KEISLING: Fall of the Bond Debt Boss: PA AG Kane brings charges against former Harrisburg Mayor Steve Reed

Presentment offers more details about the long running financial and technical problems with the Harrisburg incinerator, now owned by LCSWMA

“All happy families are alike but an unhappy family is unhappy after its own fashion,” Tolstoy wrote.

by Bill Keisling

Harrisburg’s ongoing bond debt crisis reminds us that thirty-year bonds, lasting longer than many marriages these days, can themselves be classified into broad categories:

– Those bond issues that were designed with the best of intentions, and which ended well.

– Those bond issues that were designed with good intentions, but which did not end well.

– And those bonds that were hatched with bad or hidden intentions, and did not end well.

Harrisburg since the 1970s benefited from and suffered from each of these three kinds of bond issues.

But it is the last category — bonds that have been sold for questionable or self-serving purposes — that today plagues the city, and deserves study.

Those looking for a cautionary tale on the dangers of public and municipal bond debt financing need look no further than the arrest in July of former Harrisburg PA Mayor Steve Reed.

The Bond Debt Boss

In the past, we’ve heard of political bosses who finance their machines through government funds, contracts, kickbacks, or bribes.

Steve Reed figured out how to run a political machine, for decades, with borrowed bond money. He made himself America’s Bond Debt Boss.

And now he’s busted.

This July 14 Pennsylvania Attorney General Kathleen Kane hit Reed with 499 criminal charges related to decades of fast and loose bond trading that’s left Pennsylvania’s capital city staggering under upwards of $2 billion in debt.

AG Kane accused Reed, among other things, of bribery, theft, misuse of public funds, and years of financial chicanery.

But how did it happen? More to the point, how did it happen unimpeded over such a long span of time?

Reed was mayor of Harrisburg for 28 years, from 1982 to 2010. So Kane’s 499 criminal counts of public corruption work out to almost 18 criminal counts for every year Reed was in office. And that’s a lot of criminal activity over a very long span of time.

But there’s a deeper story here.

The long-overdue criminal investigation unveiled by AG Kane in July reveals aspects of Reed’s personal misbehavior and his odd proclivities, all financed by bond underwriting.

The criminal charges also push the timeline of these behaviors back into the 1980s and 90s.

The biggest misconception or simplification about Harrisburg’s ongoing financial woes is that they are simply tied to a defaulted bond deal supposedly meant to finance a botched city incinerator retrofit in the mid-2000s.

In reality, as AG Kane’s presentment makes clear, Reed’s last incinerator bond deal was only one of many bond floats and refinances that were used to refinance growing piles of debt from one previous bond float to the next, over a span of decades.

Under Reed, bond debt became a way of doing political business, passing out largesse, and protecting and paying off political allies.

Somewhere in the middle of this story, Mayor Reed became like a homeowner awash in credit card debt who must use Visa to pay off MasterCard.

Mayor Reed and his financial cronies had no choice but to fudge the numbers on the incinerator to float a series bond issues.

Each bond refinancing was used for diverse purposes, aside from what investors were told: to pay off Reed’s loyal cronies and financial enablers; to plug holes in the city’s general fund budget; or to finance Reed’s hobby — the collection of cowboy, civil war, and other artifacts meant for museums he envisioned. Only one of these museums would ever be built.

These fast and loose Harrisburg bond deals date from 1986 to the present, and kept piling up, burying the city under its present mound of debt.

The Harrisburg incinerator that sold in a distressed fashion in 2013 for $130 million to the Lancaster County Solid Waste Management Authority (LCSWMA) was originally built in the early 1970s for $12 million.

The swollen value of the broken facility tells the story: Mayor Reed always viewed the incinerator as a vehicle to obtain more financing, and not simply as a place to burn garbage.

And this didn’t just happen with the incinerator. It happened with schools, parking lots, and other established projects, like Strawberry Square, home of the Attorney General’s Office since the 1970s. So, in a very real sense, all this happened under a succession of state attorneys general’s noses.

AG Kane’s presentment against Mayor Reed sums all this up by relating:

“The scope and complexity of this investigation make précis difficult but, in short, this Grand Jury finds that then Mayor Stephen Reed, abetted by associates in government and the professional community, exploited the availability of capital in the municipal debt market to raise money for purposes utterly unrelated to the civic project for which a given bond was issued. In other words, in every instance this Grand Jury examined, Reed and his associates marketed and sold bonds for one purpose, such as retrofitting the incinerator or renovating schools, then diverted at least some of those proceeds to buy things in which Reed was interested and to create fees payable to a coterie of professionals.”

Public entities used as piggy banks, and tapped out

It’s instructive to understand how Mayor Reed pulled all this off, for so long.

Consider the following:

Under Mayor Reed, the City of Harrisburg, the Harrisburg School District, the Harrisburg Redevelopment Authority, the Harrisburg Parking Authority, the Harristown Development Corporation, and the Harrisburg Authority (nominally the owner of the incinerator) were all used as piggy banks and borrowing entities to float bonds.

When one entity maxed out its credit limit, Reed would move on to the next.

To finance the acquisition of the museum artifacts and to grease the palms of political cronies and financial professionals, making all this possible, Reed at least as early the early 1990s created a “Special Projects Fund” in the Harrisburg Authority, and other places.

Reed essentially used each of the borrowing entities as interlocking boards, and peopled them with his longtime political operatives.

One such operative was Fred Clark.

Clark, the presentment reads, “was appointed by Reed to the board of the Harrisburg Authority from 2002-2007. He also served on the board of the Harrisburg Redevelopment Authority and the Parking Authority. Both positions were bestowed upon him by Reed. He sat on the Board of Control for the Harrisburg School District as well. He testified that Reed selected every professional that was involved with every financial transaction that occurred in the city, and that their fees were always paid out of the proceeds from the bonds.

“Mr. Clark discussed the Special Projects Fund and indicated that there were often-times when the fund had no money remaining in its coffers and the board would have to approve movement of money from other Authority accounts into the special projects account. The other way that the board would balance the budget of the special projects fund was through the administrative fees that came out of most of the financial transactions (i.e., the fresh bond issues and refinancings.) He testified that the administrative fee was something wholly created by Reed. It had no basis in work that was done by the Authority and the board had no voice in determining what the fee would be.”

Incinerator bond funding misappropriations date from early 1990s, not 2000s.

Financial and technical problems with the Harrisburg incinerator, Kane’s presentment makes clear, date at least from the 1990s (if not the 1970s and 80s), and not the simply 2000s.

“The city sold the incinerator to the (Harrisburg Authority) at a time when the EPA introduced more stringent regulations of waste to energy facilities like the incinerator,” the presentment relates. “It became clear it would be necessary either to close the incinerator or to spend a great deal of money to retrofit it to bring it into compliance with the federal law.”

Problem was, it was never simply about the incinerator.

With each successive bond issue to finance and refinance the sale of the incinerator, or to repair it, Mayor Reed could siphon off more “administrative fees” to finance his special projects like artifact collection, and pay other bills, and plug growing holes in the city’s general operating budget.

So keeping the incinerator online was necessary as a funding tool to keep the party rolling.

It was one big, long-running Ponzi scheme.

The history of the Harrisburg incinerator financings and refinancings is as complicated as the mechanics of the incinerator itself. And these complexities continue to prevent public understanding, or participation.

“In 1993, the Harrisburg Authority purchased the incinerator from the City of Harrisburg for $26.7 million dollars,” the presentment recounts. “This would be about $15 million more than the original construction cost of the incinerator, and $100 million less than what LCSWMA would pay for it in 2013. … (T)hat purchase was made entirely with borrowed money. It was necessary to borrow an additional $7.5 million dollars at the same time bringing the 1993 purchase price, all of which was borrowed, to $34.2 million.

“In 1996 and 1997, it was necessary to borrow $3.5 million and $10.9 million respectively. Millions of dollars of that aggregate borrowing were consumed by a working capital deficit signifying that the revenues generated by the incinerator were not sufficient to pay the expenses.

“In 1998, it was necessary for the Authority to issue close to $56 million dollars in debt which purported to refinance the 1993 and 1997 borrowings. Far from generating revenue or cutting expenses, this borrowing was necessary to prop up the operation of the facility with ever increasing borrowing at increasing cost to incinerator operations.

“Again, in 2000, the Authority issued another $25.2 million dollars’ worth of debt to restructure prior borrowing and to back fill the hole which the previous bond issues had created. Despite the self-evident need for every available dollar to go to debt service and operations, $4.2 million dollars more in debt was incurred in 2000 and diverted to the City of Harrisburg as a ‘guaranty fee.’ This ‘guaranty fee’ was created and sized to fill a budget deficit in the City of Harrisburg’s General Fund. This Grand Jury finds that this fee was disproportionate to the value of the guaranty, and a clear example of Reed taking bond proceeds from one bond issue and using them for a purpose that Reed believed would be beneficial to him.”

“The incinerator could ill afford this additional debt constituting the guaranty fee bonds and this is an instance of exploitation of the municipal bond market by Reed.

“In 2002, still more debt was issued, and the Authority offered $17 million dollars of additional bonds for sale. The vast majority of bond proceeds from this offering had to be expended as working capital. By this time the incinerator was producing nothing but additional debt, and each bond issuance forged a new link in the chain of debt wrapped around the city and which the city still drags behind it to this day.

“But the worst was yet to come. In 2003 the Authority issued Series A, B and C notes of 2003 for a total amount of almost $76 million dollars. Like paying one credit card with another, the massive 2003 issuance accomplished little more than kicking the can down the road at great expense to incinerator operations.”

Trouble was, the incinerator still wasn’t working. But it didn’t matter that the trash incinerator itself was a piece of garbage. It was always, in Reed’s mind, a stalking horse for more bond financings.

Why most other cities don’t have incinerators

One city consultant, engineer David Brinjac, told the grand jury he’d performed maintenance work on the incinerator in 1982, and again in the late 1980s.

“Brinjac installed the initial turbine engine in the facility,” with produced electricity from garbage, the presentment relates.

“When talk began in the mid ’90’s of the need to retrofit the incinerator,” the report continues, “Brinjac, in association with Chester Engineers and Malcolm Pirnie, responded to a 1995 request for proposal concerning the feasibility of bringing the incinerator into (environmental) compliance. Brinjac concluded such an effort was not financially viable for either the City or the Authority because of the amount of debt already outstanding and the additional amount it would be necessary to incur.

“In August of 1995, Brinjac presented his conclusions to Reed and his executive staff. The engineers informed Reed that if it were easy to do this kind of waste to energy facility project, they would be ‘building incinerators everywhere’ and that it was much harder with the $68 million or $70 million already outstanding in debt. Reed said, ‘(T)hank you. You are fired.’ Reed walked out of the room.”

There was only room for Yes Men around Mayor Reed. But there would still be plenty of Yes Men to be found. And they’re still around today.

By the early 2000s, with credit limits tapped out, Reed would be forced to hire an unknown firm, Barlow, to work on the incinerator. More established, bondable firms simply were too expensive. Barlow underbid the job and had no performance bond.

“Ultimately,” the presentment reads, by the mid-2000’s “the decision was made to hire Barlow, an unknown entity in the City of Harrisburg, to perform the retrofit. The problems with the company itself are widely known and certainly served to send Harrisburg deeper into financial ruin.”

The hiring of Barlow was actually one of the last links in a chain of cascading financial problems.

But by this time it was a Hail Mary pass to keep the bond money flowing.

This is also where the story usually picks up in the complicit Harrisburg and mid-state press.

But obviously the story goes back twenty years prior to the mid-2000 incinerator retrofit.

Where were the watchdogs, and where were the newspapers?

The questions begin to pile up, like the debt.

Where were the watchdogs? Where were the regulators? Where was the state attorney general’s office? Where were the newspapers?

In Harrisburg, as in Lancaster, the daily newspapers played their own role in the continuing, cascading bond debt.

The Harrisburg Patriot-News continuously called Steve Reed “Mayor for Life.” In one memorable column, published in the 1980s, the Patriot breathlessly compared Reed favorably to Abe Lincoln, Winston Churchill and Ronald Reagan.

The Harrisburg Patriot’s culpability in all this business-as-usual shouldn’t be understated.

Former Harrisburg city council President Richard House told the grand jury, “There was a saying — the media always called him ‘Mayor for Life.’ You know, if you start reading media clips long enough you start believing them yourself.”

The Harrisburg newspaper, it turns out, for decades happily looked the other way or thus helped conceal all this from the public. One wonders about the failing Harrisburg Strong Plan of 2013, which sold the bloated incinerator to LCSWMA, and which the newspaper just-as-breathlessly supported to refinance the previous mess.

Simply stated, citizens were, and continued to be, duped by these insiders and their boosters in the press.

“In every instance, bonds were sold for one purpose and some of the proceeds spent on another purpose,” the grand jury’s presentment states. “This diversion was actively hidden from investors and the citizens of Harrisburg. Transparency and competition for city business were subverted in favor of obfuscation and patronage. Debt which encumbers Harrisburg to this day was heedlessly issued to enable the purchase of artifacts and to pay select professionals.

“We find that Reed offered things of value to officials in exchange for the discharge of their official duties and to bring them to heel. We find that Reed improperly retained possession of a massive collection of city property at the expense of the city and its creditors.

“Ultimately, Reed began to treat the city’s assets as his own and to build a city which was a monument to him and not administered for the common good.”

These bond issues were issued with bad intentions, and did not end well.