BOSTON — Harrisburg, Pa., receiver William Lynch's announcement that major parties in the city's debt crisis, including major creditors, have reached a consensus prompted observers - including skeptics who haven't yet seen any numbers - to wonder why now, after such prolonged acrimony among many parties.
The "D" word immediately kicks in. Did anyone say Detroit?
The Motor City's July 18 filing for Chapter 9 bankruptcy protection trumps any discussion of municipal distress these days, and Pennsylvania's ban on a Harrisburg bankruptcy filing expired eight months ago.
But Lynch, who has sought to clear Pennsylvania's capital city of its crippling debt, denied that Detroit cast any shadow.
"Having that as an undesirable alternative has always been helpful. But the Detroit situation is very different from our own, I think," said Lynch, a retired Air Force general who succeeded David Unkovic in May 2012. "We have some capability to work out a solution among ourselves here, because I think it's doable."
Lynch, who said he was "speaking as a layman," sees problems with Detroit's filing.
"I think it was premature and I think it will generate a lucrative environment for lawyers for a long time, and it may even generate a U.S. Supreme Court case before it's over," he said.
Harrisburg is staring at $345 million in debt that it cannot pay, related to bond-financing overruns from an incinerator retrofit project. It has also missed its last three general obligation bond payments. Other debt, including other post-employment benefits, the parking authority, structural deficits and arcane property deals that trace to former Mayor Steven Reed, could total as much as $450 million more.
Mark Schwartz, however, disagreed with Lynch.
"That's the sense I get, that Detroit had something to do with it, because they've done nothing in the past year, they haven't given us any more information and they've probably paid lawyers a great deal of money to do nothing. Now they're in a hurry to sell all these trinkets," said Schwartz, who represented the Harrisburg City Council in its failed attempt to file for bankruptcy.
The council filed under Chapter 9 in October 2011 over Mayor Linda Thompson's objections, but federal bankruptcy judge Mary France nullified the filing a month later, citing the state restriction at the time, and the divide between Thompson and the council.
Schwartz, a Bryan Mawr, Pa., solo practitioner, quit last year, saying the city never paid him.
When Lynch announced the consensus last week, though acknowledging "a gazillion details" remain unsolved, reaction came from two camps.
Supporters say finally everyone appears on the same page while skeptics want to see raw numbers. Lynch said he will file a plan with the Commonwealth Court of Pennsylvania in mid- to late August. He hopes for Justice Bonnie Brigance Leadbetter to sign off on the deal by mid-September.
"What's changed here is that we have agreed to work together. By we, I mean the creditors we spend a lot of time with. The difference is that we have agreed to stop negotiating against each other," Lynch told reporters at Harrisburg City Hall. Assured Guaranty Municipal Corp., the bond insurer for the trash-burner project, has been a major holdout in creditor concessions.
The city recently netted $2.6 million from a sale of Wild West artifacts that former mayor Reed acquired in a botched attempt to start a museum, but proceeds amount to just a fraction of the city's debt.
In Harrisburg, according to Lynch, the prevailing mindset is that enough is enough. "We have agreed that we will not let disagreements get to the point where anybody pulls the plug and says 'that's it, I'm outta here,' " said Lynch.
Bill Brandt calls it deal fatigue.
"I know I'm mixing my metaphors but you have a Mexican standoff, as John Wayne used to call it. People get tired and the passion goes away," said Brandt, chief executive of Chicago turnaround firm Development Specialists Inc. and chairman of the Illinois Finance Authority. "Fortunately for people, revenge dissipates and when people talk about money, common sense can take over."
Brandt criticized Michigan Gov. Rick Snyder and his emergency manager for Detroit, Jones Day partner Kevyn Orr.
"I see an agenda that's less about public policy and more about law firms. I see Gov. Snyder trying to halve off Detroit and not be tagged with any political liability by passing it off to a third party," said Brandt. "States like Pennsylvania and Illinois are working to prevent a free-fall of Chapter 9s that could wreck bond ratings. Are you telling me that Detroit's filing will have no effect on Flint?"
Schwartz, though, cites Central Falls, R.I., as an example of a smooth bankruptcy process. The 19,000-population, one-square-mile city with an $80 million unfunded pension liability exited Chapter 9 last September, only 13 months after filing. While in bankruptcy court, Central Falls cut police and fire retiree benefits by as much as 55% and produced a six-year recovery plan.
"Even though Central Falls was so small, they had a massive pension debt, and the bankruptcy dealt with that," said Schwartz. "What I like about bankruptcy is that you get away from the politics. You produce a balance sheet and go over what a city can and cannot do."
In Harrisburg, the incinerator debt is by far the biggest albatross. The city and Dauphin County guaranteed most of the debt related to a retrofit to the trash burner four miles southeast of downtown. Lynch is on the verge of selling the incinerator to the Lancaster County Solid Waste Management Authority.
The sale price is a variable. "The amount of money changes with the bond market and other things and we think we know, yes," said Lynch, who said the deal, when combined with a public-private partnership involving the city's revenue-producing parking garages, should enable the city and county to walk away from the incinerator debt and that parking proceeds would eventually take care of other, or stranded debt.
According to Brandt, a parking deal would be the equivalent of a commuter tax without the political volatility. The latter is politically unpopular among lawmakers who represent the many suburbanites who commute into Harrisburg.
"In some oddball way, there will be some variation of a P3 much like [Mayor Richard] Daly did in Chicago," Brandt said.
Lynch, though, warns the deal is far from done.
"What happens if, suppose, 'I don't get as much of that, can I get some of this? What are you going to give up if we have to give up a little more and if you give up something, how do I give you credit for that?' Those kinds of things are best done with our lawyers and financial guys in a room somewhere. Just lock 'em up until they come up with something that everybody agrees to," said Lynch, who once helped rebuild Baghdad.
That Harrisburg has been sharply divided is an understatement.
Three times in 2011 the City Council defeated a state-sponsored financial recovery plan that Thompson supported, all by 4-3 votes. The mayor responded through the city's website by calling the four "unfit to hold office." Thompson and the city's controller, Dan Miller - who favors a bankruptcy filing - don't speak to one another. Miller challenged Thompson in a Democratic mayoral primary that bookstore owner Eric Papenfuse won. Miller will decide this month whether to run as a Republican, having secured enough GOP votes.
Thompson's supporters say she inherited a major mess from Reed while critics call her ill-tempered and divisive. One member of the Harrisburg Authority public works agency, William Cluck, called Thompson "mentally ill" on a local video.
"I am not a math person, and even for me, the math part of this Harrisburg problem has been much easier than the people problem," said Lynch. "Make no mistake, people have very strong positions and very strong feelings and very strong biases that all need to be taken into account."
Thompson, who lost the Democratic primary in her re-election attempt, sees a debt deal as a chance to leave office on a high. "I want it to be my legacy, and it will be," she said.
On Wednesday, the City Council will return from its summer break to introduce bills intended to move the debt agreement along. They have scheduled final approval for Aug. 27. Their legislation includes extending the 2% earned-income tax rate. Firefighters union approval of local contracts is needed.
"This is an important step in achieving that goal and I appreciate the parties coming together to get there. The receiver is using the same playbook that City Council used in trying to negotiate with the creditors and it is getting results," said Councilman Brad Koplinski, a Democrat who is running for lieutenant governor on a platform of helping distressed communities.
In addition, state lawmakers are working on an aid package to help defray Harrisburg's stranded deficit — the amount by which operational costs exceed revenues.
The Securities and Exchange Commission three months ago charged Harrisburg with securities fraud for lying about its deteriorating finances. Harrisburg settled with the SEC by agreeing to fully disclose financial information in the future. The agreement involved no fines or prison time.
Koplinski, a former SEC attorney, called on federal and state agencies to continue to aggressively investigate the complex web of transactions, including swap deals, that made Harrisburg such a financial basket case.
"It is important that we don't lose sight that the system that put us into this mess is broken and we must continue to demand that the various law enforcement agencies investigate how Harrisburg got here and take steps to insure that this cannot happen again anywhere in the commonwealth," said Koplinski. "Those that got rich from getting Harrisburg into this situation should pay their fair share to take the burden off the taxpayers of Harrisburg."