At the end of the trail of tears, after the arguments and the litigation over Harrisburg’s debt crisis, a few hundred words in Pennsylvania’s constitution may decide the outcome of the crisis.
In 1968, at Pennsylvania’s last constitutional convention, two reasonable-sounding paragraphs concerning local debt were inserted into Article IX of the revised state constitution, which contained reforms of local government laws.
Those two paragraphs shed much light on the wrangling now transpiring in Harrisburg over the city’s monumental debt (now approaching $2 billion) and the eventual outcome of the city’s travails.
Section 10, of Article IX, reads in whole:
Ҥ 10. Local government debt.
Subject only to the restrictions imposed by this section, the General Assembly shall prescribe the debt limits of all units of local government including municipalities and school districts. For such purposes, the debt limit base shall be a percentage of the total revenue, as defined by the General Assembly, of the unit of local government computed over a specific period immediately preceding the year of borrowing. The debt limit to be prescribed in every such case shall exclude all indebtedness (1) for any project to the extent that it is self-liquidating or self-supporting or which has heretofore been defined as self-liquidating or self-supporting, or (2) which has been approved by referendum held in such manner as shall be provided by law. The provisions of this paragraph shall not apply to the City or County of Philadelphia.
“Any unit of local government, including municipalities and school districts, incurring any indebtedness, shall at or before the time of so doing adopt a covenant, which shall be binding upon it so long as any such indebtedness shall remain unpaid, to make payments out of its sinking fund or any other of its revenues or funds at such time and in such annual amounts specified in such covenant as shall be sufficient for the payment of the interest thereon and the principal thereof when due.”
These two paragraphs explain much about not only the roots of Harrisburg’s debt problem, but also how the incinerator debt crisis could have been avoided, and what may happen when the growing controversy eventually reaches a courtroom.
As the first paragraph explains, the General Assembly set the borrowing debt limit for Harrisburg, and other Pennsylvania municipalities.
… the General Assembly shall prescribe the debt limits of all units of local government including municipalities and school districts …
Harrisburg’s debt limit, due to a slew of convoluted bond issues, was over the years exceeded by the administration of Mayor Steve Reed.
According to the state constitution, then, to borrow more money to fix the broken incinerator, Reed’s administration (and the bond counsel and the underwriters), as well as the state Department of Community and Economic Development (DCED), were left with only two courses of action.
They could argue (as Reed, his bond counsel and the underwriters did) and certify (in DCED’s case) that a repaired, operational city incinerator would generate enough revenue from tipping fees and electrical generation to pay off the bonds, that the incinerator, in the words of the constitution, would be “self liquidating.”
… The debt limit to be prescribed in every such case shall exclude all indebtedness (1) for any project to the extent that it is self-liquidating or self-supporting or which has heretofore been defined as self-liquidating or self-supporting …
But this was not the case. Mayor Reed and complicit bond counsel and underwriters instead cooked the books and fudged facts to make the incinerator debt appear to be “self liquidating,” when it clearly was not, in violation of state law. The supposed state watchdog — DCED — signed off on this.
The city, the DCED, and the bond underwriters had another option: they could take the matter to the voters to approve the incinerator bond issue by referendum.
… or (2) which has been approved by referendum held in such manner as shall be provided by law …
As we shall see in following reports, the public over the years has been left out of the loop. For various reasons, a referendum, which decades before was the best option, was the last thing officials wanted to see happen.
The result of all this was an insolvent city.
The last paragraph of Section 10, of Article IX of the Pennsylvania constitution prescribes the outcome of the Harrisburg debt case, as demanded by the state constitution:
Any unit of local government, including municipalities and school districts, incurring any indebtedness, shall at or before the time of so doing adopt a covenant, which shall be binding upon it so long as any such indebtedness shall remain unpaid, to make payments out of its sinking fund or any other of its revenues or funds at such time and in such annual amounts specified in such covenant as shall be sufficient for the payment of the interest thereon and the principal thereof when due.
In simple words, according to the Pennsylvania constitution, the bondholders must be paid by the broke city.
This made sense in 1968, when the Local Government section of the constitution was written. In those days, the bond dealers were tools of the municipalities.
These days, this has been put on its head: municipal leaders are tools of the complicit bond dealers.
Unless the bond counsel, underwriters, and other complicit professionals are held to account for their fraudulent dealings in Harrisburg’s ruination, the state constitution says bondholders must be repaid by the victimized city taxpayers.
Meanwhile, Dauphin County commissioners, bondholders and the bond insurer have filed a smokescreen lawsuit in state courts against the city of Harrisburg, demanding repayment in full.
But the Harrisburg’s Authority’s forensic audit of its incinerator, now the subject of state senate hearings, documented how the bond dealers and Dauphin County in fact benefited from the fraudulent bond deals and swaps.
Should the city of Harrisburg file for bankruptcy in federal court, all bets are off. The state constitution would likely not apply in federal court, and creditors would likely be subject to investigation and negotiation, and have to settle for less.
However Gov. Tom Corbett this summer signed legislation prohibiting Harrisburg from filing for bankruptcy at least until the end of November.
Eliminating the possibility of bankruptcy, whether with a city like Harrisburg, student education loans, or big commercial concerns like banks and auto manufacturers, allows a lack of oversight by investors. It is a disruption of Adam Smith’s invisible hand of capitalism and a dis-service to everyone.
Once again, I find it interesting that the Republicans, supposedly the party of capitalism and free market economics, so readily and blatantly abandons those principles when they’re inconvenient.