http://globaleconomicanalysis.blogspot.com/2012/09/harrisburg-to-run-out-of-money-in.html
The Patriot News notes Harrisburg's eye-popping debt total is just one piece of city's bleak financial puzzle
While the amount of debt is eye-popping, it is only one piece of the jigsaw puzzle that is the city’s bleak financial background.
It does not account for past-due debt payments or unfunded pension and healthcare obligations. Nor does it include the estimated annual deficits in the city’s and school district’s budgets, which this year are so far estimated at $6.8 million for the city and at least $7 million for the school district, even with drastic cuts such as eliminating kindergarten.
A declining tax base contributes to the overall problem — between 2009 and 2012, the assessed value of property in the city dropped by more than $30 million, according to a school district report.
Meanwhile, each time property taxes increase, fewer people pay them. According to a school district report, property tax collection rates have fallen from 87 percent to 83 percent.
THE DOMINO EFFECT
City schools may find themselves in a similar situation.
In 2009, the district refinanced almost $280 million of outstanding debt to exit swap agreements and lower debt payments over the first few years by securing lower interest rates. It also borrowed an additional $10 million for building projects and equipment purchases.
Whenever you see stories like this, you can bet your last dime that massive amounts of fraud are in play.
The NPR article profiled David Unkovic, the man appointed by the state of Pennsylvania to fix the Harrisburg debt problem.
Unkovic resigned in May, then completely vanished from public life after scrawling out a hand-written letter of resignation.
Months later, NPR tracked him down and now Unkovic believes there is something more sinister than gross mismanagement at play.
From NPR
Stephen Reed was the mayor of Harrisburg from 1980 to 2009. People in town famously say he never met a bond he didn't like. He used the money borrowed on the incinerator to do all sorts of things.
He bought strange artifacts from all over the country, dreaming of building a Wild West museum. The city borrowed money to buy a baseball team and build a stadium; the team was later sold at a loss.
"The fundamental problem is he was borrowing more than he was really allowed to under state law," Unkovic says.
In 2007, Harrisburg filed a document called an 8110 b certificate. It was a promise, Bill Cluck says, that all the previous debt borrowed on the incinerator was still self-liquidating — that the incinerator would bring in enough money to pay the money that had been already borrowed on it.
"They knew it wasn't true when it was submitted, and it's never been corrected to this day," Cluck says.
Where Did the Money Go?
Stories like this irritate me because they always seem to stop short. Citing Cluck, NRR says money went to "pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal".
I can certainly believe that. Indeed I would be shocked to find out otherwise. But where is the list of names? What banks and politicians profited from these shady deals? Inquiring minds and taxpayers have a right to know.
Mike "Mish" Shedlock
and Scranton , Pa - closed recently on a loan to cover payroll and back wages , larger financial problems still loom......
http://thetimes-tribune.com/news/scranton-closes-on-6-25m-loan-to-cover-payroll-1.1366183
Sunday, September 02, 2012 12:15 AM
Harrisburg to Run Out of Money in October; Inside America's Most Indebted City; Labyrinth of Fraud
Congratulations to Harrisburg, the capital of Pennsylvania, for having the highest per capita debt of any city in the country.
The town's 50,000 citizens are on the hook for $1.5 billion according to the NPR article Inside America's Most Indebted City.
The town's 50,000 citizens are on the hook for $1.5 billion according to the NPR article Inside America's Most Indebted City.
The city has delayed payments to light bulb venders and paper sellers. Restaurants have hired their own security. A local strip club paid to keep the street light on. The city is projected to run out of money entirely in October.
A judge has recently ordered a 1% income tax hike on the people still left in Harrisburg. But the city council has promised to fight it.$1.5 Billion Does Not Include Schools, Pensions, Unfunded Liabilities
The Patriot News notes Harrisburg's eye-popping debt total is just one piece of city's bleak financial puzzle
It’s almost impossible to say exactly how much money the elected and appointed officials of Harrisburg have borrowed.
Missing financial audits, complicated transactions and intertwining finances create a labyrinth of money that stretches decades into Harrisburg’s history.
At best estimates, based upon reviews of independent reports and audited financial statements, the amount of debt owed by the city and its affiliated entities — with interest — stands somewhere north of $1.5 billion.
That’s roughly $30,285 for each of the 49,528 men, women and children living in the city and almost twice the income of the average city resident.
While the amount of debt is eye-popping, it is only one piece of the jigsaw puzzle that is the city’s bleak financial background.
It does not account for past-due debt payments or unfunded pension and healthcare obligations. Nor does it include the estimated annual deficits in the city’s and school district’s budgets, which this year are so far estimated at $6.8 million for the city and at least $7 million for the school district, even with drastic cuts such as eliminating kindergarten.
A declining tax base contributes to the overall problem — between 2009 and 2012, the assessed value of property in the city dropped by more than $30 million, according to a school district report.
Meanwhile, each time property taxes increase, fewer people pay them. According to a school district report, property tax collection rates have fallen from 87 percent to 83 percent.
THE DOMINO EFFECT
City schools may find themselves in a similar situation.
In 2009, the district refinanced almost $280 million of outstanding debt to exit swap agreements and lower debt payments over the first few years by securing lower interest rates. It also borrowed an additional $10 million for building projects and equipment purchases.
In his recovery plan, former Receiver David Unkovic noted that according to the last completed financial audit of the city — and the letter of the law — the city could borrow still more money.Labyrinth of Fraud
According to his office’s calculations, the city could legally borrow up to an additional $117 million.
Whether anyone would agree to offer the city another loan, however, is an entirely different question.
Whenever you see stories like this, you can bet your last dime that massive amounts of fraud are in play.
The NPR article profiled David Unkovic, the man appointed by the state of Pennsylvania to fix the Harrisburg debt problem.
Unkovic resigned in May, then completely vanished from public life after scrawling out a hand-written letter of resignation.
Months later, NPR tracked him down and now Unkovic believes there is something more sinister than gross mismanagement at play.
From NPR
"Illegal conduct occurred," Bill Cluck, who serves on the board that runs Harrisburg's incinerator, told me. "I think false statements were submitted under penalty of law to the state government in connection with the financing."
Stephen Reed was the mayor of Harrisburg from 1980 to 2009. People in town famously say he never met a bond he didn't like. He used the money borrowed on the incinerator to do all sorts of things.
He bought strange artifacts from all over the country, dreaming of building a Wild West museum. The city borrowed money to buy a baseball team and build a stadium; the team was later sold at a loss.
"The fundamental problem is he was borrowing more than he was really allowed to under state law," Unkovic says.
In 2007, Harrisburg filed a document called an 8110 b certificate. It was a promise, Bill Cluck says, that all the previous debt borrowed on the incinerator was still self-liquidating — that the incinerator would bring in enough money to pay the money that had been already borrowed on it.
"They knew it wasn't true when it was submitted, and it's never been corrected to this day," Cluck says.
And that, according to Cluck, was a crime.
There were 17 different revenue projections showing that the incinerator could never earn back all the money that had been borrowed.
So how was it that nobody — none of the law firms, none of the financial advisers — raised questions about the wisdom of this loan?
We asked, but they refused to respond on the record. And, Cluck notes, all those advisers made hundreds of thousands of dollars in fees from the loan.
Almost none of the $30 million the city borrowed in 2007 went to the actual incinerator upgrade. It went to pay back old debt, and to pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal, Cluck says.
To make matters worse, the city ultimately was on the hook. If the incinerator couldn't make the money back, it would fall to the taxpayers of Harrisburg. And this makes Bill Cluck crazy.
"Where's the advocate for the city to say, 'Hey, you're getting screwed by the terms of these deals,'" he says. "It never happened."
Where Did the Money Go?
Stories like this irritate me because they always seem to stop short. Citing Cluck, NRR says money went to "pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal".
I can certainly believe that. Indeed I would be shocked to find out otherwise. But where is the list of names? What banks and politicians profited from these shady deals? Inquiring minds and taxpayers have a right to know.
Mike "Mish" Shedlock
and Scranton , Pa - closed recently on a loan to cover payroll and back wages , larger financial problems still loom......
http://thetimes-tribune.com/news/scranton-closes-on-6-25m-loan-to-cover-payroll-1.1366183
Scranton on Thursday closed on a $6.25 million loan from a union-owned bank that will allow the city to cover today's payroll and back wages withheld last month when salaries were slashed to minimum wages, and pay some bills, officials said.
The loan, a short-term tax anticipation note from Amalgamated Bank of New York and Washington, D.C., gives the city some breathing room to pay employees and vendors while officials continue to seek nearly $19 million in long-term borrowing, called unfunded debt, to fund the rest of the city's 2012 budget, said Mayor Chris Doherty and city solicitor Paul Kelly.
"We're happy to get this," Mr. Doherty said. "We're hopeful this will lead to unfunded debt."
The city previously had been unable to secure unfunded debt this year because it did not have an updated, realistic Act 47 recovery plan sought by lenders to show how the financially-distressed city would be able to repay debt.
A long stalemate between the mayor and council over updating a recovery plan led to a cash-crunch crisis marked by bitter disputes, court battles, a minimum-wage payday for employees and the city lurching from one payday to the next.
Finally, on Aug. 23, a revised recovery plan agreed upon by the mayor, council and the city's Act 47 recovery coordinator, Pennsylvania Economy League, was adopted by council.
The Amalgamated TAN was tentatively secured Aug. 22 in advance of the Aug. 23 recovery plan adoption. Before the council meeting that day, Mayor Chris Doherty and council President Janet Evans announced the city had secured the TAN from Amalgamated, which bills itself as the largest union-owned bank in the country. The city's firefighter union helped arrange for the bank to provide the loan, officials have said.
Coming at the 11th hour, the Amalgamated TAN allows the city to pay today's payroll of $1.1 million, as well as $750,000 in back wages also due today under a court settlement, Mr. Kelly said.
Without this TAN, the cash-strapped city would not have been able to cover a full payroll and the back wages, city Business Administrator Ryan McGowan said Thursday.
The back wages stemmed from the July 6 payday, when the mayor - because of the city's financial crisis - slashed wages of nearly 400 employees to the federal minimum wage of $7.25 an hour. The city's fire, police and DPW unions sued to reverse the minimum wages and a settlement reached last month between the city and unions called for the withheld wages to be paid by today, with 6 percent interest.
Part of the TAN will be paid with a $2.25 million state aid package to the city from the state Department of Community and Economic Development. That aid package - a $2 million interest-free loan from DCED to the city and a $225,000 grant to the city, was approved by DCED on Aug. 24 because the revised recovery plan had been adopted the previous day. Once the DCED aid package is processed, it will go directly to Amalgamated Bank to pay down the $6.25 million TAN, which has a 5 percent interest rate.
The rest of the TAN would be paid back from the city's earned-income taxes to be collected in coming months.
The city initially agreed to forward all earned-income taxes between Sept. 1 and Dec. 15 to Amalgamated, and that bank on a daily basis was to keep 60 percent of those revenues and return to the city 40 percent, until the principal is paid off. The city was to draw down the 40 percent of wage taxes to use on operating expenses, such as payroll and bills, the tentative loan terms stated.
However, the city learned from its bond counsel that having the city's wage taxes shipped to an out-of-state bank would not adhere to the state Local Government Unit Debt Act, Mr. Kelly said. So, the loan terms were changed to have the city's earned-income tax collector, Berkheimer Associates, remit the EIT proceeds on a weekly basis to First Liberty Bank, which is registered in Pennsylvania, Mr. Kelly said. First Liberty then would send 60 percent of the city's EIT collections to Amalgamated to pay off the loan, and send the other 40 percent back to the city, Mr. Kelly said.
"Amalgamated wanted Berkheimer to send 100 percent (of the EIT). The (state) debt act won't allow that. Bond counsel pointed that out and that's why we had to find a Pennsylvania bank to act as a pass through," Mr. Kelly said.
Along with 5 percent interest on the $6.25 million loan, Amalgamated also charged a 3-point (percent) origination fee. That 3 percent origination fee would be adjusted downward by a half of a point, which would be returned to the city after the bank receives the city's DCED aid package of $2.25 million, Mr. Kelly said.
The loan proceeds also would pay fees of Mr. Kelly and council solicitor Boyd Hughes, and the city's bond counsel/financial advisers Stevens & Lee and CaseCon Capital, as well as Amalgamated's attorney fees, the tentative loan terms had stated. Under the tentative terms, Amalgamated's attorney fees were not to exceed $15,000.
The final loan terms and amounts of fees paid to attorneys and firms involved were not available Thursday from city officials.
The closing was held Thursday over several hours via phone and fax between representatives of the city in Scranton and of the bank in New York, Mr. Kelly said. He said he prepared eight of the 14 documents involved in the loan closing, and the bank prepared the other six. The documents had to be reviewed by attorneys for the bank, as well as by Mr. Kelly and Mr. Hughes, Mr. Kelly said.
"So what we're doing is we're agreeing to sign everything and hold them in escrow in case there are any revisions, but monies will be wired today (Thursday)," Mr. Kelly said.
By the end of the business day Thursday, $3.5 million of the Amalgamated loan was wired to the city, thus allowing for a full payroll and the back wages to be paid on time today, Mr. Kelly said.
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