Haircuts Help Fuel Harrisburg Recovery Plan
State-appointed receiver William Lynch said his far-reaching consensus plan will position Harrisburg, Pa., into the home stretch of its financial recovery.
“It’s not over yet and I think everyone needs to understand that,” Lynch said after filing a four-year plan late Monday to rid the city of its crippling debt.
The Commonwealth Court of Pennsylvania, which must sign off on the plan, has scheduled a 10:30 a.m. hearing for Sept. 19.
The plan, titled “Harrisburg Strong,” runs 357 pages, or roughly one page for every $1 million the city owes in incinerator debt, some of which will be incinerated in creditor haircuts.
“This is the beginning of the last part of dealing with the incinerator debt and the obligations the city owes,” said Lynch, who said the plan should help Harrisburg avoid bankruptcy.
Harrisburg would pay off creditors, but not in full, through a sale of the incinerator the poster child for the city’s predicament and a lease of its parking assets.
An incinerator retrofit project alone is responsible for an estimated $362.5 million of city-guaranteed debt. The debt, combined with a structural deficit, vendor obligations and other odds and ends that trace to complex dealings over 30 years, drained Harrisburg financially.
The city expects to get $126 million to $132 million for the incinerator from the Lancaster County Solid Waste Management Authority, which will fund the purchase with long-term bonds. “We are thrilled with this next step,” said Lancaster authority chief executive James Warner.
Market conditions, notably the rise in municipal bond interest rates, make the final price a variable. Another open-ended question is a long-term agreement on the sale of electricity to the state.
“These agreements assure a base revenue stream for the facility, which generates about 76% of revenue from tipping fees paid to the plant by waste haulers and about 21% from the sale of electricity generated by the plant,” Janney Capital Markets wrote in a report published Tuesday.
Harrisburg also plans to lease its parking assets garages, lots and street-metered spaces -- in a 40-year lease to Harrisburg First, a group that includes Guggenheim Securities, Piper Jaffray & Co., AEW Capital Management and Standard Parking Corp. The Pennsylvania Economic Development Financing Authority would issue tax-exempt bonds.
One restructuring professional, while praising Lynch for orchestrating a consensus, said many questions still remain.
“The first is how to finance this,” said Bill Brandt, president of Development Specialists Inc. and chairman of the Illinois Finance Authority. “The bonds aren’t sold yet, the feds have changed course, there is general concern about Detroit and Harrisburg isn’t exactly a triple-A credit.
“But looking at the structure of the plan, it looks like it’s workable. Lynch and the stakeholders deserve a doff of the hat, but implementing it won’t be as easy as it looks in the report. Because of that, I see a bit more zigging and zagging.”
Janney also praised Lynch. “There remain a few unresolved issues, including an unresolved union agreement with firefighters, but the plan as communicated is substantive,” the report said. Other local public-sector unions are on board.
Harrisburg, long shut out of the capital markets, will have missed four straight general obligation bond payments totaling $17 million, assuming it skips the one due Sept. 15.
The plan calls for a balanced budget for four years, beginning in 2013, According to Lynch, $5 million will serve as working capital to help negate the city’s lack of capital markets access.
“Many cities issue tax anticipation notes, but as you know, we’re not beset with people lending to Harrisburg these days,” said Lynch.
The plan also called for up to $10 million over the next several years to foster “meaningful economic development” and a further $10 million over several years for infrastructure repair. Recent sinkholes on streets and a damaging fire to a string of rowhouses speak to the city’s infrastructure problems.
Lynch, a retired Air Force general who helped rebuild Baghdad during his long military career, had to navigate a different kind of minefield in Harrisburg getting creditors to agree on who gets what.
“This is a good agreement for everyone involved and, for the most part, everybody is close to being made whole,” Dauphin County Commissioner Jeff Haste.
Incinerator bond insurer Assured Guaranty Municipal Corp. and Dauphin County, which envelops Harrisburg, were the staunchest holdouts until last month, when the receiver said creditors had reached a truce. Assured and Dauphin are owed a combined $298.5 million related to the incinerator.
Under the plan, they will get about $210 million combined: $120 million to $130 million from the parking deal and the remainder from the incinerator sale.
While the compromise leaves the pair short $88.5 million -- a haircut of about 30% -- they could recoup at least some of the money long-term, including further incinerator claims and escrowed proceeds from the parking transaction and other revenue sources such as proceeds from the state fuel tax between 2013 and 2017.
CIT Capital USA Inc., which holds a federal judgment arising from a $25 million funding by an affiliate to the Harrisburg Authority in 2005 and estimates its present-value claim to be $37 million, including licensing fees, settled for $21.5 million from incinerator sale proceeds.
Covanta Energy Services Inc. settled for $9.5 million on a $26 million claim for sums it advanced the Harrisburg Authority to complete the retrofit. Covanta was hired in 2007 to operate the trash burner after original contractor Barlow Projects Inc. of Fort Collins, Colo., went bankrupt.
Ambac Assurance Corp., the insurer of the GO bonds, agreed to let the city stretch out the unpaid $17 million and at reasonable rates, but can back out of the deal if it doesn’t receive a $6 million payment expected from parking revenues by Dec. 15.