Harrisburg, PA Bankrupt Over Garbage Incinerator

Harrisburg, Pennsylvania, was told to consider bankruptcy, which "may offer Harrisburg relief from $68 million in debt-service payments this year tied to a waste-to-energy incinerator project," Bloomberg reports.

Harrisburg, the state capital, "has guaranteed payments on $282 million in bonds on the incinerator, run by the Harrisburg Authority. The payments on the bonds and on a working-capital loan this year add up to four times the amount the city collects in property taxes each year, budget documents show."

PennLive.com reported on April 8 that the Harrisburg Authority would look into the controversial incinerator deal - $125 million bond deal in 2003 to repair and upgrade the Harrisburg incinerator after the EPA shut it down. The bond was not a performance bond. The city and county was left with the debt when the repair job was botched.

$68 million in debt-service payments exceed the city's annual budget, according to PennLive.com. The new mayor of the city, Linda D. Thompson, wants to sell off city's assets like parking garages and dam to pay the debt, instead of bankruptcy. She says the city has already identified a real estate agent who can quickly evaluate land assets that the city has.

Hmmmm. Who is this woman, who wants to sell out the city to pay the investors?

And who are the investors of this bond, and which bank was the underwriter of this bond? (My best guess is one of those Wall Street firms, but I could be wrong.) Who was a liaison between the bank and the city council? And who holds the CDS on the bond?

How did the original $125 million balloon into nearly $300 million? (Interest rate swap, anyone? Say the bank would accept 6% fixed rate interest payment from the city, and pay the city at a floating rate. The problem is that the floating rate, which is often pegged to short-term LIBOR, cratered to near zero when the credit market froze and the financial markets crashed in 2008.)

It seems municipal governments across the country went on a borrowing and spending binge in the early 2000's to build a world-class garbage incinerator or sewage treatment plant or power line (or whatever they can spend money on). Jefferson County in Alabama almost went bankrupt after having splurged on the sewer treatment plant, thanks to the bond (with the interest rate swaps) underwritten by J.P. Morgan. Here's another one from Seattle area, Snohomish County, paying AIG $14 million to get out of the swap agreement that it entered to reduce interest expenses on the debt, which was used to build power lines and electric poles. This one was underwritten by Smith Barney, later absorbed by Citigroup.

I expect many more stories like these to surface in the not-too-distant future.

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