artificially manipulated the rates to the save the banks. After the credit crisis broke out, borrowers had to continue selling adjustable-rate securities at auction under the deals. Auction interest rates soared when bond insurers’ ratings were downgraded because of subprime mortgage losses; but the periodic payments that banks made to borrowers as part of the swaps plunged, because they were linked to benchmarks such as Federal Reserve lending rates, which were slashed to almost zero.

In a February 2010 article titled “How Big Banks' Interest-Rate Schemes Bankrupt States,” Mike Elk compared the swaps to payday loans. They were bad deals, but municipal council members had no other way of getting the money. He quoted economist Susan Ozawa of the New School:

The markets were pricing in serious falls in the prime interest rate. . . . So it would have been clear that this was not going to be a good deal over the life of the contracts. So the states and municipalities were entering into these long maturity swaps out of necessity. They were desperate, if not naive, and couldn't look to the Federal Government or Congress and had to turn themselves over to the banks.

As almost all reasoned economists had predicted in the wake of a deepening recession, the federal government aggressively drove down interest rates to save the big banks. This created opportunity for banks – whose variable payments on the derivative deals were tied to interest rates set largely by the Federal Reserve and Government – to profit excessively at the expense of state and local governments. While banks are still collecting fixed rates of from 4 percent to 6 percent, they are now regularly paying state and local governments as little as a tenth of one percent on the outstanding bonds – with no end to the low rates in sight.

http://www.webofdebt.com/articles/interestrateswap.php

[-] 2 points by Uneasy (19) 10 years ago

This problem has nothing to do with interest rate swaps.

It has to do with the mayor and city government having eyes bigger than their stomachs.

Details...

http://www.npr.org/blogs/money/2012/08/24/159995636/episode-397-why-the-hero-of-harrisburg-couldnt-save-the-city

[-] 1 points by freewriterguy (882) 10 years ago

let pa sell some of that land they stole from the people and use that to pay their debts, we dont have any more money for dumb government

[-] 0 points by 1sealyon (434) 10 years ago

5 out of the ten cities in the US with the highest debt are capitals (State or otherwise). Why are the seats of government so messed up?

http://money.usnews.com/money/personal-finance/slideshows/top-10-cities-with-the-most-debt

[-] 1 points by JesseHeffran (3903) 10 years ago

The slide show was about credit card debt, mostly. So do you believe credit card debt is a problem because people need credit to survive or because people live out of their means? . I believe that the powers that be thought it would be more profitable to give credit cards out en mass, then to give raises to the working class.

And this is now the end game of decisions made two to three decades ago.

[-] 1 points by mserfas (652) from Ashland, PA 10 years ago

The above article gave an interesting explanation to that - it says government, including state government - owns 49% of Harrisburg's tax base! I haven't confirmed that, but if cities are supposed to be funded by property tax, and the state government can buy up as much of the capital as it wants and not pay taxes... well, there's your problem.

[-] 0 points by 1sealyon (434) 10 years ago

Well, there is the a tax side of the problem but also a spending side.

[-] 1 points by mserfas (652) from Ashland, PA 10 years ago

Well, personally I've opposed garbage incinerators from about when I was first old enough to vote, but Pennsylvania never saw a plan to take in other states' trash it didn't love. It's a way to make revenue when taxing the trillion dollars in natural gas under the ground is utterly unthinkable.

[-] 2 points by mserfas (652) from Ashland, PA 10 years ago

The "impact fee" is a small compensation for the actual damage done to the environment by the drilling itself; it's not actually a tax on the value of the natural gas extracted. I saw an estimate of $180 million in revenue, which is a lot, but not compared to the value of the gas reserves. Hugo Chavez would have gotten at least 16%! Also note there is a court challenge ( http://stateimpact.npr.org/pennsylvania/2012/07/26/commonwealth-court-rules-on-act-13/ ) based on that bill's other effect, of forcing counties to allow the drilling all over the place. As I understand it, the gas companies can pretty much get anybody anywhere in a square mile to say yes to a well, and they can extract all the gas from that area, so while the property owner gets what seems like 'big money' to him, in exchange for the damage and disturbance done to his property, it still is nothing compared to the value of the gas, which all and entirely is the property of those corporations best in a position to extract it, before they make the first purchase or drill the first well.

[-] 0 points by 1sealyon (434) 10 years ago

What is the cost estimate for the environmental damage?

What prevents the State from going after the gas companies to get compensation for any damage that they do?

Also, I believe that these companies are already making a lot of infrastructure improvement (roads, schools, utilities, etc.).

[-] 0 points by Lucky1 (-125) from Wray, CO 10 years ago

No big deal.

[-] 1 points by MattLHolck (16833) from San Diego, CA 10 years ago

we live in a debtor economy

[-] 1 points by jrhirsch (4714) from Sun City, CA 10 years ago

Debt is another "product" we just have to have.

"My god, my neighbor has huge debt! I better show him who's boss. Who in the hell does he think he is? Showing off his gold and platinum credit cards again. I can go just as deeply into debt. Even deeper if I really try!"

[-] 1 points by MattLHolck (16833) from San Diego, CA 10 years ago

when money starts as debt, there's hardly a reason to fear more debt

[-] -1 points by funkytown (-374) 10 years ago

Well, easy come, easy go... I assume you are employed by one of these school districts?

Doesn't really matter - you can just ask Obama to give you our money. And you'll have to because a municipality should not be permitted to file for bankruptcy. This debt should be attached in the form of taxes to every past and present member of elected government to include the seizure by eminent domain of their personal assets; the remainder must fall to all residents whether in possession of taxable property or not.

[-] 1 points by Uneasy (19) 10 years ago

The residents should tell Harrisburg to FOAD.

There's no way people will be held to financial slavery (two years on average of free labor withheld from their paychecks) for others idiocy.

[-] -1 points by funkytown (-374) 10 years ago

Yea... and to label it merely as mismanagement is erroneous.