Capital Crisis
On Point with Chris Papst
While the country is focused on the financial meltdown in Washington, Pennsylvania is experiencing its own capital crisis, which is being largely overlooked.
Right now, the City of Harrisburg is fighting for its economic life. Decreased revenues, increased costs and massive debt are crippling the Commonwealth's capital. The city is teetering on the edge of economic collapse. And if it falls, it won't fall alone.
Harrisburg's money troubles started a couple decades ago. But in 2003, when the Environmental Protection Agency shut down the city's incinerator, it got really bad. The EPA claimed the incinerator did not meet code. Instead of selling the land and moving on, city leaders decided to repair it.
They partnered with Barlow Projects, a Colorado based incinerator tech company. Barlow's bid to repair the facility was $77 million - $40 to $50 million less than its nearest competitor. However, Barlow could not secure the appropriate performance and payment bonds to begin construction. Performance and payment bonds serve as insurance policies and are legally required for any public project over $5,000.
Despite a lack of bond security, the city still went forward with the project – its fatal mistake. To make a long story bearable, Barlow ended up going bankrupt before the project was completed. Instead of cutting their losses, the city hired a new contractor to finish the job. By the time it was completed, Harrisburg had $310 million in incinerator debt; six times its annual budget of roughly $50 million.
Now, city leaders are trying to find a solution. Late last year, the mayor asked the state for help by requesting Act 47 status. Act 47 is a program set up by the Commonwealth in the 80s to help financially distressed municipalities. When a municipality enters Act 47 (Scranton, Reading, Pittsburgh have), the state hires a financial team to write up a recovery plan.
A few months ago, Harrisburg received its plan. But then - despite requesting the help - Harrisburg became the first municipality in Act 47 history to reject the plan. The city council voted 4-3. The members who rejected it didn't think bondholders were giving enough concessions. Plus, they wanted to see a commuter tax or sales tax. Now, the mayor has put together her own plan, which largely mirrors the original plan that failed. If that plan fails as well, there's no telling what will happen.
To make matters worse, city leaders are being handcuffed by the state. In his most recent budget, Governor Corbett signed a measure that prohibited Harrisburg from filing for bankruptcy – a tool city leaders hoped to use as leverage against the bondholders. In addition, there is a bill coming up this fall that will stop Harrisburg from passing a commuter tax to raise revenue
This is a terrible situation made worse by the number of people affected. Dauphin County has insured $120 million of Harrisburg's debt. If the capital city can't service that debt, the taxpayers of Dauphin County will have to, and Dauphin County doesn't have $120 million just lying around. So then, who will end up paying that debt?
To make matters worse, the city is already being sued by its creditors for missing payments. And the mayor just announced the city will be out of money by mid-September. That means workers and bondholders will not get paid.
Even though this situation is not getting much national media attention, cash-strapped municipalities all around the country are closely watching. Because if Harrisburg ultimately files for bankruptcy and is able to successfully rewrite its debt contracts, that would encourage other troubled municipalities to follow suit. The results could be disastrous as insurance companies and other bondholders lose billions in payments. If the housing bubble was bad, what will the municipality bubble look like?
You may not have heard much about the current financial crisis in Harrisburg, but depending on what happens, you may be heavily affected.
Chris Papst is a two-time Emmy Award winning journalist for CBS-21.
Right now, the City of Harrisburg is fighting for its economic life. Decreased revenues, increased costs and massive debt are crippling the Commonwealth's capital. The city is teetering on the edge of economic collapse. And if it falls, it won't fall alone.
Harrisburg's money troubles started a couple decades ago. But in 2003, when the Environmental Protection Agency shut down the city's incinerator, it got really bad. The EPA claimed the incinerator did not meet code. Instead of selling the land and moving on, city leaders decided to repair it.
They partnered with Barlow Projects, a Colorado based incinerator tech company. Barlow's bid to repair the facility was $77 million - $40 to $50 million less than its nearest competitor. However, Barlow could not secure the appropriate performance and payment bonds to begin construction. Performance and payment bonds serve as insurance policies and are legally required for any public project over $5,000.
Despite a lack of bond security, the city still went forward with the project – its fatal mistake. To make a long story bearable, Barlow ended up going bankrupt before the project was completed. Instead of cutting their losses, the city hired a new contractor to finish the job. By the time it was completed, Harrisburg had $310 million in incinerator debt; six times its annual budget of roughly $50 million.
Now, city leaders are trying to find a solution. Late last year, the mayor asked the state for help by requesting Act 47 status. Act 47 is a program set up by the Commonwealth in the 80s to help financially distressed municipalities. When a municipality enters Act 47 (Scranton, Reading, Pittsburgh have), the state hires a financial team to write up a recovery plan.
A few months ago, Harrisburg received its plan. But then - despite requesting the help - Harrisburg became the first municipality in Act 47 history to reject the plan. The city council voted 4-3. The members who rejected it didn't think bondholders were giving enough concessions. Plus, they wanted to see a commuter tax or sales tax. Now, the mayor has put together her own plan, which largely mirrors the original plan that failed. If that plan fails as well, there's no telling what will happen.
To make matters worse, city leaders are being handcuffed by the state. In his most recent budget, Governor Corbett signed a measure that prohibited Harrisburg from filing for bankruptcy – a tool city leaders hoped to use as leverage against the bondholders. In addition, there is a bill coming up this fall that will stop Harrisburg from passing a commuter tax to raise revenue
This is a terrible situation made worse by the number of people affected. Dauphin County has insured $120 million of Harrisburg's debt. If the capital city can't service that debt, the taxpayers of Dauphin County will have to, and Dauphin County doesn't have $120 million just lying around. So then, who will end up paying that debt?
To make matters worse, the city is already being sued by its creditors for missing payments. And the mayor just announced the city will be out of money by mid-September. That means workers and bondholders will not get paid.
Even though this situation is not getting much national media attention, cash-strapped municipalities all around the country are closely watching. Because if Harrisburg ultimately files for bankruptcy and is able to successfully rewrite its debt contracts, that would encourage other troubled municipalities to follow suit. The results could be disastrous as insurance companies and other bondholders lose billions in payments. If the housing bubble was bad, what will the municipality bubble look like?
You may not have heard much about the current financial crisis in Harrisburg, but depending on what happens, you may be heavily affected.
Chris Papst is a two-time Emmy Award winning journalist for CBS-21.
