Harrisburg Incinerator Forensic Audit Report

ARCHIVE. ORIGINALLY PUBLISHED JANUARY 18TH, 2012.

It’s here. In the public’s hands. The report of the investigation into the Harrisburg Incinerator financings, aka the forensic audit.

Timelines are provided with analysis of financial transactions going back as far as 1998. People, companies, and players are named. Some cooperated with the investigation, some didn’t.

Conducted, compiled, and presented by ParenteBeard LLC and Klehr Harrison Harvey Branzburg LLP, the investigative report is 133 pages long with 466 footnotes (read the footnotes!) and 44 pages of exhibits. It is said there 8000 documents that back the whole thing up. The report and exhibits are at the end of this article.

At a glance, here are parts that stand out:

• Professionals and officials involved didn’t give credence to the obvious risks of many of the transactions engaged to finance and facilitate this public project. “There are no indications that the City, the Authority or their advisors identified the conflict or potential problems.”
• No one left room for error. None. There was no realistic “cushion” for mistake, miscalculation, or mismanagement.
  • There are “significant questions” about professional and guarantee fees paid, especially in regard to the 2007 bond transactions.
  • Mayor Stephen Reed had his team that got the deals done. In the transactions and decisions, the same names come up again and again and are considered Reed’s “closest advisors.”
  • There was conflict of interest. Most notably The Harrisburg Authority (THA) Board member Fred Clark as employee of Reynolds Construction, a company that received multiple contracts for the Incinerator. As Board member, Clark abstained from votes and seemed to think that was kosher enough.
  • “We have seen no evidence that any of Reynolds’ contracts were competitively bid. Based upon our experience with construction contracting, the roles that Reynolds played in working on behalf of the owner and the general contractor on the same project is highly unusual since Reynolds was in the position of having to serve two masters with potentially competing interests.”
  • It would appear the only one who thought the retrofit project could actually be completed for the time and money Barlow Projects, Inc forecasted was Barlow. And for the sake of the project, City of Harrisburg, Dauphin County, and financiers agreed. Erroneously.
  • Consultants were hired by the County, City, and City Council to perform due diligence, but none offered “meaningful challenge to the Barlow projections.”
  • Actual costs of the retrofit exceeded projections. The report states projections were “highly dependent on assumptions.”
  • Barlow should have gotten a performance bond or not been hired since performance bonds protect the public. There was no performance bond because Barlow couldn’t get one due to its financial fragility.
  • In 2003, City Council was offered a “special projects fund” when members impeded the retrofit project.
  • The City of Harrisburg received fees from its guarantees on the Incinerator financings to fund the City’s Budget, “further damaging the RRF’s ability to pay its operating expenses and debt service.”
  •  The bond insurer Assured Guaranty (formerly FSA) seemed to have known that if the retrofit failed, there was no way the City would be able to pay the debt.
  • “In some cases, the Authority, the City and the County took strained positions on state law regarding municipal debt financing and other issues to allow the retrofit and related financings to proceed.”
  • There is “question” not accusation that requirements were complied with. Throughout the report, it is stated there is no evidence of proper consent, approval, or awareness of pertinent parties in certain matters. There is a lack of formal opinions, authorizations, and resolutions. There’s a whole section entitled “Failure to Comply with Bond Document Requirements.”
  • The City and County received reimbursements they should not have received. Payments to the City and County should have been subordinate to payments to other Incinerator debt.
  • The 2007 finance transactions should have never occurred.
  • Dauphin County declined to provide certain documents relating to the investigation (documents from their advisors). Documents obtained from the County were done through Right to Knows.
  • The City of Harrisburg only provided one filing cabinet of documents and as the reports states, surely there are more, but they cannot be found. They’re gone.
  • Key player attorney and lobbyists Andrew Giorgione refused the request for an interview with the auditors.
  • James Ellison and the law firm he works for, Rhoads & Sinon; the law firm of Buchanan Ingersoll & Rooney, P.C. (who Giorgione works for); and the financial advisory firm of Milt Lopus & Associates, Inc. all failed to provide documents requested.

   

  There is also reference to The Local Government Unit Debt Act and the concept of “self-liquidating debt.” Basically, the Debt Act puts a cap on what a municipality can borrow based on its tax base. However, if debt is found to be self-liquidating, i.e. it can pay for itself based on some sort of revenues, then the debt doesn’t count against the cap. For any new debt to occur, PA’s Department of Community and Economic Development must give its approval that the Debt Act cap isn’t being infringed by issuing what is called a Clean Certification.

  If you have talked with Receiver David Unkovic, you know this is one of his primary quandaries about the Incinerator debt. Because the Incinerator was closed from 2003 until April 2006, technically previous debt incurred couldn’t be defined as self-liquidating because the Incinerator wasn’t operating and generating revenues. However, the City of Harrisburg got around this and received a Clean Certification from the State.

  READ THE REPORT. RE-READ IT. TAKE NOTES. GET USED TO THE NAMES, THE STORY, THE ISSUES.

  Per the report, in 2003, the City’s debt allowance was only $25.9 million, which should have meant it could not guarantee the 2003 retrofit bonds. Also more importantly, the 2003 bonds themselves were qualified as “self-liquidating,” yet the Incinerator was closed and not generating revenue to make debt payments. “It appears from reviewing the relevant documents that the proceedings filed with DCED took an aggressive position by dismissing the lack of revenue stream from the then-shuttered RRF, and assuming that the City could take into account future revenues of a retrofit” (page 54). More assumptions. This aspect of the report is significant.

  Not to be overlooked are the campaign contributions THA asked the auditors to look into. For example, one of the apparent conflict of interest subjects is Fred Clark. Looking at Exhibit J, we see Clark contributed $22,781 to Reed’s campaigns from 2000-2010. That’s a lot of money, especially considering his involvement in the saga. And note, Clark’s not alone in his support of Mayor Reed’s political command.

  Read the report. Re-read it. Take notes. Get used to the names, the story, the issues. While it is not certain what will happen next, it is certain that this investigative report will be the talk of the town. This report will develop in its meaning, significance, and revelation as more people read it, multiple readings take place, and the critical conversation ensues.

  Serendipitously, this forensic audit report comes out less than a week after the last day of the trial of The Harrisburg Authority versus CIT Capital USA, Inc, which is referred to in the report. During the trial, the public began to get details, truths, and facts about the Incinerator debacle. This forensic audit fills us in on more.

  Read: 

  • Report on the Forensic Audit of the Harrisburg Incinerator
  • Exhibits to the Report on the Forensic Audit Harrisburg Incinerator

  Also reference:

  • The Trial: THA vs CIT (Part 1)
  • The Trial: THA vs CIT (Part 2)