By STEVEN MALANGA
During an April 2009 debate among candidates vying to be mayor of Harrisburg, Pa., one aspirant suggested that the financially troubled city should sell some of its valuable historical artifacts and use the proceeds to finance a "Harrisburg Museum of Bad Ideas." One compelling exhibit would be the city's recent decision to file for bankruptcy protection.
Harrisburg, the capital of Pennsylvania, is drowning in debt. City officials have known for more than four years that they'd have to deal with the fiscal mess, but they punted. The state has engineered a bailout plan, but the city council rejected it. Instead it has asked creditors to forgo as much as $100 million of the debt. Essentially, the city council is engaged in a giant game of brinksmanship with the state and creditors, daring them to come up with something that's less onerous than the current state plan, which involves asset sales and renegotiating union contracts.
"There's no way [state] legislators are going to sit up there and let the capital city of this state go under. They would be the laughingstock of the country," council member Gloria Martin-Roberts said earlier this year.
Under seven-term Mayor Stephen Reed, who governed from 1982 to 2010, Harrisburg had a long love affair with borrowed money, using it to spur projects of dubious value. The city invested millions of dollars in a stadium in the late 1980s to attract a minor league baseball team. When the Harrisburg Senators threatened to leave in 1995, the city bought the team with borrowed money. In 2009, even as the fiscal clouds darkened, it sank another $45 million, including $18 million in new debt, into upgrading the stadium. The team was attracting 2,488 fans per game.
Then there are those historical artifacts. Mr. Reed, once described by a local newspaper as a man who "never met a municipal bond he didn't like," wanted to borrow to open a network of museums. He spent some $39 million on a National Civil War Museum that opened in 2001. It has struggled for years to attract crowds. Undeterred, the mayor borrowed some $8 million to buy artifacts—including a Gatling gun, a Wells Fargo coach and a document signed by Wyatt Earp—for a proposed Wild West museum, though most of the purchases were made without the knowledge and consent of the city council. Plans for a Wild West museum and a National Sports Hall of Fame, financed by a $30 million bond offering, mercifully fell through.
The Harrisburg Authority, a city agency controlled by the mayor, floated much of the city's debt, including millions on an ill-fated incinerator. Built in the 1970s, it has been plagued by breakdowns and operating losses. Many other municipal governments, including nearby Lancaster County's, have turned their incinerators over to private-sector operators. The Harrisburg Authority spent the 1990s investing millions in a fruitless effort to make the plant efficient and profitable. But default loomed by 2003—when the city was forced to close the incinerator, now saddled with $100 million in debt, because it did not comply with federal clean-air standards.
Next up? A massive retrofit engineered by Barlow Projects Inc., a firm from Fort Collins, Colo. Harrisburg and Dauphin County, where the city is located, agreed to guarantee $125 million in new borrowing that was supposed to be paid back by revenues from the reopened plant. The city's debt load grew to $441 million, about $9,000 per resident.
The project fell behind and Barlow filed for bankruptcy in 2007 after the city fired it before work on the plant was completed. Harrisburg has missed payments on the incinerator debt, and it avoided default on its general obligation bonds in September 2010 only because the state stepped in with aid.
A worried state government enlisted a financial consultant to come up with a bailout plan. Unveiled in June, it involves selling the rights to the city's parking garage revenues to raise money, privatizing commercial sanitation services to cut costs, gaining concessions from city workers on pay and benefits, and raising taxes.
The city council rejected the state plan in July. Mayor Linda Thompson proposed a similar plan. It was voted down in August. Earlier this month the city council essentially threw Harrisburg on the mercy of the federal bankruptcy court, where members hope for a better deal.
The state has already challenged the bankruptcy petition. Gov. Tom Corbett, calling the Chapter 9 filing "illegal," is preparing to take over management of the city. But the city council remains defiant. Its attorney, Mark Schwartz, said that Mr. Corbett "can declare it Flag Day or Pay Investment Banks Day, it doesn't matter. He has to justify [a takeover] before the bankruptcy court."
Harrisburg's creditors, including municipal bond insurer Assured Guaranty Municipal Corp., have also sued the city. The municipal finance industry will be watching what happens with keen interest—because Assured Guaranty had received city and county debt guarantees. The county has lived up to its agreement and made payments to bondholders, but Harrisburg has not.
The Harrisburg case raises fundamental questions about the way cities and states increasingly use debt to finance speculative development that private investors or lenders won't touch. From minor league stadiums to arenas, museums, downtown redevelopment and waste plants with unproven technologies, billions have been spent on schemes of questionable value. Some projects are backed by unrealistic economic projections, which leave taxpayers on the hook for bond payments or operating subsidies. These deals are one reason why state and local debt outstanding has ballooned from $1.3 trillion to $2.5 trillion in the last decade, according to the U.S. Federal Reserve.
Perhaps the country does need a national museum of bad government ideas. Harrisburg would be a good place for it.
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