KEISLING: Harrisburg bond debt criminal probe serves as wake-up call to Lancaster and other municipal officials

Could Lancaster be heading down the same road as Harrisburg?

by Bill Keisling

The arrest this month of former Harrisburg Mayor Steve Reed by Pennsylvania Attorney General Kathleen Kane serves notice on other public figures and municipal bond dealers in Pennsylvania, and around the country, to tread carefully with their own growing bond debt schemes.

Reed was indicted this July 14 after decades of fast-and-loose bond trading that left Pennsylvania’s capital with more than $1 billion in municipal bond debt.

Reed financed his political machine for decades with municipal bonds, and rewarded a network of favored insiders for their help from the bond proceeds.

But are these practices continuing in other Pennsylvania cities, like Lancaster? And what’s the common denominator with Harrisburg and other municipalities?

Reading between the lines of what AG Kane has said, her office, broadly speaking, is on the lookout for networks of insider public figures and bond financiers who issue debt by fudging figures for the benefit of themselves, and not the public.

“What is most disturbing to me is that it went unchecked for 20 years,” Kane said at her July 14 press conference, announcing the criminal charges against Reed. “At the Office of Attorney General, we’re the watchdog over government. And this case went unchecked for so long, there was no real watchdog. There was no one who stood up and (warned against) the reissuance of these bonds when the incinerator cannot handle any more. And to reissue bonds in the amount of over $200 million on a $32 million purchase price is not just negligence, it becomes criminal after a while. And no one stood up for the city.

“No one stood up for the citizens of the city. And because of the scope of what occurred, and it occurred in plain sight, it’s very disturbing to me.”

“What these charges are about is about accountability,” Kane explained. “We’re here to serve the public, and the public needs to be served, not (someone’s own) serve-serving interests. This is about accountability. This is about not playing games with public debt. … This is about accountability to the citizens, nothing more than that.”

Is Kane’s indictment against Reed the first step, or a warning shot, in investigating special interests elsewhere? Is the Harrisburg Incinerator debacle but the most egregious example yet of Ponzi schemes by special interests enriching themselves at taxpayers expense?

Lancaster Convention Center debt mounts with failed projections

In Lancaster, for example, a string of failed financings and re-financings related to the city’s Convention Center raises similar disturbing questions.

In 2009, the Lancaster County Convention Center opened after county commissioners partially guaranteed bonds amounting to approximately $64 million.

But the income from the Convention Center never met rosy predictions made at the time of the bond floats.

So in 2014, Well Fargo, now the owner of the bond debt, agreed to lower the interest rate in exchange for a full guarantee by the county of the growing debt.

But as the public debt continued to pile up, insiders continued to propose ways to protect themselves, and not the public, for failed or fudged revenue projections.

This year, in 2015, insiders proposed the processing of an unusual “City Revitalization and Improvement Zone” (CRIZ) loan of $5 million in additional Convention Center financing. The added debt is hypothetically to be serviced from added state tax revenue. But the ultimate guarantor of CRIZ debt will be the City of Lancaster.

The questions, like the debt, start to pile up.

While the insiders seem only interested in protecting themselves in this growing mess, who protects the public from this growing pile of unsuccessful bond debt?

Were the original Lancaster Convention Center bond debt projections of 2009 and 2014 fraudulent, and deserving of a criminal probe by Kane’s office?

Is the 2015 CRIZ scheme also piling more unsustainable debt on a failed project, and throwing more good money after bad?

Former Harrisburg official sees similarities between growing Harrisburg and Lancaster bond debt

“What’s happening in Lancaster today seems to be what happened in Harrisburg in the 1990s,” says Corey Stein, who served as Harrisburg’s Risk Manager from 1983 to 1998. Today Stein consults nationally on projects involving public / private partnerships, such as the Lancaster Convention Center.

“I think Kane has put them all on notice,” Stein says. “Of course it puts them on warning to reexamine their projects, and ask themselves a simple unvarnished question: ‘Will it work or won’t it?’

“Lancaster and other communities seem to be going down the same road as Harrisburg,” he says. “Part of what happened in Harrisburg, as in Lancaster, is that everyone became comfortable. They became overly comfortable that these decisions weren’t going to be reviewed by anyone.

“Part of what happened is that these folks didn’t see the warning signs, the road signs that should have told them to tread carefully with issuing more public debt on top of previous unsustainable debt.

“It’s like a homeowner rolling more and more debt onto more and more credit cards,” Stein says. “You forget it has to end at some time.”

“If I’m too comfortable working on some of these projects, I become uncomfortable,” Stein says. “In fact, when I work on some of these projects, I make it a point to ask myself, ‘Am I being too comfortable with some of the assumptions I’m being presented with?’ It helps to ask yourself, ‘What would this look like is it was reviewed by someone?’ ‘What would this look like as a newspaper headline?'”

“They should have been worried before this,” says Stein. “We used to have newspapers asking questions.”

But in Harrisburg, as in Lancaster, the newspapers became uncritical boosters of the establishment’s bond schemes.

“It’s in the interest of taxpayers to know these issues will be reviewed,” Stein says.

“I’ll tell you something: Kane’s prosecution not only matters in Lancaster and Harrisburg,” he says. “It matters to Arkansas and California and everywhere else around the country. This is national news. This is a wake-up call for the entire industry, all around the country. Believe me, they’re all paying attention now. Or they should be.”

Still, Stein says, “If Kane was stronger, I think they’d be more worried.”

Stop Kane

A reasonable question is whether the current push to remove AG Kane from office is at least partly based on her willingness to investigate previously protected political finance insiders.

At her July 14 Harrisburg debt press conference, Kane was asked by a reporter whether she would resign if indicted for sharing information for a news story with the Philadelphia Daily News.

Kane said she wouldn’t resign.

Did her Harrisburg debt investigation involve state officials charged with oversight? she was asked.

“At this point I can’t comment on who or what it involves,” Kane replied. “I can tell you that we have looked at the entire case. We’ll continue with the next grand jury, and figure out everyone who had a part to play in this, whether it was regarding the self-liquidating debt certification, that the debt was ‘self-liquidating’ when it really was not. Or anybody who played a part in offering their vote on the issuance of debt in exchange for other favors, or other things of value.”

Kane said her office supported legislation to provide more funds for state regulators.

“We need more oversight,” she says. “We needed watchdogs before this happens, and before it gets out of control, before the citizens of Harrisburg were faced with this massive, crushing debt.”