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Harrisburg Receiver Lynch Talks Up His Plan to Right the City

HARRISBURG, Pa. –  Bill Lynch sat back and laughed as he recalled Pennsylvania Gov. Tom Corbett choosing him 17 months ago as Harrisburg’s state-appointed receiver.

“I had no idea when he named me how complex this would be,” Lynch said during an interview in the state finance building, across the street from the Pennsylvania capitol. “Even for me, who’s not a math person, the numbers part has not been the most difficult.”

Lynch, a retired Air Force general who once helped rebuild Baghdad, immersed himself in a different kind of chaos in Harrisburg, taking on a city crippled by years of backstabbing and infighting that helped it acquire more than $600 million of debt that it cannot pay, placing it on the cusp of bankruptcy.

“Over time, people have developed a lot of deep-seated biases about all kinds of things,” said Lynch. “We had to find out where interests aligned and work out something that has a little in it for everyone.”

Three weeks ago, Lynch’s team emerged with a 357-page financial recovery plan titled “Harrisburg Strong,” a document as complex as the city’s tale of woe itself. It aims to wipe out incinerator debt and keep Harrisburg out of bankruptcy court.

Boiled down to bullet points, the plan revolves around the sale of the incinerator – Ground Zero in the city’s debt crisis – to the Lancaster County Solid Waste Management Authority, and a 40-year lease of parking assets to Harrisburg First, a consortium that includes Guggenheim Securities, Piper Jaffray & Co., AEW Capital Management and Standard Parking Corp.

The plan, which the Commonwealth Court of Pennsylvania must approve, also includes a four-year balanced budget and various measures to win back the good graces of the capital markets.

Justice Bonnie Brigance Leadbetter has scheduled a hearing for Thursday. The City Council approved the plan Tuesday, with a few tweaks.

Incinerator debt alone accounts for about $363 million, about seven times the general fund balance of the city, which has about 49,000 residents.

Lynch’s team includes deep-in-the-weeds financial advisor Steven Goldfield, and hypertalkative lead attorney Mark Kaufman from Atlanta’s McKenna, Long & Aldridge LLP. Lynch succeeded David Unkovic in May 2012 after Unkovic abruptly quit, citing “political and ethical crosswinds.”

“We’re three birds of a different feather,” said Goldfield, an attorney and senior managing director at Public Resources Advisory Group in Philadelphia.

“But never did we all have a bad day at once,” Lynch added.

“There has been an unbelievable amount of emotion in this city over the years to the point where people can’t exercise rational judgment,” Goldfield said. “What Gen. Lynch has done is get people to put everything aside and work out an arrangement that’s good for this city at this time.”

Major creditors and late holdouts Assured Guaranty Municipal Corp. and Dauphin County are in store for haircuts of up to 30%, but could recoup some of their losses through back-end receipts from the parking deal. Assured Guaranty is the incinerator bond insurer.

“We decided early that we wanted the best deal for us, and when I say us, I mean the city,” said Lynch.

“I don’t like to use the word haircut. If AGM or Dauphin County thinks it’s a good deal, please ask them,” he said.

“It’s a comprehensive plan that leaves no tax or expense unnoticed on the road to recovery,” said Villanova School of Business professor David Fiorenza.

“There’s a very robust capital markets approach underlying this plan,” said Goldfield. He and Lynch pointed to less publicized provisions, including the sale of Wild West artifacts to help pay off a loan to Metro Bank early and the transfer of the water and sewer system to the Harrisburg Authority public works agency, which will qualify the city for $26 million in low-interest loans from the Pennsylvania Infrastructure and Investment Authority, or Pennvest.

“Everybody needed something,” said Goldfield.

“AGM, for example, needed some good press. They needed a victory and they knew the situation would not get any better, but could be worse,” he said.

“It’s important to note that even if the incinerator problem never existed, the city of Harrisburg would be near bankruptcy,” said Lynch.

Harrisburg’s City Council filed a Chapter 9 bankruptcy petition in October 2011 against the wishes of Mayor Linda Thompson and state officials, but a federal bankruptcy judge voided the filing.

Lynch cited Detroit’s morass as good reason to avoid Chapter 9.

He also differs from those who tout Central Falls, R.I., as a template for a clean bankruptcy filing. Central Falls, with only one square mile and 19,000 residents, exited bankruptcy in 13 months, but retirees sustained cuts of up to 55%.

“We use Central Falls as an example of the dark side of bankruptcy. They closed the library and hurt many retired people on the pensions,” he said.

He calls the Harrisburg plan a blueprint for future governance.

“We can’t fix a problem that’s gone back 30 years, but we can provide tools, such as a four-year balanced budget and four years of reasonably rigid controls. Future city councils and future mayors will have to manage the city effectively.”

While the Lynch team is optimistic about obtaining final approval, the three also hedge that optimism.

Asked what could go wrong, Goldfield said: “Anything and everything.”

For openers, the rapid rise in bond interest rates since Federal Reserve chairman Ben Bernanke on June 19 announced the Fed’s intention to phase out quantitative easing could make creditors skittish about signing off.

“I check the [Municipal Market Data] index twice a day. It’s probably not healthy to do that,” said Goldfield.

Skeptics still abound. The City Council, long an opponent of receivership, hired Alvarez & Marsal LLC to scrutinize the plan. The workout firm endorsed it, giving a skeptical body a needed second opinion.

City Controller Dan Miller, who lost a Democratic mayoral primary but is challenging nominee Eric Papenfuse from the Republican side in November, questions why creditors should get the opportunity long-term to be made whole.

“The burden is placed disproportionately on the residents and taxpayers of this city,” Miller wrote in a letter to the City Council. “As willing participants in the incinerator retrofit financing deal at the root of many of the city’s financial woes, shouldn’t the plan require these creditors to make substantial concessions?”

Other creditors include CIT Group Inc., Ambac Assurance Corp., Metro Bank, SunTrust Leasing and Covanta Energy Inc.

Some residents worry about paying the most expensive tipping fee in the country, $190 a ton.

Wariness abounds locally about anything Wall Street. Last week the council’s newest member, Bruce Weber, invoked a scene from the organized crime movie “Goodfellas” while questioning the parking deal at an evening work session. “Many people feel that way when they’re dealing with sophisticated Wall Street types,” said Weber, who works full-time as a fiscal analyst for the state Department of Revenue.

Receivership emerged late in 2011 after the City Council three times – all by 4-3 votes -- rejected a workout plan proposed under the state-sponsored Act 47 program for distressed municipalities. But Brad Koplinski, a councilman who vigorously fought receivership, likes what he sees in Lynch.

“We fought like hell against the receivership, but it’s actually been a good relationship,” said Koplinski, a Democrat who is running for lieutenant governor in 2014 on a theme of helping distressed communities. “He has included us in the process. The council has been included since day one.”

Koplinski, who has visited all 67 Pennsylvania counties while campaigning, said that despite ending up in receivership, the council’s pushing back on the Act 47 plan resulted in a deal far better or the city.

“They tried to shove a cookie cutter Act 47 plan down our throats,” said Koplinski during an interview at Democratic consulting firm Penn Blue Strategies, where he is a principal. Koplinski once called Act 47 program a “roach motel” because 27 communities remain in it and few ever leave.

Koplinski and others have requested the Internal Revenue Service and the Securities and Exchange Commission investigate the incinerator bond deals. State Attorney General Kathleen Kane’s office has also launched a criminal investigation.

Goldfield, meanwhile, calls the parking deal a de-facto commuter tax, which state law prohibits Harrisburg from enacting. Many state workers drive to the capital from the suburbs.

“This is the commuter tax,” said Goldfield. “These are the people coming in from the suburbs. Not many people in Harrisburg can afford $150 or $160 a month.” Harrisburg’s median annual income is just under $32,000, compared with $50,000 for the region. More than 31% of Harrisburg residents live below the poverty level, according to the U.S. Census, compared to 12.6% for Pennsylvania as a whole.

The council on Tuesday added a provision that would enable payoff of the parking bonds sooner than 40 years if the operation is profitable.

Overall, the deal includes a stretched-out repayment of $17 million of general obligation bonds to Ambac Assurance Corp. Harrisburg has missed four straight GO payments.

“That’s a big event in the municipal bond world. That’s kind of a gold standard,” Goldfield said.

The plan also features some labor concessions in return for police officers not having to live in the city. Other components of Harrisburg Strong call for infrastructure investment and economic development.

“It sounds ridiculous, but people in the city – I would say twice a week – come up to me on the street and say thanks,” said Lynch. “All kinds of cats and dogs.”

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