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Take my incinerator, please!
Long road from Lancaster to buy Harrisburg incinerator
Lancaster waste authority's mysterious offshore Cayman Island account
Dust to ashes? Harrisburg to seek bids to privatize sanitation and trash collection: Public Works building to be raised for ash burial
Skin deep: Lessons of history lost in Harrisburg's deepening bond debt crisis
Gov. Tom Corbett's office caught trying to silence Harrisburg debt critic
Videos: complete coverage of Harrisburg bond debt hearings
Big stakes for Harrisburg and Lancaster, PA
in pending incinerator deal
Deal requires not only careful consideration,
but also public participation
From the perspective of observers in Harrisburg, Lancaster County Solid Waste Management Authority's (LCSWMA) bid to buy the Harrisburg incinerator certainly is a big, and an important, piece of the puzzle to get Harrisburg on the road to solvency, and to keep the capital city out of bankruptcy court.
But it's by no means the only piece of the puzzle.
One big problem is that Harrisburg is about $330 million in debt from its botched incinerator retrofit.
No one knows for sure at this point, but it's believed that LCSWMA is offering about $150 million for the incinerator. That leaves some $200 million in outstanding debt.
The only other assets known to be on the table are the lease of the city's parking garages, and similar smaller pieces, like management of the city's deteriorating water and sewer works.
But it's hard to see how those assets are going to cover the remaining $200 million in debt. Maybe, if Harrisburg is lucky, those smaller assets may bring $100 million.
So that leaves behind, after all the deals are made, somewhere in the neighborhood of $100 million of "stranded" debt -- give or take. And that's not a cheap neighborhood.
But, for a variety of reasons -- political and economic -- there can be no "stranded debt" after these assets are sold or leased.
And that means that someone is going to have to take a $100 million dollar haircut.
There is a solution, former Harrisburg Receiver David Unkovic wrote in his plan.
"The solution requires a comprehensive recovery plan that really works," Unkovic wrote. "Ultimately, significant and difficult contributions will be required from many stakeholders."
Read between the lines: Harrisburg simply does not have $100 million.
So, obviously, for the plan to work, the bondholders and insurers will have to agree to take a $100 million haircut.
And that's an expensive haircut.
Cart before the horse
But there's a horse and a cart problem:
"Until the actual value of certain assets of the City is determined through a request for proposals process and until the exact extent of the structural deficit (the amount by which the City's operating expenses consistently exceed its revenues) are understood, it is not possible to determine exactly what contributions are required from various stakeholders," Unkovic pointed out.
"Once the value of the assets is known and the extent of the structural deficit is known, the Receiver can complete negotiations with the stakeholders," Unkovic continues.
But, and here's the big but:
"This will require a consensual process," Unkovic warns (my emphasis). "For the most part, the stakeholders will need to voluntarily agree to contributions in order for the plan to work."
In other words, the Harrisburg receiver's office simply doesn't have the legal authority to force the "stakeholders" (read "bondholders") into accepting this deal.
Currently, the "stakeholders" -- the bond insurer, Assured Guaranty Municipal (AGM); Dauphin County; as well as a smaller player, CIT Capital Markets -- are in state court seeking the entire amount they say they are owed.
The irony of course is that these same parties helped to push the city into insolvency, by doing things like profiting from careless bond swaps, and by not insisting on proper insurance, like a performance bond, at the incinerator.
So these supposedly aggrieved "stakeholders" themselves are far from blameless in this historic mess.
Still, if these parties don't agree to settle for much less, and continue to pretend in state court that they are blameless, the deal could easily fall apart, and Harrisburg could be pushed into bankruptcy court.
A gazillion moving pieces
There are other political problems on the horizon for the LCSWMA's incinerator hopes.
The entire package -- sale or lease of assets, and voluntary agreements to forgive the remaining debt -- has to be presented to Harrisburg city council in one piece, at one time, or it risks being voted down by council.
It's politically and economically impossible for Harrisburg city council to approve any deal if stranded debt is left on the table.
Even then, the commonwealth court judge could spike the deal.
Or, as I say, a creditor could balk: and then the whole mess slides into bankruptcy court.
And there are, as one observer recently said to me, a "gazillion moving pieces" the Harrisburg receiver has to contend with less the whole recovery plan flies apart and the capital city winds up in bankruptcy.
From Harrisburg's perspective, bankruptcy court looks increasingly like a bad idea.
There's the uncertainty of what may happen. There's never been a case this big, with so many unexplored implications, in bankruptcy court. This is sailing in uncharted seas.
The major creditors, including the bond insurer, certainly could tie up proceedings in federal court for years.
One lawyer tells me, for example, we may see, in federal bankruptcy court, as many as two interlocutory appeals all the way to the U.S. Supreme Court. (An interlocutory appeal is an appeal filed in the middle of a case, during which the case proper is essentially frozen, while higher courts weigh in on important issues.)
This means Harrisburg could be in legal limbo -- a city of 50,000 twisting in the wind -- while the case and appeals wind their way through the federal court system, up and down, and up and down again, for up to 10 years.
Legal fees will be astronomical for all parties, public and private.
High stakes card game
So everyone here is playing a very high-stakes card game, weighing their risks, and potential outcomes.
One possibility is that the bond insurer won't want to voluntarily eat $100 million, as prescribed by the receiver's plan, and may decide to take its chances in bankruptcy court.
Or, the bond folks could simply decide it's cheaper to manage the problem by paying a team of lawyers tens of millions to shepherd the case through federal court for a decade, keeping the $100 million on its books.
On the other hand, creditors may fear pushing the plan and the city into bankruptcy, one observer tells me.
In Chapter 9 court, bondholders might face the biggest cram-down "since Linda Lovelace met Harry Reems."
'In Chapter 9 court, bondholders might face the biggest cram-down since Linda Lovelace met Harry Reems'
The federal court may deal harshly with these same creditors if they are seen as playing an obstructionist role (or a fraudulent participatory role in the fast and loose bond dealings leading up to this), and the receiver's plan is destroyed.
In other words, in bankruptcy court, the bond insurers might wish they'd simply taken the $100 million haircut offered by the city receiver.
LCSWMA has, for now, tremendous leverage
Increasingly, as I say, for these and other reasons, most seem to recognize the receiver's plan must prevail.
All this gives tremendous leverage to LCSWMA in its bid to own Harrisburg's troubled incinerator.
But LCSWMA hasn't been particularly forthcoming about its reasons for wanting to own the plant, or its finances.
LCSWMA has done next to nothing to explain the deal to the public in Lancaster County, much less to garner support for it.
One observer wondered aloud to me, for example, whether a large part of LCSWMA's interest in the Harrisburg facility may actual revolve around its desire to bury incinerator ash on the site of the current Harrisburg Public Works Building.
Ash disposal is a big and expensive part of the incinerator business. The current site can hold no more ash.
As I noted last week, LCSWMA is almost certainly attempting to take advantage of the moment to seek state environmental approval to dump ash at the Public Works building site, on the one hand.
On the other hand, I'm told, environmentalists could demand a highly expensive, state-of-the-art ash handling facility on the site -- not just a landfill -- due to the huge amount of ash already buried there (dozens of acres of buried ash), and its proximity to the Susquehanna, water table concerns, and so on.
All this also underscores the importance of things like proper long-term insurance for environmental issues.
Uninsured, or under-insured, environmental liabilities can bite Harrisburg and LCSWMA in the ash (pun intended), and other places, in big ways decades down the road.
A state-of-the-art ash handling facility, moreover, if required, could easily cost ten of millions of dollars.
So these issues alone, if they are not carefully considered and weighed, have the potential to destroy the economics of the deal for LCSWMA, and Harrisburg.
But at this point no one seems to think it's worth scuttling the deal, or the receiver's plan, over LCSWMA's desire to bury ashes on the site. There obviously has to be compromises all around for this plan to work.
LCSWMA recognizes this, and apparently is negotiating for all it can get, while it can get it.
The big picture: toward public understanding and participation
That said, when you look at the big picture, the chances of the receiver's plan holding together at this moment seem astronomically slim, considering all the players, and all the interests at play.
Another real risk here involves the secretive nature of the receiver's overall plan.
If the plan is simply dropped on an unsuspecting public, without much prior explanation, it could easily fly apart, for political or legal reasons alike, as we witnessed with the recent secretive deal cobbled together by the Corbett Administration to privatize the Pennsylvania Lottery.
The news will only get worse.
The dirty little secret is that the $330 million in incinerator bond debt is only a fraction of the more than $1 billion in bond debt run up by Harrisburg over the last decades of fiscal and political irresponsibility.
I'm going to explore some of these issues in future articles.
The aim is not to be a pain, or to cause trouble, for its own sake.
Harrisburg got into this mess precisely because of fast and loose financial dealings, coupled with deliberate attempts to keep a supportive or a critical public out of the loop.
More ill conceived fast and loose financial deals simply will not cure the ill conceived fast and loose financial deals of the past.
It will only make things worse.
Not only will problems not be solved for Dauphin County residents.
Lancaster Countians stand a real risk of being pulled into this quicksand.
This mess was created precisely because there was little or no attempt to gain public understanding or support for past deals.
For David Unkovic's audacious yet reasonable plan to work -- if we want to push this car out of the ditch -- we clearly must all be pushing in the same direction.
-- Bill Keisling
posted March 26, 2013
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