Pennsylvania and municipal officials within the next two weeks could finalize a potential forbearance agreement regarding $282 million of Harrisburg Authority incinerator bonds that would give the city 90 days to craft a repayment plan.

The authority does not have sufficient operating revenue to repay the debt. It used debt-service reserve funds to meet a March 1 payment of  $2.2 million to bondholders and skipped an April 1 payment of $637,00 to Covanta Energy Inc., the plant’s operator, that would have repaid a $25.5 million project loan.

Assured Guaranty Municipal Corp. insures $195.5 million of the incinerator bonds. The city of Harrisburg guarantees the entire debt in the event that authority revenues are insufficient to pay debt service.

The city did not include debt-service costs on incinerator debt in its fiscal 2010 budget, though it did include $12 million to cover its own general obligation debt-service payments.

Dauphin County, where Harrisburg is located, has also guaranteed a portion of the debt. It budgeted $40.7 million in its fiscal 2010 budget for its incinerator debt obligations.

A forbearance agreement would give the city, the authority, and Dauphin County 90 days to map out how the bonds would be repaid, according to Brian Hudson, executive director of the Pennsylvania Housing Finance Agency. Hudson and former state Banking Secretary Bill Schenck are the two state officials working with the local governments and AGM to develop a forbearance agreement.

Hudson anticipates the involved parties will finalize an agreement within two weeks and officials are evaluating whether Harrisburg’s City Council would need to weigh in on the forbearance contract.

“It’s part of the process of formulating a plan to repay the debt,” Hudson said. “The forbearance agreement is basically providing the initial amount of 90 days to develop a plan, basically thereby incurring no additional charges during that period. So it involves pulling together a plan to restructure things.”

Potential strategies to raise money for repayment include debt restructuring, rate increases, and selling city assets such as a city parking garage.

Dauphin County Commissioner Jeff Haste said that he has seen a draft of the forbearance agreement and is willing to sign off on it. Along with the 90-day time frame, the agreement includes identifying assets that would generate $100 million to help pay down the incinerator debt, Haste said. In addition, a qualified professional would need to be hired to oversee Covanta’s operations of the plant.

“In those 90 days they have to come up with a plan to sell assets that would net out $100 million to go towards the debt,” Haste said. “It talks about having a professional person to be either hired or contracted by the authority to oversee resource recovery because they really don’t have a staff person or anybody over there now who has any expertise in resource recovery.”

The county last year filed a suit against the city as Dauphin is seeking reimbursement for payments that it made in 2009 on the incinerator debt. Haste said that if the parties sign off on a forbearance agreement, the county would not move forward with its suit during the 90 days. He said bringing all involved parties together is long overdue.

“From where I sit, we’ve been asking for this for two years and absolutely nothing has happened,” Haste said. “I’m glad Assured is finally involved. I don’t know why they weren’t involved earlier, but they are now involved and at the table.”

AGM spokeswoman Ashweeta Duranti declined to give details of the discussions with municipal and state officials.

“AGM is continuing to work closely with all parties to effect a satisfactory solution to the debt problems of the authority and the city,” Duranti wrote in an e-mail.

Michael Holmes, chief of staff for Harrisburg Mayor Linda Thompson, and Harrisburg Authority executive director Michele Torres did not respond to phone calls and e-mails regarding the incinerator debt.

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