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Harrisburg, Pa., leads the nation in a dubious distinction: It has the most debt per capita of any U.S. city. The town's 50,000 citizens are on the hook for $1.5 billion.
The bizarre tale behind the massive debt includes a do-gooder who skipped town, an epically mismanaged incinerator, and possible criminal behavior.
I profiled the do-gooder, David Unkovic, earlier this year. He was appointed by the state of Pennsylvania to fix the Harrisburg debt problem. He seemed like the perfect guy for the job. Confident but not arrogant. Low key. Earnest. The occasional bow tie, and glasses.
I asked Unkovic: Can you get this city out of debt?
"I don't say 'I,' " he said. "I think a lot of people have to help get this city turned around. But yeah. I think it can happen."
Unkovic seemed so calm when I talked to him. But a week later, he seemed to snap. Outside the local courthouse, he gave an edgy, impromptu press conference.
"The house of cards is coming down now, and they're all coming down at the same time," he said. A few days later, he scrawled a handwritten resignation letter, dropped it off downtown, and disappeared from public life.
The man brought in to vanquish the city's debt was vanquished himself. What happened? I spent months calling and emailing before I finally made contact with Unkovic again.
You can find him these days on a peaceful wilderness reserve outside Philadelphia, where he walks around a pond and thinks.
"There's probably not an hour that goes by since I've resigned that I'm not thinking about Harrisburg one way or the other," he says.
He thinks a lot about the the Harrisburg incinerator — a fire-breathing, money-burning dragon of debt that sunk the town.
When the incinerator was first built, in 1969, Harrisburg officials hoped it would allow the city would collect fees from towns all over the state for burning their trash.
But by the time Unkovic got to Harrisburg, the incinerator had accumulated $300 million worth of debt. And it had never, in four decades, really worked properly.
When Unkovic first arrived in town, he thought it was just bad management. Now, he thinks it's something more sinister. I asked Unkovic: Was the financing of the incinerator criminal?
"I don't know," he said. "It bothers me as someone who's done financing for so many years to see something like that. Because it's the worst stuff you can look at."
When I put that question to people back in Harrisburg, they didn't hesitate.
"Illegal conduct occurred," Bill Cluck, who serves on the board that runs Harrisburg's incinerator, told me. "I think false statements were submitted under penalty of law to the state government in connection with the financing."
Stephen Reed was the mayor of Harrisburg from 1980 to 2009. People in town famously say he never met a bond he didn't like. He used the money borrowed on the incinerator to do all sorts of things.
He bought strange artifacts from all over the country, dreaming of building a Wild West museum. The city borrowed money to buy a baseball team and build a stadium; the team was later sold at a loss.
"The fundamental problem is he was borrowing more than he was really allowed to under state law," Unkovic says.
Under Pennsylvania state law, there is a limit on how much a city can borrow. But the limit doesn't apply for debt that is "self-liquidating" — debt that is funding a project that is expected to pay for itself in the long run.
In 2007, Harrisburg filed a document called an 8110 b certificate. It was a promise, Bill Cluck says, that all the previous debt borrowed on the incinerator was still self-liquidating — that the incinerator would bring in enough money to pay the money that had been already borrowed on it.
"They knew it wasn't true when it was submitted, and it's never been corrected to this day," Cluck says.
And that, according to Cluck, was a crime.
There were 17 different revenue projections showing that the incinerator could never earn back all the money that had been borrowed.
So how was it that nobody — none of the law firms, none of the financial advisers — raised questions about the wisdom of this loan?
We asked, but they refused to respond on the record. And, Cluck notes, all those advisers made hundreds of thousands of dollars in fees from the loan.
Almost none of the $30 million the city borrowed in 2007 went to the actual incinerator upgrade. It went to pay back old debt, and to pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal, Cluck says.
To make matters worse, the city ultimately was on the hook. If the incinerator couldn't make the money back, it would fall to the taxpayers of Harrisburg. And this makes Bill Cluck crazy.
"Where's the advocate for the city to say, 'Hey, you're getting screwed by the terms of these deals,'" he says. "It never happened."
Of course, there is one person who was supposed to be advocate of the city of Harrisburg: the mayor. We tried hard to reach the former mayor for comment. We could not.
But consider this. In the 2000s, there was a lot of easy money out there for cities. Wall Street came up with tons of intriguing financial products, that would generate short term cash. There always seemed to be a way to borrow new money to pay back the old.
Unkovic says the former mayor may have been taken advantage of. "It's like he was a debt addict," he says. "And once he got going, he just needed more and more debt, and was sold more and more debt."
After the financial crisis, though, things changed. Local officials tried once again to refinance incinerator debt, but nobody wanted to lend the money. The tap has been turned off.
With all these debts, Harrisburg is finding it hard to cover basic services.
The city has delayed payments to light bulb venders and paper sellers. Restaurants have hired their own security. A local strip club paid to keep the street light on. The city is projected to run out of money entirely in October.
A judge has recently ordered a 1% income tax hike on the people still left in Harrisburg. But the city council has promised to fight it.
Correction: September 6, 2012 12:00 am — We said that Harrisburg, Pa., has the most debt per capita of any city in the country. We're not certain that's true. Harrisburg has an extremely high debt level — an estimated $1.5 billion for a city of 50,000 residents. But as Michael Maciag, the data editor of Governing.com, pointed out to us in an email, there is no standard measurement by which to rank city indebtednesss. We checked with David Jacobson, of Moody's Investors Service. Moody's is one of the ratings agencies whose job it is to rate the creditworthiness of cities. And he concurred that there is no agreed-upon measurement for municipal debt levels.
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