“Harrisburg was sunk by bonds that should never have been issued,” said Chris Papst, author of a new book on the city’s financial unraveling. “For the longest time, I couldn’t understand how a city could have been so financially raped.”

Chris Papst followed with interest three weeks ago as agents from the Pennsylvania attorney general's office raided the home of former Harrisburg Mayor Stephen Reed, hauling out saddles and other Wild West artifacts.

A Pittsburgh grand jury is examining the financial dealings of Reed, who ran the city from 1982 to 2010.

"Harrisburg will get closure either way," Papst, author of a new book about the city's financial collapse, said in an interview.

"If there are no charges, it means the city went broke through some very bad decisions," said Papst, a former investigative reporter for WHP-TV, a CBS affiliate in Pennsylvania's capital city. "If there are charges, it will show that Harrisburg got broke through ill-gotten means."

Sunbury Press published Papst's "Capital Murder: An Investigative Reporter's Hunt for Answers in a Collapsing City" in April. In the book, Papst calls the city a murder victim for which justice was never realized.

"Essentially, Harrisburg was sunk by bonds that should never have been issued," said Papst. "For the longest time, I couldn't understand how a city could have been so financially raped."

Drawing on his investigative reports, Papst, now with ABC affiliate WJLA-TV in Washington, chronicles Harrisburg's spiral into insolvency.

Reed, who had critics chafing over what they considered a dictatorial style, basked for many years in the glow of city development that included a downtown restaurant row, a Civil War museum and a minor-league baseball team. Meanwhile, said Papst, he used creative accounting to shift revenue and hide debt.

"His well-crafted media image directly opposed his executive style. He ran Harrisburg as if it were New York City or Chicago though in public, he possessed an ability to turn a crowded room into an intimate setting," said Papst.

Central to the city's downfall was an incinerator retrofit project. Problems ranged from faulty technology to lack of a performance bond. Most dubious, which the Harrisburg Authority public works agency highlighted in a January 2012 forensic audit, were certifications that the debt would be self-liquidating.

While the City Council's bankruptcy filing late in 2011 - which a federal judge nullified -- drew national glare, much of the backstory flew under media radar. "Some large media, such as Reuters and The Bond Buyer, continued to follow the story, but most didn't," wrote Papst.

Millions of dollars in fees collected during bond transfers went into a "special projects fund" that Reed controlled and used for Wild West artifacts, the Harrisburg Authority reported in the audit.

"Steve Reed manipulated the bond markets," Papst said. "It had finally all come together: the bonds issued during the incinerator retrofit, the allegations of him using borrowed money to pay off other borrowed money, and his working with Wall Street to ensure bonds were issued before the project was ever approved by regulators. In all those instances, millions were paid out in fees."

Papst compared Reed to convicted fraudster Bernard Madoff. "Reed wanted Harrisburg to be successful. I'm sure Bernie Madoff wanted his investors to make money, too. In both cases the men built a house of cards that wasn't sustainable."

The Securities and Exchange Commission in May 2013 accused Harrisburg of misleading investors about the city's deteriorating finances, but neither fined nor prosecuted anyone.

Reed, in a rare public appearance since leaving office at the end of 2010, told reporters outside his home in early June that he testified in April before the Pittsburgh grand jury, but otherwise is under a gag order.

Papst portrays other major players in the debt crisis, including vitriolic Mayor Linda Thompson, who succeeded Reed; the wisecracking Bryn Mawr, Pa. attorney Mark Schwartz, who represented City Council in its efforts to declare bankruptcy; city comptroller and mayoral candidate Dan Miller; and state appointed receivers David Unkovic and William Lynch. The latter succeeded an increasingly frazzled Unkovic who resigned in March 2012.

"She referred to herself in the third person, made national 'worst persons' lists and had a special gift for memorable statements," Papst wrote of Thompson, who once locked him out of a City Hall press conference after a key council vote against her recovery plan.

Of Schwartz: "With Einstein hair, tortoise-shell glasses and '70s suits, he garnered plenty of attention. The mere mention of his name seemed to draw only adoration or scorn - not much in between."

Of Unkovic: "It was obvious the stress was getting to him."

Of Lynch: "This guy was no nonsense and clearly not concerned with political correctness. I found it refreshing."

Schwartz, in a five-page commentary within the book, said Harrisburg reflects a greater malady within the muni bond industry. Bond lawyers, he said, "don't get paid to say 'no' to a bond issue. A 'yes' answer often commonly brings six figures to the lawyers and seven or more to the bankers."

Decaying infrastructure and a huge spike in crime interweaved with the city's decline - and with Papst's narrative. "Harrisburg was five times more dangerous than Philly," wrote Papst, who sometimes found himself at peril while covering crime stories.

Slapstick often reigned. Sideshows included council members insulting each other at meetings, and Miller and Thompson exchanging mud-slinging lawsuits. Thompson called residents of neighboring Perry County "scumbags," blew kisses at people throwing snowballs at her office window and even dribbled a basketball over the dried blood of a murder victim during a press conference in the run-down Allison Hill neighborhood. Thompson lost her re-election bid in 2013.

"If this weren't real, it would be a horrible novel," said Papst, a Berks County, Pa., native. "It was an ongoing soap opera. Every day something happened that would make you put your head into your hands and say 'I can't believe this.' "

At times the drama wore on Papst.

"I'm tired of covering murders, sinkholes, blight, collapsed buildings and sleazy lawyers," he wrote in the book.

Harrisburg late in 2013 averted bankruptcy through a recovery plan that included the sale of the incinerator to the Lancaster County Solid Waste Management Authority, a long-term lease of parking assets and some concessions from creditors.

 

 

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.