The former attorney for the Harrisburg, Pa., City Council has asked the Internal Revenue Service to stop the sale of the city's incinerator to the Lancaster County Solid Waste Management Authority.

"In effect, more debt is being issued to replace debt that never should have been issued at all," Bryn Mawr, Pa., solo practitioner Mark Schwartz said in a letter to IRS chief counsel William Wilkins dated Aug. 24, citing Lancaster's intention to issue more debt to purchase the incinerator. "In my opinion this constitutes an 'abusive' transaction … which will result in an 'overissuance' of tax-exempt debt."

"We feel the letter is without any merit whatsoever," authority communications manager Kathryn Sandoe said in an emailed response.

Depending on the fluctuating bond markets, Lancaster is expected to pay roughly $130 million under a complex financial recovery plan that Harrisburg's state-appointed receiver, William Lynch, filed Monday with the Commonwealth Court of Pennsylvania. The state's capital city, having guaranteed the incinerator bonds, is mired in about $350 million of debt that it cannot pay.

Schwartz, when he represented the City Council in its unsuccessful attempt to file bankruptcy late in 2011, wrote Wilkins and questioned how the bonds could qualify as "self-liquidating," thus enabling issuers to circumvent state debt limits.

U.S. Bankruptcy Court Judge Mary France in Harrisburg invalidated the bankruptcy filing in November 2011, citing a restrictive state law and the objections of Mayor Linda Thompson.

Schwartz quit representing the council in July 2012, saying the city never paid him. "This time I'm filing as a federal taxpayer and a creditor of the City of Harrisburg," he said in an interview Tuesday. "I'm against subsidizing bogus debt with more debt."

The Securities and Exchange Commission in May accused Harrisburg of securities fraud, saying the city misled investors about its deteriorating financial condition. The SEC, however, imposed no fines or prosecutions.

"You may be aware that despite a host of information and an abundance of time, the SEC managed to blow the statute of limitations, not proceeding against the professionals who structured and profited by these bond issues which can best be described as a Ponzi scheme," Schwartz told Wilkins in his most recent letter. "At this point you are able to stop what amounts to another raid on the federal treasury when it comes to the Lancaster County Solid Waste Authority's issuing more debt to 'purchase' the incinerator."

Two weeks ago, state Attorney General Kathleen Kane said her office would investigate the incinerator bond transactions.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.