Harrisburg Mayor Linda Thompson in New York City

On November 2nd, the Harrisburg Mayor attended the Bloomberg State & Municipal Finance Conference. She was a featured speaker and gave a talk entitled, “The Harrisburg Incinerator Challenge.” Below is the transcript of her talk.

BLOOMBERG PANEL, THE HARRISBURG INCINERATOR CHALLENGE

NOVEMBER 2, 2011

SPEAKERS:
LINDA D. THOMPSON, MAYOR, CITY OF HARRISBURG, PA

JONATHAN WEIL, BLOOMBERG NEWS

JONATHAN WEIL, BLOOMBERG NEWS: Thank you for joining
us. For those of you who don’t know here, Linda Thompson’s
been mayor of Harrisburg, Pennsylvania since January 2010
when she succeeded Stephen Reed, who’d been the mayor since,
like, the 1700s or –

(LAUGHTER)

LINDA D. THOMPSON, MAYOR, CITY OF HARRISBURG, PA: Be
nice.

WEIL: She was first elected to the city council in 2001.
She’s a Democrat. Last month, Harrisburg became the first
state capital in at least four decades to file for a chapter
9 bankruptcy protection.

According to the bankruptcy petition, the city’s
guaranteed debts for about $240 million, largely related to
an incinerator project, with $65 million of it overdue. My
reporting was that Harrisburg has skipped principle interest
payments on the incinerator debts since 2009 but has not
defaulted on its general obligation bonds. Correct me if
there are any –

THOMPSON: Yes. There were –

WEIL: — flaws here.

THOMPSON: There are some corrections, but we’ll get to
that.

WEIL: OK. The city faces a debt five times the size of
its general fund budget, namely due to the planned overhaul
and expansion of the incinerator.

Now, you objected to the move, approved by a bare
majority of the city council, to file for bankruptcy. And
again, for those in the audience who haven’t followed this
closely, could you summarize for us, how did Harrisburg get
in this mess in the first place, and why were you opposed to
filing for bankruptcy?

THOMPSON: Well, first of all, thank you for having me.
It’s a great opportunity to tell more of a boots on the
ground story. Because of course we love our media, but the
truth doesn’t always get out.

I am a first-term mayor. Eight-year councilwoman. And we
inherited a mess in terms of my administration. We had a
mayor in office for 20 — 27 years. Did a great job up until
a certain point, and just became unchecked. And as a result,
we had this situation today.

How did we get here? There are two serious primary
issues here financially. The city of Harrisburg cosigned
behind one of our municipal corporations of a retrofit
facility. We used to be the owners and operators of this –
of the incinerator up until 1993.

Actually, 2000 — 93. In 93, we sold it to the
Harrisburg Authority, the Harrisburg Authority allowed us to
continue to manage it up until 2003, when we hired a company
called Barlow Projects under the guise of taking our system
that was causing us financial pain because of EPA and DEP
violations.

As a result, they brought in this new technology that
was supposed to work, 21st century, and he ran out of money.
The project went awry and there was no performance bond on
the deal.

As a result, there had to be some additional borrowing.
An additional $65 million of borrowing to fix what the $125
million project was supposed to initially do for us.

So, the city was no longer the managers. We then at 2006
turned it over to a company called Covanta, an energy
company, to actually get the facility up and running with the
$65 million additional borrowing.

Covanta, of course, needed a $35 million construction
loan and $25 million of working capital on top of the six –
on top of the $25 million.

And then, incidentally, we found out later on that there
was some secret borrowing of a $25 million CIT agreement
between the Harrisburg Authority and this company called CIT
that’s now being litigated.

So, that’s how we got to the tune of $310 million, not
242. In the meantime, the city of Harrisburg guaranteed all
of the debt on the incinerator, the entire debt of $288
million, first co-signer. Our county government, who is a
sitting government in our city, was the secondary co- signer.

So, in other words, it would — it had a domino trigger.
If the city of Harrisburg could not back those bonds
payments, if the Harrisburg Authority could not pay them,
which ended up being the case,

I don’t ever recall that the Harrisburg Authority ever
making any of its bond payments. The city had to kick in and
make them for several years using some of the debt reserve
funding. And ultimately, the — the county commissioners had
to come in because the city could no longer take on the debt
bond payments on behalf of the Harrisburg Authority.

So, the $65 million you referenced is not really $65
million. When we had a recovery plan, it was up to $75
million, and since they’re still making bond payments, it’s
probably going to be an additional $75 million, maybe $78
million to $80 million that we will owe with our three
primary creditors, which is Covanta, AGM — and the county –
the county government.

Because if in fact the county government could not make
the bond payment then it kicks back into Assured’s pocket to
pay the bond. And each one of us had been affected one way or
another in paying the bond payments.

WEIL: There’s a truism in investing that you should know
what you’re investing in when you make that decision.
Everything that you just described, and I know that’s just a
synopsis, is just — impossible to follow from the outside.

THOMPSON: And again, when I was a councilwoman, city
council did not go on the experts of the administration, we
hired our own independent consultants to advise us, and they
gave us a report, and the indicated that — we asked,
actually, three sound questions, and it was, was the
equipment — was the technology sound? Would the funding
work? Will the number work? And will it be environmentally
sound? Because those are the three issues that kept us in
trouble.

And the report came back a resounding yes, that they
would, and it would be in the best interests of the city.

Because the incinerator was supposed to be used for the
region, which is why we got our county government to back the
bonds, because they also take their trash there. And it was
supposed to be turned into a resource recovery facility where
it would also generate extra revenue, such as steam, the sale
of electricity.

And because the project went awry, those components
never even materialized. And so, yes, here we are today.

So, council — the only thing we regret now, those
members, which included me, we regret is that we didn’t have
the legal expertise to really dissect the documents that took
place after we gained the legislative approval to determine
whether it was — there was a performance bond on it. We
didn’t find this out until years later.

WEIL: The governor of the state has now set in motion a
process immediately to a state takeover. We reported today,
Bloomberg News, that he’s interviewing candidates for — to
possibly be a receiver for Harrisburg. How would you view
state receivership for Harrisburg?

THOMPSON: Well, as we continue to talk about how we got
here, we are — there’s two scenarios here, as I said. We
have the incinerator conundrum, and we also have a city
that’s deemed as structurally deficit.

And we always have mandates that we never have enough
money to take care of, our unfunded mandates. So, we’re
really creatures of the state.

We have a — a city that is highly non-taxed. We have a
great deal of universities, colleges, and non-profits,
hospitals, and our very own state government and county
government are tax exempt. So, that really does — does a
crippling effect on our city in terms of gaining revenue for
taxation.

In addition, we have unfunded mandates. We have about
7,000 unfunded mandates on our municipality. Municipalities
in the state of Pennsylvania all have these same mandates,
and all of our mayors in the city of — in the state of
Pennsylvania are grappling with these unfunded mandates.

And we actually have formed a coalition, 29 mayors, and
we organize with our think tanks a proposal to our governor
about how the state can aid us to help address our structural
deficits.

WEIL: Are you hoping for a receivership, then?

THOMPSON: Absolutely not. And in fact, I — the Senate
Bill 1151 was introduced to force council to the table.
Unfortunately, we do have elected officials that want to pay
politics, and some are aspiring to be the next mayor. And
that gets in the way sometimes.

But for the most part, we have a spirit of cooperation
in our city. Our government is cooperating, the mayor is
cooperating with the governor, our county commissioners are
cooperating.

And we’re also trying to whip up our creditors. As I
said, we have three primary creditors, which is Assured,
Covanta, and also the county government, and nobody wants our
city to go into bankruptcy.

WEIL: What type of concessions are you expecting from
them?

THOMPSON: From who?

WEIL: The three creditors you just named?

THOMPSON: Well, again, when the recovery plan was
implemented, in 2010 — let me back up — I took our city
into a distressed state. Our state government helps its
municipalities out when they get into financial trouble.

And so I put ourselves up under the state to be able to
get some financial assistance and some technical assistance
that often municipalities and mayors don’t have beyond our
scope of expertise.

And we — the state awarded us that status. So, with
that comes high, competent consultants and also technical
assistance in terms of financial support.

So, that’s the avenue I took. We got a coordinator out
of that, and they came in and dissected our structural outlay
and determined that we had several matters and that they put
together a recovery plan.

The recovery plan included a number of things.
Internally, scaling back our government, renegotiating our
union contracts, and at the same time, looking for ways to
get our non-profit organizations to be a part of a pilot
program to give in lieu of property taxes.

It also calls for us leveraging our assets. We have two
assets. Of course, the resource recovery facility is, by the
way, is operating finally at its high capacity and it’s able
to make enough money to pay for its operations.

And just now, we’re starting to see a little bit of
surplus, but not enough to make its bond payments. So, that’s
a good sign there, because it is a very lucrative asset.

At the same time, we have parking garages, and that was
also a recommendation in this recovery plan.

When it went before council three times, when council
voted down the first recovery plan saying it was too onerous
on the taxpayers, it kicked the coordinator out and put the
mayor automatically in place, which is uncharted waters.

So, I became the coordinator, made adjustments to the
plan where I actually was able to use some things that the
state didn’t want as a leverage to get them to give us more
money, and it worked.

So, we got an additional $2.5 million out of our state,
because they’re tax-exempt and they own more than 50 percent
of property in our city. And also got our county government
to give us some money, because they also are tax-exempt, so I
got them to give an additional $1 million.

And I did some other changes, and council rejected two
of those plans. They rejected three recovery plans, and the
state actually was forced to implement legislation called
Senate Bill 1151 to force council to the table and put them
in a very limited time frame, 30 days, which is where we are
with the discussion about receivership.

I certainly don’t want our state coming in –

WEIL: If you think that’s where it’s going to be.

THOMPSON: I don’t think so. I think council now
understands that the pressure’s on them, that it would be
your deciding factor and it would be on your political bite
saying that you allowed your state — your city to be taken
over by your governor.

The governor has his own problems, and believe me, he
does have them. He doesn’t want our city. But at the same
time, we share a common understanding that we want our city
to become solvent again.

We can get through this. We want to cooperate with our
creditors. We want to honor our debt. But at the same time,
we also want our creditors to know that in this bond world,
there’s risk, and there’s rewards.

And I’m of the mindset that we can use our assets to
leverage those assets to do what they need to do for us in
the meantime to get us up out of this and get us a long-term
sustainability plan, and that’s precisely what my goal has
been as the mayor.

WEIL: The governor and the city’s — some of the city’s
creditors have joined you in opposing the bankruptcy
petition. The bankruptcy judge has set a short November 30 –
23rd hearing in the case. That’s actually after the point in
which there might be a receivership appointed.

THOMPSON: Precisely.

WEIL: What do you hope, expect will come out of that
bankruptcy proceeding?

THOMPSON: Well, as you noted to this community, that I
oppose the bankruptcy. I oppose the bankruptcy. I’m no
bankruptcy expert, judge, or attorney. But at the same time,
I believe our problem is solvable. And this is what I’ve been
constantly saying to our legislative branch of government. We
have assets. And unfortunately as a mayor, I don’t want to
sell our lucrative assets.

But it — as complex as this matter is, I try to keep it
simple for the average voter and resident, that if you have a
house and you have earned that house in terms of having 100
percent equity in that house, and you lost your job, no fault
of your own, you got yourself into trouble, you ran up your
credit cards, you have no ability to pay those credit cards
and your credit card company takes you to court.

And if you go to court, the judge is going to want to
know what’s your solution. What’s your plan? What’s your –
of paying your debt?

WEIL: And on that –

THOMPSON: You’ve got to leverage — you’ve got to
leverage that house. You’ve got to get the equity out of
there and pay off those credit cards, which is what I’m
talking about in terms of our leasing of our garages, so –

WEIL: And on that note, you’ve — we’ve reported that
you’ve said that Harrisburg — you believe Harrisburg will be
able to meet its debt obligations and payroll three months
for the rest of the year. What about three months from now?
Six months from now? A year from now?

THOMPSON: Well, in the recovery play, there is long-term
sustainability and strategies put in place. The biggest
strategy that we have to painstakingly do, and that is
leveraging our assets.

We have a very lucrative parking facility, and we have a
sound resource recovery facility, now. And combined, we can
get that debt bought down on the incinerator and ultimately
do all of our internal cleansing of scaling back our
government, which are things I’ve already done.

I’ve scaled back our government costs about 20 percent,
personnel reductions 10 percent. And we expect to have a
recovery plan and some solvency by 2014.

WEIL: OK. Three months from now, do you believe that the
city will be able to meet its debt obligations and meet its
payroll?

THOMPSON: If everything works according to the plan,
yes. We’ll be back on a slow recovery track.

WEIL: Bill?

UNIDENTIFIED PARTICIPANT: Simeon’s (ph) got some
questions, and I’ve got some questions for the mayor, so why
don’t — Simeon, why don’t you take the audience questions.

UNIDENTIFIED PARTICIPANT: I think one thing we’ve
figured out here is that when you’re in financial distress,
it’s quite procedurally driven, and I have a –

THOMPSON: Yes.

UNIDENTIFIED PARTICIPANT: — procedural question from
Seth Brunby (ph) of Debt Wire. “While the city council is the
petitioner, the mayor is the party that is filing all motions
to continue the city’s business in the ordinary course. If
the court ultimately accepts the petition, who will manage
the city and represent it in court? And if it’s the mayor’s
office, can you withdraw the petition?”

THOMPSON: Well, I’m not the attorney here. I can’t
answer the question whether I can withdraw the petition. I’d
rather do the pre- stages. I believe that there was a
procedural defect in what council did.

We operate under a third-class charter code which says
that there’s a strong mayor form of government under a plan
A, which says that the mayor is the one that ultimately, if
council decides to put in a resolution about the bankruptcy,
I’m the one that actually has to move that process forward.

So, that’s why I’m protesting through litigation that
procedure was defective and actually the mayor has the power
to do what council did. So, that’s the argument there. And
we’re going to wait for the judge to decide.

In the meantime, I’m going to honor the law that the
governor signed, which is 11 bill — 1151 that says that we
must move forward with a recovery or else.

So again, I’m no expert in terms of being a bankruptcy
attorney, which is why I hired a law firm to do that for me.
So, if the judge ultimately says that the city is insolvent
and/or it doesn’t have the ability to make the case in terms
of not being able to pay these three — biggest two- thirds
of our debt, then I’ll honor the judge’s decision.

But again, my whole goal is to really work with our
creditors. Because listen. Bankruptcy will have rippling
effects in — not only for the state, but for the region and
for the city. And long-term rippling effects.

We have, as I said, structural — structural deficits,
and we have a great deal of unfunded mandates, often where we
need capital. We need bonding, borrowing, in order to be able
to deal with our mandated infrastructure needs.

And we don’t have a pay as we go system. It’s just
impossible to have that kind of system as a municipality. So,
we need some help from our state, too. So, we’ve been making
some concessions to our state. I — the governor has
committed to helping the city out, and we’re going to hold
him to task.

My biggest stickler right now in this recovery plan is
that I want AGM, I want the county, and I want Covanta to
understand that if we happen — have to leverage our most
lucrative asset, which is our parking garages, that we want
them to make some concessions.

And they have made some concessions, but not sufficient
enough for me as a mayor to get rid of the stranded debt.
There is stranded debt after we sell the incinerator. All –
restructured recovery facility. And we leverage and lease our
parking garages.

As a mayor, I don’t want any more debt after that until
we can fully get our structural deficits in line and get a
solid clear pathway at being able to meet our debt
obligations.

Because again, we’ve been challenged in our general
obligations, as well, but we haven’t missed a payment. And I
don’t want to have to continue to struggle like this, so they
have to take some hits.

UNIDENTIFIED PARTICIPANT: I’ve actually got key two
questions related to that that have come in from — by
e-mail. One is, well, what about the stranded debt? If you
sell or lease the parking garages and the incinerator, you
still have, the questioner said, “around $180 million of
stranded debt.” I don’t know if that’s a correct figure or
not.

THOMPSON: Well, I don’t –

UNIDENTIFIED PARTICIPANT: The second — the second
question is, another question said, another questioner said,
aren’t the incinerator and the garage some of the greatest
bargains available on the muni asset market anywhere right
now?

THOMPSON: Let me deal with the first question. Listen. A
mayor’s got to do what a mayor’s got to do. And the fact of
the matter is, I haven’t seen anyone to bring me a plan that
demonstrates that there’s a check out there waiting for me to
pay $310 million of debt.

Which is why I said we have a spirit of cooperation here
against — with all stakeholders. AGM stands to lose on this.
The county stands to lose. And so does the city of Harrisburg
and our state government. So, we all have to be big boys and
girls in the room and do what we do best, and that is to
solve our challenges.

The stranded debt issue is what we’re at the table

battling about, and I’ve made it no secret to the state, the
county, AGM, and Covanta that I will not settle for a deal
that will leave any amount of stranded debt on the table.

And again, I’m not quite sure if the person is correct
about $100 million stranded debt. I have someone checking the
numbers now so that when we go into the next meeting, I
organized a meeting with all of our creditors within this
20-day timeline that we have under this emergency completion
date that the governor imposed on us through 11 bill 50 –
Senate Bill 1151.

I organized a creditors meeting because it even says
that we can meet with our creditors in a private room. So, we
have a creditors meeting scheduled on the 7th of November,
and all of the creditors are coming into the table, and
that’s where we’ll all roll up our sleeves and bang it out.
And the goal is to get the stranded debt off the table.

And I suspect that everybody’s going to work
cooperatively because particularly those leaders who are
working together, such as the state, the county, AGM, and
Assure, and hopefully our city council, will come out with
our — with our game faces on saying that we’ve resolved this
issue. There won’t be any takeover, and that all the parties
have taken their equally shared hits and get our city back to
solvency.

UNIDENTIFIED PARTICIPANT: Thank you very much.

THOMPSON: OK. Thank you.