Planet Money
11:46 am
Fri August 31, 2012

Inside America's Most Indebted City

Originally published on Thu September 6, 2012 2:58 pm

Harrisburg, Pa., leads the nation in a dubious distinction: It has the most debt per capita of any U.S. city. The town's 50,000 citizens are on the hook for $1.5 billion.

The bizarre tale behind the massive debt includes a do-gooder who skipped town, an epically mismanaged incinerator, and possible criminal behavior.

I profiled the do-gooder, David Unkovic, earlier this year. He was appointed by the state of Pennsylvania to fix the Harrisburg debt problem. He seemed like the perfect guy for the job. Confident but not arrogant. Low key. Earnest. The occasional bow tie, and glasses.

I asked Unkovic: Can you get this city out of debt?

"I don't say 'I,' " he said. "I think a lot of people have to help get this city turned around. But yeah. I think it can happen."

Unkovic seemed so calm when I talked to him. But a week later, he seemed to snap. Outside the local courthouse, he gave an edgy, impromptu press conference.

"The house of cards is coming down now, and they're all coming down at the same time," he said. A few days later, he scrawled a handwritten resignation letter, dropped it off downtown, and disappeared from public life.

The man brought in to vanquish the city's debt was vanquished himself. What happened? I spent months calling and emailing before I finally made contact with Unkovic again.

You can find him these days on a peaceful wilderness reserve outside Philadelphia, where he walks around a pond and thinks.

"There's probably not an hour that goes by since I've resigned that I'm not thinking about Harrisburg one way or the other," he says.

He thinks a lot about the the Harrisburg incinerator — a fire-breathing, money-burning dragon of debt that sunk the town.

When the incinerator was first built, in 1969, Harrisburg officials hoped it would allow the city would collect fees from towns all over the state for burning their trash.

But by the time Unkovic got to Harrisburg, the incinerator had accumulated $300 million worth of debt. And it had never, in four decades, really worked properly.

When Unkovic first arrived in town, he thought it was just bad management. Now, he thinks it's something more sinister. I asked Unkovic: Was the financing of the incinerator criminal?

"I don't know," he said. "It bothers me as someone who's done financing for so many years to see something like that. Because it's the worst stuff you can look at."

When I put that question to people back in Harrisburg, they didn't hesitate.

"Illegal conduct occurred," Bill Cluck, who serves on the board that runs Harrisburg's incinerator, told me. "I think false statements were submitted under penalty of law to the state government in connection with the financing."

Stephen Reed was the mayor of Harrisburg from 1980 to 2009. People in town famously say he never met a bond he didn't like. He used the money borrowed on the incinerator to do all sorts of things.

He bought strange artifacts from all over the country, dreaming of building a Wild West museum. The city borrowed money to buy a baseball team and build a stadium; the team was later sold at a loss.

"The fundamental problem is he was borrowing more than he was really allowed to under state law," Unkovic says.

Under Pennsylvania state law, there is a limit on how much a city can borrow. But the limit doesn't apply for debt that is "self-liquidating" — debt that is funding a project that is expected to pay for itself in the long run.

In 2007, Harrisburg filed a document called an 8110 b certificate. It was a promise, Bill Cluck says, that all the previous debt borrowed on the incinerator was still self-liquidating — that the incinerator would bring in enough money to pay the money that had been already borrowed on it.

"They knew it wasn't true when it was submitted, and it's never been corrected to this day," Cluck says.

And that, according to Cluck, was a crime.

There were 17 different revenue projections showing that the incinerator could never earn back all the money that had been borrowed.

So how was it that nobody — none of the law firms, none of the financial advisers — raised questions about the wisdom of this loan?

We asked, but they refused to respond on the record. And, Cluck notes, all those advisers made hundreds of thousands of dollars in fees from the loan.

Almost none of the $30 million the city borrowed in 2007 went to the actual incinerator upgrade. It went to pay back old debt, and to pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal, Cluck says.

To make matters worse, the city ultimately was on the hook. If the incinerator couldn't make the money back, it would fall to the taxpayers of Harrisburg. And this makes Bill Cluck crazy.

"Where's the advocate for the city to say, 'Hey, you're getting screwed by the terms of these deals,'" he says. "It never happened."

Of course, there is one person who was supposed to be advocate of the city of Harrisburg: the mayor. We tried hard to reach the former mayor for comment. We could not.

But consider this. In the 2000s, there was a lot of easy money out there for cities. Wall Street came up with tons of intriguing financial products, that would generate short term cash. There always seemed to be a way to borrow new money to pay back the old.

Unkovic says the former mayor may have been taken advantage of. "It's like he was a debt addict," he says. "And once he got going, he just needed more and more debt, and was sold more and more debt."

After the financial crisis, though, things changed. Local officials tried once again to refinance incinerator debt, but nobody wanted to lend the money. The tap has been turned off.

With all these debts, Harrisburg is finding it hard to cover basic services.
The city has delayed payments to light bulb venders and paper sellers. Restaurants have hired their own security. A local strip club paid to keep the street light on. The city is projected to run out of money entirely in October.

A judge has recently ordered a 1% income tax hike on the people still left in Harrisburg. But the city council has promised to fight it.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block. In a matter of weeks, Harrisburg, Pennsylvania, will likely run out of money. It has the most debt, per capita, of any city in the country. That's $1.5 billion, for a city for 50,000 people. [POST-BROADCAST CORRECTION: While Harrisburg does have an extremely high debt level, NPR is not certain it has the most debt, per capita, of any city in the country because there is no standard measurement for ranking municipal debt levels.]

Today, we bring you the bizarre tale of how things went so wrong - a story about a do-gooder who skipped town, possible criminal behavior, and an incinerator. Here's Planet Money's Zoe Chase.

ZOE CHASE, BYLINE: Let's begin with the do-gooder, David Unkovic. We profiled him on this program a few months ago. He was appointed by the state of Pennsylvania, to fix the Harrisburg debt problem. And he seemed like the perfect guy for the job. He was a sort of Dudley Do-Right figure: glasses and bow tie, confident but not arrogant.

Back then - March of 2012 - I asked him: So you think you can get this city out of debt?

(SOUNDBITE OF ARCHIVED BROADCAST)

DAVID UNKOVIC: I don't say "I" - I'm going to do anything. I think a lot of people have to help get this city turned around. But yeah, I think it can happen.

CHASE: See? Calm, unassuming. But then, just a week after I talked to him, just a few months after coming to Harrisburg, he seemed to snap. Outside the courthouse, he gave this impromptu press conference.

(SOUNDBITE OF ARCHIVED BROADCAST)

UNKOVIC: It's basically a house of cards, and the cards are coming down. And they're coming down now, and they're all coming down at the same time.

CHASE: A few days later, he scrawled this handwritten resignation letter, and dropped it off downtown. He disappeared from public life. The man brought in to vanquish the debt, he was vanquished himself. So what happened?

UNKOVIC: There's probably not an hour that goes by, since I resigned, that I haven't been thinking about Harrisburg - one way or the other.

CHASE: It took months to finally make contact with Unkovic again. You can find him these days bird-watching outside Philly, thinking about the albatross of debt that he'd been battling with - the Harrisburg incinerator. The incinerator was first built in 1969. And it represented a dream - the dream that Harrisburg would be the trash capital of the state. It would collect fees from miles around, to burn the trash of Pennsylvania.

But by the time Unkovic got there, the incinerator had accumulated more than $300 million worth of debt. And it had never - in four decades - really worked properly. When Unkovic first arrived in town, he thought it was just bad management. Now, he thinks it's something more sinister.

Did you think the financing of the incinerator was criminal?

UNKOVIC: I don't know. Um - it bothers me, as someone who's done financing for so many years, to see something like that because it's like, the worst stuff you can look at.

CHASE: But other people, back in Harrisburg, they don't hesitate.

BILL CLUCK: Illegal conduct occurred. Um...

CHASE: So you think a crime was committed.

CLUCK: Yeah. I think false statements were submitted - under penalty of law - to the state government, in association with the financing.

CHASE: This is Bill Cluck. He serves on the board that runs Harrisburg's sewer system and the incinerator. He's been a longtime critic of Harrisburg's borrowing habits, especially when it came to the incinerator. Now, Harrisburg had the same mayor for almost 30 years - 1980 to 2009 - Stephen Reed. And every couple years, Mayor Reed would go to city council and ask permission to borrow more money, to fix up the incinerator. In 2007, one of the guys he was asking was a newly elected councilman, Dan Miller.

You have a folder called incinerator, huh?

DAN MILLER: Well, when that vote came up, I did research.

CHASE: Miller is the city controller now. He's also an accountant. Back in 2007, he said: Let me just look into this a bit, to get some context for this loan; there have been so many.

He prints out a spreadsheet.

MILLER: So I went back to the original bond deals in the - 1969, and went forward. And you know, it started out as - well, you can see; $12.5 million.

CHASE: That's how much was borrowed?

MILLER: Yes. There were nine refinancings prior to 2007, and the debt went from $12.5 million to $221 million. So it's going the wrong way.

CHASE: The city owed $200 million-plus on the incinerator by 2007, and the mayor wanted to borrow 30 million more. People famously say about Mayor Reed, that he never met a bond he didn't like. He used all the money borrowed on the incinerator to do all kinds of stuff. Like, he bought these strange artifacts from all over the country, to build a Wild West museum. The city borrowed money to buy a baseball team, and build a baseball stadium. The team was recently sold, at a loss.

UNKOVIC: The fundamental problem was, they were issuing more debt than they really were allowed to, under state law.

CHASE: David Unkovic, remember, used to be in charge of the city; now, wandering in the wilderness. He points out that under Pennsylvania state law, you're not allowed to just borrow as much as you want. There's a debt limit to how much cities can borrow. There is, however, a way around this law. If you can assert the debt is what you call self-liquidating - that once the incinerator is up and running and making money, it'll pay for itself. So to get this extra $30 million, they needed to say the incinerator would pay off, all by itself, the $220 million they'd already borrowed. So in 2007, the city filed this document - the 8110 (b) certificate. Bill Cluck says, think of it as a promise.

CLUCK: Swearing under penalty of law, that the incinerator project was self-sufficient; that the revenue from the incinerator would be sufficient to pay old and new debt. And they knew it wasn't true when it was submitted. And it's never been corrected, to this day.

CHASE: And that, says Cluck and many others, was a crime. Everyone knew the incinerator wasn't self-liquidating. In fact, there were 17 different revenue projections showing it could never earn back all the money that had been borrowed on it. So how was it that nobody raised questions about the wisdom of this loan? None of the law firms, the financial advisers who worked on it. Well, we asked. They refused to respond, on the record. Here's Bill Cluck.

CLUCK: So what you have is, you have the financial adviser, makes $142,000 on this $30 million - notes. That's a lot of money. The county had a law firm; the city had a law firm. It's...

CHASE: I mean, how many law firms are on this list?

CLUCK: Financial advisers like to call this the Noah's Ark of public financing - meaning, there's two of everything.

CHASE: The $30 million borrowed in 2007, almost none of it went to the actual incinerator upgrade. Virtually all of it went to pay back old debt, and fees to these many firms that set up the deal in the first place. The very same firms ended up on practically every deal, Cluck says. To make matters worse, the city ultimately was on the hook. If the incinerator couldn't make the money back, it would fall to the taxpayers of Harrisburg. And this makes Bill Cluck crazy.

CLUCK: Where's the advocate for the city, to say "hey, you're getting screwed by the terms of these deals"? It never happened.

CHASE: Of course, there is one person that's supposed to be an advocate for the city of Harrisburg - the mayor, right? If this was such a bad deal for the city, why would he sign off on it? David Unkovic, he has a theory.

UNKOVIC: In other ways, when I look at it, it's like he was being taken advantage of, you know? It's like he was a debt addict and that he - once he got going, just needed more and more debt, and was sold more and more debt.

CHASE: We tried hard to reach the former mayor, for comment. We could not. But consider this: In the 2000s, there was a lot of easy money out there, for cities. Wall Street came up with tons of intriguing financial products that would generate short-term cash. There always seemed to be a way to refinance a loan; to borrow new money, to pay back the old - that is, until two years ago; a very different borrowing climate.

Local officials tried to refinance the 2007 debt, and could not. The tap's turned off. With all these debts, the city is finding it hard to cover basic services. They've delayed payments to light bulb vendors, paper sellers. Restaurants have hired their own security. A local strip club paid to keep the streetlights on. The city is projected to run out of money entirely, in October. A judge has recently ordered a 1 percent income tax hike on the people still left in Harrisburg, but city council promises to fight it. The search for revenue, for that city, continues.

Zoe Chase, NPR News. Transcript provided by NPR, Copyright NPR.

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