The attorney representing the Harrisburg City Council in its bankruptcy filing is asking the Internal Revenue Service and the Securities and Exchange Commission to investigate the financing of the incinerator renovation project that left Pennsylvania’s capital city with $310 million of bond debt and on the cusp of a state takeover.
“Specifically, I question whether there was adequate due diligence in deciding that the bonds would be revenue bonds that were judged to be self-supporting from money generated by the facility,” Mark Schwartz wrote in a letter to IRS chief counsel William Wilkins in Washington, D.C., and Clifford Gannett, director of the IRS office of tax-exempt bonds in Chesterfield, Mo.
He has forwarded the letter to officials from the SEC’s Philadelphia office. “The IRS is looking at conduit offerings, and this should be the poster child,” Schwartz said in an interview.
“Then there is the matter of whether or not there was proper disclosure with respect not only to this, but also whether there was adequate disclosure in general regarding what was being done with respect to the facility and the qualifications of those involved with the retrofit itself,” Schwartz said in the letter, dated Nov. 9, which he released Monday. “Of course, this pertains to whether the reasonable expectations test was met regarding the exemption from taxation of the bonds issued. In addition, there needs to be an investigation into the swaps that were conducted.”
Also on Monday, talks among Mayor Linda Thompson, the City Council, and state officials broke down, meaning the state will take over the city’s finances. The deadline was midnight Monday, but Thompson and the majority of the seven-member council are at loggerheads over the adoption of a recovery plan. Thompson’s four opponents failed to show at a Monday morning meeting of creditors, and an evening session was canceled.
“The creditors’ meeting this morning was a bust,” Council Vice President Patty Kim, who is running for state representative in the 103rd District, said in a statement on her website. “Receivership begins for Harrisburg.”
Gov. Tom Corbett has been interviewing candidates for the position. “We’ll make a decision this week,” he said Monday afternoon.
Harrisburg, with a population of 49,000, has a debt load estimated at about five times the size of its general fund budget of $55 million. The city is overdue on about $60 million of its incinerator debt, according to bankruptcy filings. Harrisburg is current on its general obligation payments, having barely missed a September default by extending a lease agreement with the Harrisburg Parking Authority.
Four of the seven council members voted last month to file for Chapter 9 protection. Judge Mary France of the U.S. Bankruptcy Court for the Middle District of Pennsylvania in Harrisburg is expected to rule Nov. 23 on the validity of the filing. The state, Thompson, city unions, and major creditors, including bond insurer Assured Guaranty Municipal Corp., GO insurer Ambac Assurance Corp., and incinerator guarantor Dauphin County, oppose the filing.
The city failed to get creditors to forgive some of the debt. “Assured Guaranty has attempted for over two years to reach a viable solution with absolutely no cooperation from City Council,” Holly Horn, Assured’s chief surveillance officer for public finance, said in a letter to Thompson.
A recently enacted state law restricted cities in the Act 47 program for distressed communities from filing for bankruptcy. Harrisburg joined that program last December. Schwartz, however, has argued in court filings that when the city enrolled in Act 47, bankruptcy was an option. Restricting Harrisburg from filing under Chapter 9 amounts to an illegal ex-post facto move, he said.
Three times the City Council — all by 4-to-3 votes — has rejected a financial recovery plan under Act 47, the first offered by Novak Consulting Group, and the latter two by Thompson, who also supported the Novak version.
The state’s Department of Community and Economic Development, which will coordinate the takeover, already has an emergency plan in place for the city.