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Harrisburg Lawyer Kaufman: Recovery Plan Intricate, Solid

Rapidly rising municipal bond interest rates further complicated the intricate Harrisburg debt reduction plan, said the lead attorney for the state-appointed receiver in Pennsylvania’s financially crippled capital.

“Bond market conditions made it more difficult. Costs went up. We had to go through another round,” Mark Kaufman, a partner and co-chair of the municipal reform and innovation practice at Atlanta-based McKenna Long & Aldridge LLP, said in a lengthy interview. “The bond market was working against us.”

A solution, however, remained within sight and on Monday, state-appointed receiver William Lynch filed the 357-page financial recovery plan, titled “Harrisburg Strong,” with the Commonwealth Court of Pennsylvania.

Lynch expects the plan to keep Harrisburg, which is mired in $363 million of incinerator bond debt plus myriad other obligations, out of bankruptcy court.

Harrisburg’s City Council filed for bankruptcy nearly two years ago over Mayor Linda Thompson’s objections, but a federal judge invalidated the filing.

Justice Bonnie Brigance Leadbetter, who must approve Lynch’s plan, has scheduled a hearing for 10:30 a.m. Sept. 19.

“It’s got appendices and indexes and all that kind of stuff but in fact, it reads pretty well,” Lynch, a retired Air Force general, told reporters. “It’s not a legal brief and it’s not written by accountants for accountants.”

But Kaufman, who worked with Lynch and financial advisor Steven Goldfield as part of a leadership troika in the receiver’s office, said the agreement was among his most elaborate over his nearly 40 years of practice.

“If this not the most complicated, I’d say it’s among the top two or three. This required every bit of experience,” he said. Kaufman compared the degree of difficulty with the 1978 changes to the Bankruptcy Code. “I was a young pup then.”

Major incinerator creditors Assured Guaranty Municipal Corp. and Dauphin County get an initial 30% haircut from their combined claims of nearly $300 million, but can recoup some money long-term through the sale of the incinerator to the Lancaster County Solid Waste Management Authority, a 40-year lease of parking assets and other sources.

David Fiorenza, the former chief financial officer of Radnor Township, Pa. and a Villanova School of Business professor, called the plan a template.

“Academia teaching public-sector finance should use this as a case study and the recovery plan can serve as a model for solvency for other cities in the United States faced with similar circumstances as Harrisburg,” he said.

Detroit’s bankruptcy filing cast no shadow over the negotiations, Kaufman said. Lynch announced a creditor consensus on July 24, six days after Detroit filed for bankruptcy. Kaufman said the Harrisburg parties were entering the home stretch and Detroit was not a factor.

“We were already dealing with ‘devil in the details’ kind of work,” he said.

“We got everyone under the tent and showed what was under the hood. We touched every base and maxed out revenue,” Kaufman said. “Certainly you can’t have cooperation without full disclosure. Saying ‘Here’s what it is, take it or leave it,’ is a recipe for disaster.”

Avoiding bankruptcy was essential, said Kaufman, who sees three negatives with Chapter 9: expense, time and uncertainty. “Bankruptcy does not print money, nor does it create a balance,” he said. “Unlike Chapter 7, it’s not quite ‘a fresh start.’ You can’t dissolve a city.”

Harrisburg also is plagued with political infighting that at times has bordered on slapstick. The past two years included three separate 4-3 votes in 2011 against the initial state-sponsored recovery plan under the Act 47 program, as well as name-calling on websites and in local videos.

“There are political issues way beyond the financial four corners,” said Kaufman. “But we have been working very hard with the City Council since last summer.”

A turning point, he said, came in mid-2012 when the Commonwealth Court backed a Lynch initiative to double the earned-income tax to 2% from 1%, which most council members fought. Two months after Leadbetter’s mandate, the council approved the measure by a 5-2 vote.

“We worked out some good terms in the agreement that we have,” council President and staunch receivership opponent Wanda Williams said at the time. Lynch must petition the court to extend the tax after its first year.

“That [court order] was a clear-cut victory for the receiver, but it didn’t generate a future anything,” said Kaufman. “We didn’t impose anything on the City Council, but we worked cooperatively to reach a solution with some balance. Cramming it down was not the answer.”

Kafuman defended the incinerator sale to Lancaster, amid accusations by former Harrisburg City Council attorney Mark Schwartz that the transaction is anticompetitive. Schwartz this week asked the Internal Revenue Service to halt the deal.

“It was done in a way that will pass any challenge for tax-exempt status. There is no question that this was done with highly qualified professionals at the table,” said Kaufman.

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