Fri March 23, 2012
How A City Goes Broke
Originally published on Mon March 26, 2012 4:35 pm
This is the first of two stories we're doing on Harrisburg. Read the second story here.
Eric Papenfuse owns a bookstore in Harrisburg, Pa. He used to be on the city agency in charge of basic municipal services — sewer, water, trash.
He's giving me a tour of the town, known mainly these days for having more debt per resident than any other city in the country. The city got into so much debt because of the way it deals with garbage. So, Papenfuse drives me out to the edge of town to see the trash incinerator that sunk the city.
"Welcome to the almost-$350-million-in-debt Harrisburg incinerator," he says.
Garbage trucks are pulling in and dumping huge mounds of trash. The trucks have to pay a fee to leave their trash here. Those fees were supposed to pay for the incinerator. It didn't work out that way.
Out behind the incinerator, a field is littered with big pieces of old machinery — steel tubing, a pressure vent — that represent decades of work on the incinerator. For years, Papenfuse tells me, the city borrowed money to upgrade the incinerator.
There was always the promise that the incinerator would pay for itself real soon — if only they could get it exactly right. Every time the debt came due, the city borrowed new money to pay back the old money.
"Basically, every time something goes wrong with the incinerator, [they] say, 'Let's just make it better,' " he says. " 'Borrow twice as much money; we could burn twice as much trash.' "
Right around the millennium, the Environmental Protection Agency shut the incinerator down. The city could have cut its losses. It didn't.
"This is when they say, 'We will double the debt and expand the incinerator,' " Papenfuse says.
All along, the city kept saying the debt it was taking on was "self-liquidating." In other words, the trash fees from the incinerator would bring in enough money to pay back the money it was borrowing.
But the debt was never self-liquidating, according to a forensic audit done by the Harrisburg Authority, the municipal board Papenfuse used to sit on.
"Eventually, the money comes due," Papenfuse says. And the trash fees aren't enough to pay it back.
"Unfortunately, the city doesn't have the resources to make those payments ... on what is now over $300 million plus worth of debt," says Bill Cluck. Cluck sits on the board of the agency that called for the audit — the board that Papenfuse used to be on.
The county has paid a chunk of the city's debt, as has an insurance company, which is now suing the city.
Hundreds of millions of dollars later, the incinerator works. It works really well. But Harrisburg has run out of time. So the city is planning to sell it to the highest bidder.
We'll have more later today on how Harrisburg is trying to save itself.
DAVID GREENE, HOST:
You may know Harrisburg, Pennsylvania, as the capital of the Keystone state. But it has another distinction. Harrisburg has the most debt, per resident, of any city in America. And the reason is even more distinctive. It's not the decline in manufacturin; it's not the housing crisis. It is the way the city deals with its trash. Zoe Chace, of NPR's Planet Money team, explains.
ZOE CHACE, BYLINE: How much debt does Harrisburg have? Well, look around.
ERIC PAPENFUSE: Everything in Harrisburg is in debt, or has various money owed on it.
CHACE: Eric Papenfuse owns a bookstore here in town. He's driving me around. School district buildings, City Hall, the stadium - all in hock. Papenfuse used to be on the agency in charge of the city basics - sewer, water, trash. Speaking of which, he takes me out to the edge of town to see the biggest culprit. This is the record holder for Harrisburg debt.
PAPENFUSE: Welcome to the almost $350-million-in-debt Harrisburg incinerator. You see the trucks sort of lining up and coming in. If we were to go in and follow them, you'd see this huge, huge mound of trash.
CHACE: The mounds of trash represent real money because you have to pay a fee when you drop off your garbage. That's why the incinerator was supposed to make so much money - because with the trash, comes the money. And the incinerator itself is working fine, right now. But if you walk around back, the field behind the incinerator is littered with big pieces of old machinery - bets that went bad, remnants of construction projects that someone once thought would make the thing profitable - insulation, steel tubing, just lying around.
Let's just sit on one of these things.
PAPENFUSE: Yes, let's sit on the pressure vent, alternating - sure.
CHACE: Watch out for the rusty nails.
PAPENFUSE: OK. It's true.
CHACE: For years, Papenfuse tells me, the city borrowed money to upgrade the incinerator, always with the promise that the incinerator would pay for itself real soon - if only we could get it exactly right. When the debt would come due, they'd borrow new money to pay back the old money.
PAPENFUSE: Basically, every time something goes wrong with the incinerator, those that are running the incinerator come back and say, well, let's just make it better. And in order to make it better, we could just borrow twice as much money; we could burn twice as much trash.
CHACE: There was a moment of reckoning right around the millennium. The Environmental Protection Agency shut the thing down - carcinogens and the like. And it's a moment where the city could cut its losses. But instead...
PAPENFUSE: That's when the doubling down occurs. That's when they say, we will double the debt, and we will expand the incinerator.
CHACE: Like any bet where you double down, you'll need a big win to justify all that you've put on the table. The city wouldn't be taking such a serious loss now, if they'd only decided back then to stop playing; stop all the refinancing and guaranteeing those old debts.
BILL CLUCK: When the city guarantees the debt, they claimed it was self-liquidating - meaning, it would pay for itself.
CHACE: This is Bill Cluck. He's on the board today that Eric Papenfuse quit in frustration, the Harrisburg Authority. He says the reason Harrisburg took on so much debt was because they always promised, with the upgrades, new garbage coming in would pay the debt down. The problem...
CLUCK: The debt was never self-liquidating.
CHACE: That's the conclusion of an investigation commissioned by the Harrisburg Authority. It's like you were gambling with house money and it turns out, there's no money in the house. The more borrowing the city did to bring the incinerator up to code, the more complex the financing became. So complex, it's under review by the U.S. attorney's office.
PAPENFUSE: And, of course, eventually the money comes due.
CHACE: And the trash burning couldn't pay it back.
CLUCK: Unfortunately, the city doesn't have the resources to make those payments.
CHACE: The money.
CLUCK: They don't have the money, on what is now over $300 million worth of debt.
CHACE: So the county stepped in and paid. So did an insurance company. Now add them to the long list of people suing the city, looking for their money back.
(SOUNDBITE OF A TRUCK)
CHACE: Truck from York, Pennsylvania, dropping their trash off.
PAPENFUSE: Well, I mean, in some respects the vision, you know, has - has come to fruition. Turned out to be apocalyptic, but other than that...
CHACE: Three hundred-odd million dollars later, the incinerator works really well - which means it can be sold to pay down some of the debt on it. And that's what will happen. The city has run out of time to figure out how to make money off the thing, so they're selling it off to the highest bidder. We'll have more on the plans to save Harrisburg this afternoon, on ALL THINGS CONSIDERED.
Zoe Chace, NPR News.
GREENE: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.