Is LCSWMA’s proposed purchase of the accident-plagued Harrisburg incinerator that has already lost hundreds of millions of dollars the culmination of a pattern of risk taking…even recklessness?
by Bill Keisling – another in a series
Moody’s rating bureau recently warned investors that it may downgrade Lancaster County Solid Waste Management Authority’s (LCSWMA) credit rating to nearly non-investment grade if the authority acquired the accident-plagued Harrisburg incinerator.
Moody’s did not explain its rationale beyond saying it needed more information on the largely secretive deal. But Moody’s certainly sent a powerful warning to investors, and the Lancaster community.
Given the incinerator facility’s horrid history of ‘burning through’ more than three hundred million dollars in repairs over the past decade (pardon the pun), is adequate insurance from reputable insurers available to offset huge risks?
And if not properly insured against major losses, would LCSWMA itself possibly end up in bankruptcy court? Or worse yet, will the cost of Lancaster county trash collection be doubled or tripled?
Moody’s may ponder these questions and none of this is far-fetched. Ask the residents of Harrisburg.
Just recently the Harrisburg incinerator suffered an unexpected mechanical failure that left it hobbled for months, unable to burn enough garbage or to generate enough revenue to pay for itself.
A crack in a single high-tech incinerator turbine fan blade was discovered. Eventually, after much haggling, the defect was covered by manufacturer’s warranty. But the repair cost approximately a million dollars.
How important was proper insurance?
“Approximately $700,000 of the turbine repairs were covered by insurance proceeds,” the Harrisburg Authority’s January 23, 2013, minutes reflect.
The incinerator, or the Harrisburg Resource Recovery Facility, as it is known, is a tremendously complicated, high-tech, unconventional, and temperamental facility. It has been trouble plagued since its inception.
With turbine fan blades spinning at thousands of RPM to churn out electricity from garbage-heated steam, the plant, at the heart of Harrisburg’s financial meltdown, is essentially a “747 fueled by garbage,” one long-time observer tells me.
The ill-fated incinerator at the center of the financial storm was originally built by the city for about $10 million in the early 1970s.
Due to long-term failures of the Harrisburg Authority to maintain accurate financial records, no one quite knows how much the cost of repairs and operating losses have been, but it has today grown to more than $300 million, much of it resulting from attempts to reconstruct the facility over the past decade.
With this history of trouble of mechanical breakdowns, full and comprehensive insurance is a necessity.
But LCSWMA, by its own admission, does not completely rely on state-regulated or -guaranteed insurance for its properties. Apparently, the authority is saying, it doesn’t want to pay the cost of state-overseen insurance. So it had to go overseas.
Instead of purchasing state-approved policies from domestic insurers who qualify for emergency governmental coverage, the Lancaster Waste Authority reports it is insuring at least some of its risk in self-regulated and self-assessed offshore pools.
The questions involve not only the type of insurance claimed by LCSWMA, but the amount and the terms. (Example: If a house is worth $300,000, would just $100,000 in fire insurance be prudent? Example: Would a policy excluding water damage be desirable?) Nevertheless, based on public records, there is much of great concern to be inferred.
The Lancaster Solid Waste Management Authority reports it has used some of the money supposedly set aside as reserves for “Self Insurance” to pay off bond debt.
At least one such “insurer account” is based in the Cayman Islands, the authority reports.
Since the usual state-backed insurance pool does not guarantee some of the Lancaster Authority’s existing insurance, there may be no money from the Commonwealth of Pennsylvania to backstop a financial crisis, should one occur.
The authority’s current ‘creative’ approach to insurance coverage may reduce its costs of operations but, given a major loss, will the offshore funds from a consortium of investors begin to be sufficient?
And who else may be in LCSWMA’s offshore insurance pool? How much capital is available in the pool, and from whom? Are private corporations, subject to different laws than public authorities like LCSWMA, also in the pool? These are just some of the answers being sought. Yet NewsLanc requests for pertinent information concerning insurance coverage have been stone walled by LCSWMA.
In its 2012 Full Audited Financial Statement, as in earlier years, LCSWMA reports:
“The Authority self insures certain risks, for which commercial insurance is not economically available including pollution occurrence, through the Government Self Insurance Fund, an entity which is separate from the Authority. Each participant in the fund contributes to this entity on a self‐assessed basis. Contributions are placed into a trust and managed pursuant to a trustee agreement. The available self insurance coverage was $3,923,307 and $3,934,326 at December 31, 2012 and 2011, respectively. The agreement for formation of the fund provides that the fund will be self‐ sustaining through member premiums.”
Among other problems, LCSWMA isn’t being totally forthright in this and other financial statements.
It turns out, there is no insurance company called “Government Self Insurance Fund,” as described by the authority’s financial reports.
Neither is there a “Government Self Insurance Fund” listed with Pennsylvania Insurance Department, says Melissa Fox, a spokesperson for the department.
Nor would such a fund, not registered with the state, be overseen or guaranteed by the state in the event of financial collapse, says Fox.
So there is apparently no public “backstop” should this fund be found to be insolvent, or without enough resources to cover a serious problem.
Elsewhere, LCSWMA provides other clues as to what this mysterious “Government Self Insurance Fund” may actually be.
In its 2009 financial statement, LCSWMA reports, “The Authority has also issued a letter of credit to Raffles Insurance, Ltd. to guaranty payment of additional captive insurance premiums.” Raffles Insurance, Ltd., is a private, offshore concern based in the Cayman Islands.
In its September 7, 2010 Board of Director minutes, LCSWMA further states, “Workers’ Compensation, Automobile, and General Liability are covered through Raffles Insurance, Ltd.”
Raffles is not registered, overseen, or backed by the Pennsylvania Insurance Department, according to a state website listing companies “admitted” and licensed to underwrite insurance policies in Pennsylvania.
Causing further concern, LCSWMA revealed in its 2009 financial statement, “During the year ended December 31, 2009, the Authority received $3 million from the fund as a return of prior period contributions. This amount is included in miscellaneous non-operating revenues in the accompanying statements of revenues, expenses, and changes in net assets, and was used by the Authority to effect (sic) the redemption of the Series A of 1998 bonds.” (emphasis added)
Funds supposedly needed as reserves for insurance risks appear to have been taken in and out of the account to pay off bonds from the previous decade. This would certainly not be the case for traditional insurance policies or coverage, experts say
These unusual practices seem to more reflect a “creative-finance fund,” rather than the prudent standard insurance pool used by most public entities, including cities and counties.
Because they are not “admitted” (not state licensed) to underwrite insurance in Pennsylvania, Raffles, Ltd., and similar offshore concerns are known in the trade as “non-admitted” insurers. These firms issue what is called in the insurance trade “non-admitted paper.
The use of “admitted vs. non-admitted insurance” in turn is governed by various state laws, including the Third Class City Code, and the Pennsylvania Code, says Bob Anspach, an insurance expert with the Pennsylvania Municipal League
Third class cities like Harrisburg and Lancaster are supposed to first attempt to purchase “admitted-paper insurance,” says Anspach
Pennsylvania’s Third Class City Code (Section 2403 – Specific powers) for example, enables a city council to, “make contracts of insurance with any mutual or other fire insurance company, association or exchange, duly authorized by law to transact insurance business in the Commonwealth of Pennsylvania, on any building or property owned by the city.” (emphasis added.
The code further mandates (Article XIX – Contracts) that this restriction applies to contracts made between a city such as Harrisburg or Lancaster
“…involving any policies of insurance or surety company bonds; those made for public utility service under tariffs on file with the Pennsylvania Public Utility Commission; those made with another political subdivision or a county, the Commonwealth of Pennsylvania, the Federal government, any agency of the Commonwealth or the Federal government, or any municipal authority,” such as LCSWMA
There are exemptions in law allowing for non-admitted paper insurance, Anspach points out
If insurance is “non-attainable” through a licensed carrier, or is “too expensive,” a public entity may have to insure itself through an offshore carrier of non-admitted insurance paper
For example, in the Harrisburg Receiver’s financial recovery plan, former Harrisburg Receiver David Unkovic noted, “In interviews (Harrisburg’s insurance team), it was indicated that Travelers, who had been providing the City with its insurance needs for several years, chose not to renew their program due primarily to the City’s financial condition. [The city] was successful in having Brit Insurance, a London insurer, agree to provide a renewal offerin
In this case, Travelers insurance (an admitted company) no longer wanted to insure the financially risky City of Harrisburg. So Harrisburg, in a bind, had no choice but to turn to insurance from Brit Insurance, a carrier not licensed in Pennsylvania, but a member of the Lloyd’s of London syndicate
Insurance not admitted or licensed by the Commonwealth of Pennsylvania is called “surplus line insurance,” Anspach explains
The rules governing when a third class city such as Harrisburg or Lancaster, or its authorities, can turn to surplus lines are found in the Surplus Lines Law of the Pennsylvania Code (Article 16 of the Insurance Company Law of 1921, May 17, P.L. 682, as amended and supplemented).
Section 1604 of the Pennsylvania Code states
“Insurance may be procured through a surplus lines licensee from nonadmitted insurers if the following requirements are met
(i) The full amount or kind of insurance cannot be obtained from admitted insurers.
(ii) The full amount or kind of insurance cannot be obtained from any admitted insurers because coverage comparable to the coverage being sought generally is not available in the authorized market.
(iii) The kind of insurance sought to be obtained from admitted insurers requires a unique form of coverage not available in the admitted market.”
In other words, by law, the surplus line insurance can be used by public entities such as the Harrisburg or Lancaster waste authorities only if admitted and licensed insurers will not write the coverage, or if the entity can’t afford the coverage offered by licensed insurers.
And all this is supposed to be documented by the authority that purchases the insurance.
Just what exactly are the unusual offshore accounts used by the Lancaster Solid Waste Management Authority, and why did LCSWMA turn to them?
All this goes to the importance of an independent feasibility study and due diligence before the Lancaster Authority risks so much of the community’s money.
But neither proper due diligence, nor an independent feasibility study, appear to be forthcoming.
It appears that even the LCSWMA board members do not fully understand LCSWMA’s insurance, the proposed purchase of the incinerator, and the amount of the risks.
In our next article, LCSWMA CEO Jim Warner explains to an inquisitive board member that the LCSWMA is held “captive” by its insurance coverage, and so has turned to offshore insurance.
To be continued …
