Harrisburg should sell its incinerator to help pay down $220 million of outstanding debt tied to the facility as the city will not have cash to meet payroll or other bills by the fourth quarter of 2011, according to a long-awaited fiscal recovery plan issued Monday afternoon.

The Novak Consulting Group, which compiled the recovery plan, urges Pennsylvania's capital city to avoid a filing for bankruptcy and look toward asset sales and leases to get out from under its incinerator debt.

"Chapter 9 is not recommended in this situation as it is the least desirable alternative and an alternative that is likely to be expensive, time-consuming and under the ultimate control and direction of the bankruptcy court," the recovery plan reads.

Harrisburg entered into the state's distressed municipalities program, called Act 47, in December. Officials will hold a June 28 public hearing on the recovery plan. Harrisburg's City Council then has 25 days to act on the plan. Failure to implement a plan by then would prompt the state to withhold grants, loans, and payments to the city and its agencies, according to the state's Department of Community and Economic Development.

According to the recovery plan, Harrisburg "is facing a direct, immediate and grave financial crisis." Suggested remedies include asset sales, fiscal restraint, property tax and fee increases, and contract renegotiations with unions.

Julia Novak, president of Novak Consulting, was set to testify before the City Council Monday evening to present the recovery plan and answer any of the panel's questions.

Bonds outstanding on the incinerator total $220 million, according to the recovery plan. The Harrisburg Authority issued the bonds and the city guarantees the debt but has failed to meet debt service obligations. Debt-service reserve funds; Dauphin County, co-guarantor of the bonds; and Assured Guaranty Municipal Corp., insurer of the bonds, have been paying bondholders.

The plan proposes selling the incinerator to the Lancaster County Solid Waste Management Authority, a neighboring incinerator agency, and also selling or leasing the city's parking assets.

The LCSWMA has offered $124 million for the Harrisburg incinerator. Long-term lease offers for the parking assets have come in at more than $200 million, according to the report.

Those transactions would help pay down a large portion of the outstanding incinerator bonds and fill an estimated $5.4 million deficit this year to address the city's near-term liquidity needs. The asset and lease sales would also help the city repay a combined $75.7 million to Dauphin County, Assured Guaranty, and the facility's operator for debt service costs and other payments made on the incinerator debt.

The recovery plan estimates that Harrisburg would then have $26 million of incinerator debt remaining. The city would issue $26 million of bonds to refinance the remaining debt with Dauphin County's guarantee and wrapped with Assured Guaranty insurance.

Debt service costs on the new bonds and the loss of parking revenue would total about $2.5 million per year, according to the report. Dauphin County would allocate $2 million of gaming revenues annually and a property tax increase to generate $1 million per year would offset the $2.5 million.

While Mayor Linda Thompson said she would not comment before the council meeting, she issued a statement Monday afternoon, saying, "I think my office and City Council together can quickly determine where we agree and disagree, and focus on finding compromise on any disagreements."

Citing field work and analysis, the report said the city has a structural deficit in its operating budget that exceeded $2 million in 2010; an additional $3.4 million will be added to that deficit in 2011. That shortfall is expected to grow to more than $10 million by 2015.

While the plan's authors recommended austerity measures, they also warned that the city's incinerator bond debt alone could force the city to file for bankruptcy protection.

"While the structural deficit alone creates a critical situation in a matter of months, the debt associated with the Harrisburg Resource Recovery Facility could, by the stroke of a judge's pen, force the city to file for Chapter 9," the report said.

The report said avoiding bankruptcy requires the patience and cooperation of Dauphin County and Assured Guaranty, a consensual solution to the debt, reopening labor agreements; and an end to infighting.

"The contentious relationship and lawsuits among the city's own elected officials frustrate a citizenry who want their local government to be responsible, refrain from placing blame, and start taking affirmative action to restore fiscal stability and long-term viability of the city," the report said.

Harrisburg, with a population of about 47,000, received yet another legal setback on Friday, when the Commonwealth Court of Pennsylvania reversed a lower court ruling and reinstated a $37.4 million lawsuit by Dauphin County over the missed incinerator debt payments. Dauphin County filed the suit in November 2009.

"The county is hopeful that the Act 47 process will result in implementation of a plan that resolves the city's debt obligations, thereby making continued litigation unnecessary," Dauphin County special counsel Chuck Zwally said in a statement Monday afternoon.

Novak was the recovery plan coordinator. Also working on the plan were Bob O'Donnell of O'Donnell Associates and former House speaker, the Pennsylvania Economy League, and law firm Stevens & Lee PC.

"I will review this document with an open mind and consider seriously what is being recommended," said Council President Gloria Martin-Roberts. "This plan, with other information that council has acquired over the past two-plus years, will have a bearing on what may be the best options for Harrisburg's recovery, as I see it. I am extremely optimistic that Harrisburg City will get back on track and right its direction."

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.