Posted 11 years ago on Sept. 2, 2012, 9:11 a.m. EST by Uneasy
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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.