The state-appointed receiver for financially ailing Harrisburg wants to close on the sale or lease of the city’s two main assets by the end of June — the incinerator that’s ground zero in the debt crisis in Pennsylvania’s capital city, and its revenue-producing parking garages.

It remains to be seen whether David Unkovic, who released a financial recovery plan for the city on Monday, can meet what he admits is a tight deadline of June 30. His proposed timeline itself, though, suggests bankruptcy is very much on the table.

Harrisburg is buried under about $310 million of bond debt related to an incinerator retrofit project. Overall debt, including general obligation and other parties, totals about $450 million.

Come July 1, state law would no longer prohibit the city from filing for protection from creditors under Chapter 9. Until then, Unkovic can use bankruptcy as leverage to bring creditors to the table for concessions.

A federal judge last fall invalidated an appeal by Harrisburg’s City Council, citing the state law related to the Act 47 program for distressed communities, which the city joined in 2010. But Unkovic could file on behalf of the city after the sunset, unfettered by state law and backed by the powers of his receivership.

“The height of the irony is that this is precisely what Pennsylvania’s governor was trying to avoid when Harrisburg sought to file bankruptcy,” said Anthony Sabino, a law professor at St. John’s University’s Peter J. Tobin College of Business.

Unkovic, in his 200-page report, touched on many bases, including bond debt, internal dysfunction, and the need for state assistance and regional taxing solutions. He said his timetable was unrelated to any possible bankruptcy filing.

“The city has challenges this year and there has to be a deadline in place. I think I’m trying to say that things have to take place quickly but deliberately,” Unkovic said in an interview.

“I realize there’s a history with the incinerator, but I also feel that a receiver, even though I’m arriving later in the process, can add a fresh voice to the process. I hope people view the report as a practical solution,” added Unkovic, who said the most difficult part of his report was “trying to understand from a timing perspective how the recovery will take place.”

Reaction to the report was mixed.

Incinerator bond insurer Assured Guaranty Municipal Corp., while saying the the plan is "a good first step," also called it too general for creditors to fairly assess. "In light of the receiver’s statutory mandate under Act 47, we are surprised that the plan appears to unfairly prefer the payment of city GO [general obligation] bondholders at the expense of the holders of the city’s guaranteed resource recovery facility debt," AGM said in a statement. "We remain committed to work with the receiver to develop a recovery plan that restores the city’s fiscal stability and resolves the city’s [resource recovery facility] debt."

Mayor Linda Thompson as of Tuesday afternoon had yet to comment, saying she was still studying it.

City Controller Dan Miller, who has said repeatedly that a Chapter 9 filing would settle debts more equitably, praised Unkovic for his grasp on Harrisburg’s other problems, which include rising labor and pension costs, and the potential $40 million of guaranteed and unfunded debt coming due beginning in 2016 for bonds related to the Strawberry Square downtown mall. The Harrisburg Redevelopment Authority issued the bonds in the mid-1990s and has not paid for them, but the city has issued guarantees.

“Everything in it we already know, but at least this time, as opposed to the initial Act 47 report, Unkovic does understand the full magnitude of our issues,” said Miller. “He also understands that the only leverage we have is bankruptcy, and that’s what he will use to try and negotiate a deal.”

Still, Miller called on Unkovic to tackle the city’s escalating structural deficit, estimated to soar from $5.8 million in fiscal 2012 to nearly $10 million in 2016. Unkovic admitted that determining the size of the structural deficit will take some time. Lacking new revenue sources, the city must focus on core services and have others handled through intergovernmental cooperation or third-party arrangements.

“The receiver’s probably still very much on a learning curve,” said Sabino. “There are still more unanswered questions than there are answers. I think it’s going to be difficult to meet his timetable for selling the assets.”

Dauphin County commissioners Jeff Haste, Mike Pries and George Hartwick 3d said Unkovic’s report didn’t go far enough to deal with the incinerator debt. “The longer action is delayed, the worse the problem becomes,” they said in a joint statement.

Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, thinks Unkovic can sell the incinerator and garages on time, because much due diligence has already been exercised in previous bids, which include a $124 million offer for the incinerator -- with no debt assumption -- by neighboring Lancaster County. “They’ve had a couple of trial runs already,” Schankel said.

Brad Koplinski, one of four council members who had fought the appointment of a receiver on the grounds that he would usurp local decision-making, was encouraged that bankruptcy was “not off the table,” and praised Unkovic for his open-mindedness. He also held out hope for the city getting value for its assets and obtaining creditor concessions.

“If we can get $120 million for the garages and $120 million for the incinerator, that still leaves us with another $80 million,” said Koplinski. “Are we going to get the $100 million concession from creditors that we wanted? Probably not, but if we can get a decent price for these two assets and get some givebacks from creditors, that should get us in the direction of where we want to be.”

Despite his diplomatic tone, Unkovic left no doubt who was in charge, according to Schankel, who said: “There was iron in his thought process.”

Case in point, Schankel said, was Unkovic’s insistence that the city hire a chief operating officer, a position unfilled for more than two years. Unkovic would sign off on the hire. While the COO would nominally report to the mayor, Thompson could not fire the officer. 

“The advantage of a bill like Act 47 is that it brings some extended adult supervision to the table,” said William Kannel, a bankruptcy lawyer with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.

Unkovic in his interview reiterated that he would not seek federal investigations of incinerator bond deals. The City Council has asked the U.S. Department of Justice for such a probe, and Mark Schwartz, the council’s attorney, has sought intervention from the Securities and Exchange Commission and the Internal Revenue Service.

“People have asked me about that and I say that my plan is about financial recovery for Harrisburg,” Unkovic said.


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