Having sold its incinerator, Harrisburg has a new symbol of a deal gone sour.
A 12-story downtown office building, subject of a $6.9 million borrowing in 1998 that straddled the city with $42 million in debt service, is the latest financial albatross in Pennsylvania's 49,000-population capital, which is trying to get back on its feet after barely avoiding bankruptcy.
Mark Schwartz, a Bryn Mawr, Pa., attorney who represented the Harrisburg City Council in its 2011 attempt to put the city in bankruptcy, called the original financing "ass backwards," saying it gave Pennsylvania use of the building for its employees while the city was on the hook for the bonds.
On Jan. 30, Mayor Eric Papenfuse — who set aside his own fierce objections — signed off on an elaborate restructuring settlement involving the state government and bond insurer Assured Guaranty Municipal Corp. for debt related to the building, known as the Verizon Tower after its longtime main tenant.
"I felt that there were no other options but to sign it," Papenfuse said in an interview. He cited the benefits of relocating about 900 state workers and their parking revenue downtown. Verizon Communications is vacating the offices in the building, which also includes retail and restaurants below, raising the specter of a vacant building generating no revenue for the city at all.
With payment on the back-loaded bonds not due to start until 2016, the transaction flew under the radar for years while city and state officials coped with bond financing overruns to an incinerator retrofit project that largely accounted for more than $600 million in debt and pushed Harrisburg to the brink of Chapter 9.
Papenfuse's biggest concern about the settlement is that too little money from a lease agreement with the state Department of General Services is being used to pay off the 1998 bonds. He also accused state officials of pressuring him into signing off at the last minute.
The settlement, normally an event that brings sighs of relief from all parties, reopened some wounds in a city still reeling from the incinerator debacle.
The city, however hard it tries, can't escape its past.
"Harrisburg is still trying to come to terms with the reckless and in my opinion criminal actions of the Reed administration," said an angry Papenfuse.
Stephen Reed was the city's mayor from 1982 to 2010, at the helm for both the Verizon Tower bonds and the incinerator boondoggle. Efforts to reach Reed failed.
"The Verizon Tower deal was done in the same modus operandi as the incinerator and other deals," Papenfuse said.
Papenfuse, a former board member of the Harrisburg Authority public works agency and long a critic of Reed, asked state Attorney General Kathleen Kane to investigate the 1998 Verizon deal. Kane's office is also probing the incinerator financings. Papenfuse said he found the original bond materials "horribly negligent."
"It's a very bitter pill to have to pay back what we owe for what originally was $6 million to plug a budget hole," said Papenfuse. "We will pay the Verizon debt. The problem is, I can't give the police force as much as I would like or finance infrastructure needs as much as I would like."
The Harrisburg Strong recovery plan, which the Commonwealth Court approved in 2013, included the leasing of 200,000 square feet at the tower in addition to the headline components - the sale of the incinerator and a long-term parking lease.
The settlement will provide a state tenant to replace Verizon and is expected to reduce the city's total debt service to about $18 million, with the first payment of $500,000 due in 2017. However, it also saddles Harrisburg with $7.4 million of payments due in 2033.
"[It] leaves unclear how the city will meet two large balloon maturities in the final year of the bonds, raising the possibility of a re-default and a potential loss to creditors in 2033," said Moody's Investors Service.
Papenfuse worries that the back-loaded deal essentially maxes out unrated Harrisburg's debt.
"Because of the debt, I don't see us getting a bond rating anytime soon," he said.
Harrisburg, if it wishes, could defer up to $2.7 million in debt-service payments stemming from a 1998 issue of general obligation-guaranteed lease revenue bonds that financed the building. Assured Guaranty would cover the missed payments at a 6.07% rate no later than 2033.
"The current mayor did not have many options afforded to him as he is backed into a corner with no exit, except to delay the debt payments which are already at astronomical amounts," said David Fiorenza, a professor at Villanova School of Business and a former chief financial officer of Radnor Township, Pa.
Lease payments from Verizon Communications - formerly Bell Atlantic - were to cover debt service beginning in 2016, but Verizon's lease expires that year and the telecommunications giant did not renew.
"The structure of the ill-fated bonds was risky," said Moody's, which noted that the bonds were not structured to withstand a Verizon pullout.
The state stepped in a year ago with a partial solution - to lease office space at the building, but rent money won't cover the entire debt service obligation.
State officials did a lot of behind-the-scenes work with Harrisburg's financial recovery advisors to craft the deal. In addition to relocating the state workers, the city is expected to realize an additional $600,000 annually from an increase in parking taxes and $48,000 per year from an increase in the local services tax.
Financial advisors worked with state officials, banks and Assured Guaranty for roughly two years, sifting through obscure state laws and policies about building occupancy, among other tasks.
The state's Department of General Services was able to lease the tower for a base amount of $65 million over the 17 years - considered favorable terms for the city, given market conditions — and the deal included an energy-savings component that stands to free up money for the city on the back end of the arrangement, when the balloon payments come due.
"On this one, they got a lot of help from the state, and that was kind of an untold story, how much the state has helped - things like the parking authority leasing," said Alan Schankel, a managing director with Janney Capital Markets in Philadelphia.
Parking revenue, however, has come up short, which Papenfuse referenced in a letter to Fred Reddig, an official with the state Department of Community and Economic Development and the city's coordinator under the Act 47 workout program for distressed communities.
"Instead of lobbying AGM to let the city have the option to borrow even more money at over 6% interest per year, the focus should have been on increasing the debt service allocation to make up for the parking shortfall," Papenfuse wrote.
Papenfuse is also upset that the energy modernization agreement in the settlement was not publicly bid. State officials insisted on using German conglomerate Siemens AG.
"Siemens is a perfectly competent, fine international company, but they're very expensive," said the mayor. "We could have done something less elaborate and saved money for debt service."
Papenfuse also said state officials threatened the city with the loss of $5 million per year in funding had he not signed the agreement.
A message seeking comment was left with Reddig. Assured Guaranty declined comment.
According to Schankel, Harrisburg has a long road to full recovery.
"My sense is that they still have some things to work through," he said. "The jury's still out. The recovery plan, Harrisburg Strong, set them up with an opportunity, but it's still kind of a struggle. They have low wealth metrics and Pennsylvania's economy is not exactly booming."
The Verizon deal was overlooked during the peak of the debt crisis "perhaps it was because even though the deal was in 1998, it was all zeroes and no debt until 2016," said Schankel. "That made it kind of easy to kick the can down the road when they were going through receivership and recovery."
The U.S. Securities and Exchange Commission in 2013 charged Harrisburg with securities fraud for providing misleading information about its deteriorating finances — including credit rating and debt payments — but imposed no fine or prosecutions. City officials signed a cease-and-desist order.
According to Papenfuse, Harrisburg's short-term financial situation is relatively strong. The city had a cash balance of nearly $5 million as of December. "We're caught up in all our bills," he said.
