Harrisburg has more than incinerator debt

Fri Oct 14, 2011 11:50pm BST

October 6: Muniland snaps

October 6: Muniland snaps

The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.

The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.

Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.

We should step back, though, and take a broader view of events and discern some important lessons for municipal governance. For example, current news reporting has focused on the $320 million of debt owed for the unprofitable incinerator plant. But the city has an additional $143 million dollars of debt, which they either issued or guaranteed. Harrisburg is a city of 49,000 with a majority of low income residents who had a median household income of $26,920 in 2010. The city is way over it’s head in debt with municipal debt per household of approximately $23,734. It’s hard to see how this can be serviced.

 

This debt, for the most part, was taken on by the former mayor, Stephen R. Reed, who served for 28 years and championed a whole slate of development projects from the incinerator upgrade to a Wild West museum. His efforts may have been to able kick start the city but he left it in debt hell. The local paper The Patriot News reported in 2009:

Finally, [former mayor] Reed’s penchant for complicated bond deals that gave rise to parking garages, soon-to-be-finished renovations to the baseball stadium on City Island and the Harrisburg University tower seemed to come crashing down. A project to overhaul Harrisburg’s trash incinerator piled up $288 million in debt with no means to pay it off.

It seems as if no one tried to constrain the former mayor when he was on his big development run. He must of thought “if we build it they will come”. A local small business owner described the satisfaction of city residents with all the development. From The Patriot News again:

As he worries over the prospect of a stiff tax increase to staunch Harrisburg’s beleaguered budget, [book store owner Eric] Papenfuse says city residents have only themselves to blame for never questioning the details of Reed’s dizzying debt deals. “People were very satisfied with him being the financial wizard behind the curtain,” Papenfuse said, drawing a Wizard of Oz analogy. “They didn’t ask a lot of questions.”

Now the bill has come due.

This is a general problem in muniland. Most residents have little to no understanding of their local indebtedness. This happens for a number of reasons including general indifference, complexity and lack of access to the information, especially in the case of municipal derivatives and bank loans.

The banks are a problem, too, because their job is to get municipalities to issue more debt. As a Citi municipal banker said at a recent industry conference “our clients are underleveraged”. Or, put more simply, “our clients need to take on more debt”. Many cities and states are drowning in debt. Some like California, New Jersey and Illinois don’t have the capacity to borrow much more.

There will be a lot to learn from watching Harrisburg struggle to get out from under this crush of debt. But understanding the mechanics of bankruptcy or receivership are much less important than understanding that good municipal governance doesn’t rest on issuing more debt to fund “economic development”. As painful as it is for the national economy for states and cities to reduce their debt loads it must be done. Harrisburg is an extreme example of municipal profligacy but many others are still hiding in the hills.