HARRISBURG, Pa. – An attorney hired for the Harrisburg Authority’s forensic audit methodically told a state Senate committee Thursday how frequent red flags were ignored while incinerator-related debt exploded and left taxpayers in Pennsylvania’s capital city with $340 million in debt that it cannot pay.
The city guaranteed the debt.
“There are many trails that can be followed in this saga, and a lot of these trails lead down ratholes,” Steven Goldfield told the Local Government Committee during a morning session on Harrisburg’s debt financing crisis.
Goldfield, a senior counselor with financial advisory firm Public Resources Advisory Group and a former bond counsel and underwriters counsel, assisted the Harrisburg Authority, the public works agency that owns the incinerator.
According to Goldfield, alarm bells should have sounded during early financings for the incinerator project after the Harrisburg Authority purchased the incinerator from the city in 1993. Those financings, he said, contradicted the city’s certification that the trash-to-energy project was “self-liquidating,” or sustained by revenues from tipping fees and sales of electricity, and therefore not subject to governmental debt limits.
“Self-liquidating is the jumping-off point,” said Goldfield.
About $60 million of bond deals in the late 1990s -- after the authority purchased the incinerator from the city in 1993 and including a $55 million refunding in 1998, were for working capital, Goldfield said.
“This wasn’t a crown jewel,” he said. “There were reduced waste flows, which meant less money in tipping fees. There wasn’t really a revenue stream. It needed work.”
Well before the city borrowed $75 million in 2003 to retrofit the incinerator after the demise of the initial contractor, Colorado-based Barlow Projects, a deadly cycle of borrowing to meet unsustainable debt service was well in place, according to Goldfield.
“The borrowing was what I call ‘scoop and toss,’ chuck it out long,” he aid. “Pay over 20 years instead of two years. The course of conduct was to keep borrowing. That’s how you have $300 million in debt.”
Goldfield also said that as borrowing increased, bond structures became more labyrinth.
“As we got to 2003, you begin to see convoluted structures with more and more levels of subordination,” he said. “There were constraints designed to get around concerns. Structures were designed to fit into something unusual.”
Committee members wondered why no city or regional officials spoke up against the borrowing.
Goldfield replied: “I think there’s not a person in the report that didn’t have an opportunity to say, ‘This is not the thing to do.’ I’m less concerned about who didn’t say no, but rather, that nobody said no.”
Stephen Reed, Harrisburg’s mayor from 1982 to 2010, was scheduled to speak Thursday afternoon.
The authority released its audit in January. It is the basis of the Senate hearings, according to committee chairman John Eichelberger, R-Blair Township, who called the debt crisis a “unique fiscal disaster.” Authority officials say they lacked subpoena power, thus limiting the scope of the audit.
Eichelberger said the hearings might avert another Harrisburg-type fiasco in Pennsylvania through legislation.
“As legislators we are not prosecutors or a grand jury. But we can examine the statutes and maybe protect the taxpayers in another jurisdiction from suffering a similar fate,” he said.
“You can’t legislate good financial taste,” Goldfield said. “I don’t know if this is going to come down to a legislative fix. I don’t know if we’ll ever get the full story out because some people are in litigation and they are circumspect.”
The Harrisburg City Council has requested that Securities and Exchange Commission and the Internal Revenue Service investigate the bond financings.
The committee’s minority chairman, John Blake, D-Archibald, cited a disregard for cash flow.
“It seems to me that the people who bought this paper didn’t care about the cash flow; they cared about the guarantees, and that’s part of the problem,” Blake said.
The panel intends to hear from financial advisors at its follow-up meeting on Oct. 29.