"Questionable practices" regarding the financings of the incinerator retrofit project in Harrisburg, Pa., merit a further investigation by the Internal Revenue Service and the Securities and Exchange Commission, the attorney for the City Council said in a report issued Friday.
Mark Schwartz, calling the deals excessively fee-driven, said the $310 million of incinerator-related debt included $49 million of fees and other issuance costs, amounting to 16% of the debt.
"They are among the worst financings I have witnessed in my career. It's a house of cards. To me, this is the closest thing in municipal financing to the equivalent of a Ponzi scheme," Schwartz said in an interview.
Schwartz represented Harrisburg in its Chapter 9 filing, which a federal judge invalidated on Nov. 23. He is appealing the ruling.
"An examination of the financings referenced herein raised the question of whether a public project was truly in need of a financing or whether financings in and of themselves became the project," Schwartz wrote in his report. New City Council President Wanda Williams authorized its release.
Schwartz reviewed the bond deals related to the renovation of the trash burner, which the public-works agency Harrisburg Authority operates. They were dated from 1998 through 2007.
"The justification for certain of these financings seems to be characterized by blatant and irreconcilable inconsistencies," Schwartz wrote, citing conflicting information in documents regarding whether project revenues would cover the debt.
"Why wasn't a default declared when it became clear that the facility was not generating sufficient revenues? Instead, [the Harrisburg Authority], the city, the county, underwriters, the bond insurer, lawyers, engineers and accountants all persisted in doing more financings," wrote Schwartz, a Bryn Mawr, Pa., solo practitioner and a former bond lawyer and investment banker.
"This has IRS and SEC issues and frankly, is a matter of Pennsylvania law, because the Department of Community and Economic Development rubber-stamped these deals," Schwartz said. "While I am able to pose questions and identify issues, the closing documents don't show where the money ultimately went, not only from financings undertaken by the Harrisburg Authority for the incinerator, but for other projects as well."
The Harrisburg Authority has been conducting its own forensic audit into the incinerator financing. Messages seeking comment were left Friday with the agency's interim executive director, Shannon Williams. The authority and Dauphin County were in federal court last week disputing a $25 million financing deal with CIT Group that they say wasn't properly approved.
The city's state-appointed receiver, David Unkovic, served most recently as chief counsel for DCED.
He also has ties to some companies involved in Harrisburg's debt crisis. He worked for 27 years for law firm Saul Ewing LLP, which is representing incinerator bond insurer Assured Guaranty Municipal Corp.
Unkovic also worked for Public Financial Management Inc., which represented Dauphin County in an incinerator financing, and for law firm Cozen O'Connor LP, which Pennsylvania retained in its opposition to Harrisburg's bankruptcy filing.
A spokesman for Unkovic said Friday that the receiver declined immediate comment, saying he needed to read Schwartz's report.
Messages were also left with Mayor Linda Thompson.