Incinerator project burns up Pa. capital's cash

[April 20, 2010]  HARRISBURG, Pa. (AP) -- This capital city was near total collapse three decades ago -- its department stores, theaters and trolleys were gone, replaced by vacant buildings and streets devoid of any nightlife.

A huge effort, thanks partly to an energetic mayor, brought the Susquehanna River city of 47,000 back from the brink. Today, professionals and state office workers pack the restaurants, hotels and arts venues that helped restore its respectability.

Along the way, city leaders thought they could transform their aging, debt-laden trash incinerator into a clean, efficient moneymaker. But costs exploded and massive debt payments due this year on the incinerator threaten to drag the city into bankruptcy.

So grim is the situation that Moody's Investors Service has branded Harrisburg with the lowest credit rating of any of its 3,500-plus rated municipalities that have not defaulted, hurting the city's ability to finance civic improvements without paying sky-high interest rates.

Some residents wonder whether fear of a huge property tax hike to help pay down the $280-plus million in debt tied to the incinerator will spur a rash of "for-sale" signs just as the city had hoped to end a 60-year population slide.

"We're in trouble," said Bill Cluck, an environmental and land-use lawyer who lives in Harrisburg and closely monitors city affairs. "If you can get out of the city, get out of the city. That's the perception."

Harrisburg's bad credit rating, in part, reflects the stretched finances of a city devastated by the loss of its heavy manufacturing core. Almost half its property is tax-exempt and more than a quarter of its families live in poverty, nearly three times the national rate, census figures show.

Bad spending decisions are synonymous with Harrisburg's recent history. Former Mayor Stephen Reed was sharply criticized for secretly spending millions of dollars in public money on such artifacts as an Egyptian mummy and a bright red Wells Fargo & Co. stagecoach for museums that never got built.

The trash incinerator began operating in view of a large housing project on the city's industrial southern edge in 1972, one of scores of incinerators built across the country in the last 40 years. It first generated steam heat for steel mills and downtown office buildings and in the 1980s, it began generating electricity.

But it also spewed cancer-causing dioxins into the air, and pressure from the U.S. Environmental Protection Agency led to the plant's shutdown in 2003. It didn't become fully operational again until 2008, after the costly overhaul.

The incinerator still isn't making money, even with city residents paying some of the highest trash disposal fees in the country.

With its hands tied by a stagnant tax base even before the recession, Harrisburg faces debt payments on the incinerator this year of $68 million, larger than the city's entire operating budget. Little to no money in the city's budget is set aside for the debt, which includes millions of dollars coming due in the next two months.

On April 1, the city skipped a loan repayment of $637,500 to the plant's operator, on top of several million dollars in payments to lenders already covered by county dollars or money borrowed by the city's public works authority. Meanwhile, it is negotiating with lenders a repayment plan that may force the sale or lease of major city assets, such as parking garages or an island in the Susquehanna that is home to a soccer field and a minor league baseball park.

The city's newly elected mayor, Linda Thompson, says bankruptcy is last on her list of options: In her view, it promises a big, black eye for the city and a stack of expensive legal bills, but no guarantee of financial relief.

Instead, she is working to come up with a permanent plan to deal with the entire debt and is pressing for concessions from all -- lenders, county taxpayers, labor unions and contractors -- who rely on the city's financial survival.

"We all bought in to this," Thompson said in a recent interview. "It's no longer a time to point the finger. It's time to sit at the table and say, 'we're going to make the tough sacrifices with you.'"

City Controller Dan Miller disagrees with Thompson and said filing for Chapter 9 bankruptcy could buy time to construct a manageable payment plan and settle the nerves of city residents and business owners. To the extent that it would cripple the city's ability to borrow may not be such a bad thing, he said.

In Harrisburg, 95 miles west of Philadelphia, the incinerator has come to symbolize city mismanagement.

In the 1980s and 1990s, the facility routinely violated state and federal environmental laws. In addition to the dioxin emissions, it created an 80-foot ash heap dubbed "Mount Ashmore" that sent flakes drifting into nearby neighborhoods.

It could never burn enough trash or charge enough for the service to pay off maintenance costs, critics say. Meanwhile, city officials piled tens of millions of dollars in debt onto the incinerator in the 1990s to pay for other city debts and projects and to keep it running.

When new federal air regulations took effect a decade ago, the city was faced with two expensive options: Shutting down the incinerator or retrofitting it.

City council voted 6-1 to back a $125 million overhaul in hopes that a new, bigger incinerator could pay off all the debt.

The project quickly went awry -- the price of steel had skyrocketed while the contractor and city officials blamed each other for delays -- and costs ballooned to about $180 million.

City officials, unable to wring a profit from the incinerator, knew for several years that a couple large loans taken out to finish the retrofit would come due this year.

But Reed, Thompson's predecessor, tried unsuccessfully to get council's approval to lease or sell assets.

Still, as late as October, Harrisburg's credit rating was considered average by Moody's. In February, Moody's lowered Harrisburg's credit rating for the second time in four months, saying it had a "weak" plan to address the problem.

If Harrisburg declares Chapter 9 bankruptcy, it may not have much company: Moody's said such defaults and municipal bankruptcies are rare and aren't likely to increase amid the recession.

Thompson has said she hopes to present a plan in June to deal with the debt, while residents and business owners watch to see how it will affect them.

"They ask me all the time, 'What's going to happen?'" said Fred Clark, a downtown consultant and former chairman of the city's public works authority who had opposed the retrofit. "People are concerned. They should be concerned."

[Associated Press; By MARC LEVY]

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