Unkovic: Bond System Unfair to Issuers

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HARRISBURG, Pa. - The municipal bond system is "set up not to be fair to the issuers," the first state-appointed receiver for Harrisburg, Pa., said at a conference on Monday.

"Issuers are inadequately protected," David Unkovic, now an attorney with McNees Wallace & Nurick LLC in Lancaster, Pa., said at the Widener University School of Law's "Bankruptcy and Beyond: Solving the Problem of Municipal Financial Distress" symposium.

Unkovic, a 35-year bond law veteran, was Harrisburg's receiver for four months before abruptly quitting in March 2012, saying he found himself "in an untenable position in the political and ethical crosswinds."

On Monday, Unkovic said the sheer size of many financial advisory firms and the technocratic leanings of today's bond lawyers leave municipalities overmatched.

"I'm speaking as an old bond lawyer, not as someone who was a receiver for a while," he said. "Bond lawyers today are busy figuring out the Rubik's Cube of bond issues, and they tend to have lost the notion of 'Who do I represent and what do I have to do to protect them?'" he said.

Unkovic praised his successor, retired Air Force general William Lynch, for leveling the playing field in Harrisburg. He said the threat of a Chapter 9 bankruptcy filing helped bring major creditors and other parties to the table to negotiate what became the Harrisburg Strong financial recovery plan.

Issuers carry too much debt, said Unkovic, who cited Puerto Rico's issuance of an additional $2.5 billion of bonds earlier this year despite a debt load of already $68 billion. It issued the debt after a threat of a further bond rating downgrade. Puerto Rico's population is about 3.7 million, with 40% living under the poverty line.

"That's like driving with too much to drink and a state trooper pulls you over. He tells you to hold on, takes a bottle of whiskey and a shot glass back to you and says 'I can give you a DUI citation or you can take the shot and see if you can still manage to drive the car effectively,'" he said.

Unkovic repeated his call to ban municipalities from engaging in derivative transactions known as swaps.

"In western Pennsylvania, a school district entered into a swap in 2008," he said. "Their choice was to lose $10 million by paying the early termination fee, or enter into the swap knowing they would lose money. It's gambling."

Earlier in the morning, Jarad Handelman, first executive deputy counsel to Pennsylvania Gov. Tom Corbett, said trust, expertise and state resolve are essential to effectively work with struggling cities.

"There has to be a combination of certain intangibles. The arithmetic part is the easy part," Handelman said in an interview.

According to Handelman, Unkovic and Lynch complemented each other's skills. "Gov. Corbett chose wisely in both instances," he said.

Handelman said Pennsylvania's intervention program for distressed communities, known commonly as Act 47, was "the imperfect prism through which we view municipal distress, but it does accomplish its goal, to intervene before the decision point of bankruptcy."

Harrisburg's City Council filed for Chapter 9 bankruptcy in October 2011, but U.S. Bankruptcy Judge Mary France invalidated the filing one month later. The state placed the city into receivership and in August 2013, Harrisburg adopted the so-called Harrisburg Strong recovery plan.

Key components to erasing the city's immediate crisis -- $600 million of debt -- were the sale of the incinerator to the Lancaster County Solid Waste Management Authority and the long-term leasing of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority. Bond sales for both deals closed in December.

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