US city on tricky path to restructure debt
By Nicole Bullock in New York
Published: January 24 2011 22:42 | Last updated:
January 24 2011 22:42
The state capitol: the city faces possible bankruptcy
In Harrisburg, local people are proud of their state capitol building. With a dome inspired by St Peter’s Basilica in Rome, President Theodore Roosevelt called it the “handsomest building I ever saw” at its dedication in 1906.
But a century later, the financial foundations of Pennsylvania’s capital are crumbling and it has become a symbol of struggling cities and towns across the US. The recession, the most severe since the Great Depression, has revealed years of fiscal mismanagement by state and local governments across the country.
Like many homeowners and companies, Harrisburg took on too much debt in better times.
In spite of having a past annual budget of only $60m-$64m, the city of 47,000 guaranteed $300m of debt on a local incinerator. A good chunk of that debt was incurred during the past decade in an effort to convert the incinerator into a revenue-generating energy plant. The revenues fell short and Harrisburg got burnt.
Last year, unable to pay the incinerator debt, the city came close to defaulting on its own obligations as well. The local authority that owns the incinerator has hired accountants for a forensic audit on the deals that precipitated the crisis.
Linda Thompson, the mayor, says bankruptcy – rare for local governments – is a last resort. But she wants all parties involved to share the pain for her city’s bad decisions.
That is tricky, given the pledges Harrisburg has made. It faces lawsuits, including one from Assured Guaranty, a bond insurer that also guaranteed the incinerator debt. If successful, the suit would force Harrisburg to pay the bonds by raising taxes, selling assets or making steep cuts.
Harrisburg is not alone in getting into trouble through over-borrowing. Littlefield, a city in north-west Texas, took on too much debt to build a prison that it hoped would create jobs. It has had to dismiss firefighters and police, as well as raise property taxes and water and sewer rates, to avoid default.
“There have been local citizens who have suggested going bankrupt, but, as I understand it, it is not really an option,” said Danny Davis, the Littlefield city manager. “The bondholders will just come in and make you raise your taxes to the point that you recover those funds, so you are really spitting in the wind.”
In another cautionary tale, Vallejo, California has been decimated since filing for bankruptcy two years ago. To bring its budget in line, the city has cut its police force almost in half and ceased funding for community services.
Harrisburg has not yet had to make the crushing budget adjustments seen elsewhere and can take some comfort from its recent qualification for a Pennsylvania programme that aids distressed cities.
State taxpayers will fund advisers appointed to co-ordinate a turnround plan with local officials who have butted heads repeatedly on how to fix the city’s finances.
One option – raising property taxes – is complicated by the fact that about half the city’s property, including the capitol building, is not taxable because it houses state government and related business, and many of those workers live outside the city. The state programme also could allow Harrisburg to tax its commuters and have access to cheap loans.
In a sign of the political discord, members of the city council, some who advocate exploring bankruptcy, have tapped their own advisers, Cravath, Swain & Moore, a New York law firm which has agreed to advise them at no charge.
The next few months are key. The state-named advisers, led by Cincinnati-based Novak Consulting Group, will draft a plan in the coming weeks at around the same time that Cravath will give its advice on the city’s alternatives.
The mayor and many citizens are optimistic that Harrisburg, which has faced financial problems before, can turn itself round. They point to the city’s stock of charming historic homes and its location on the banks of the Susquehanna river, an area where Samuel Taylor Coleridge, the poet, once wanted to build a Utopian community.
Darnell Williams, a long-time resident who advocates bankruptcy, says he would move if he could. Mr Williams, who helps program the computer system for the Pennsylvania State Police Department and has served on the city’s audit committee, worries about rising property taxes and a lower quality of life as his home town restructures its debts.
“In 2002, my house was appraised at $250,000, but the last appraisal was $120,000,” says Mr Williams. “I doubt I could even find someone to buy it at this price.”
