Harrisburg Authority audit: Debt crisis resulted from bad decisions

By Caroline Salls

Pittsburgh, Jan. 18 - The finding of the Harrisburg Authority's forensic audit were released Wednesday, with auditors concluding that the risks and alternatives related to a Harrisburg Resource Recovery Facility retrofit were not adequately evaluated.

The authority, which operates the City of Harrisburg, Pa.'s Harrisburg Resource Recovery Facility waste-to-energy plant, hired the law firm of Klehr Harrison Harvey Branzburg LLP and the accounting firm of ParenteBeard LLC to conduct the forensic investigation.

The auditors said in their 133-page report that the outcome of the retrofit, including the city's current debt crisis, "reflects the accumulated effects of bad decisions on critical project issues, ranging from contractor selection at the outset to the $60 million in debt taken on in 2007 when the facility was still incomplete and not fully operational."

"In some cases, the authority, the city and the county took strained positions on state law regarding municipal debt financing and other issues to allow the retrofit and related financings to proceed," the audit report said.

"The professionals, consultants and advisors who were paid significant fees to assist the authority, the city and the county in the decision making process do not appear to have adequately identified or responded to numerous red flags that, if heeded, could have led to a different outcome."

Audit findings

The audit findings included:

• The projections developed by contractor Barlow Projects to support the facility's retrofit "left little room for the changes in scope, costs, and timing that are common in such large scale construction projects;"

• The financing that was obtained by the city left no room for error or modification because typical debt service coverage ratios were not observed.

As a result, the auditors found that it was critical to the success of the retrofit that Barlow complete the project on time and at the price agreed upon, and achieve the feasibility assumptions that supported the claim that all of the facility debt, both existing and new, would be self-liquidating.

"Unfortunately, Barlow was unable to achieve any of these goals," the report said;

• There was no adequate process to evaluate if Barlow had the capability or qualifications to perform the project and whether the project made economic sense.

The auditors said the documents they analyzed did not show that any of the parties or professionals adequately evaluated or assessed the potential risks associated with the facility's retrofit between 1999 and 2003, including the economics of the project.

"Further, we have not been provided with any evidence of evaluation of any other contractors, alternative technology or other solutions beyond that offered by Barlow," the report said;

• All parties proceeded with the Barlow retrofit project in 2003 without adequate security in place to ensure Barlow's performance, although it was clear that Barlow was unable to obtain a performance bond because of its poor financial condition;

• Not obtaining adequate security has contributed significantly to the authority's inability to generate the cash flow from the facility needed to make its debt service payments;

• Most, if not all, of the parties involved with the facility knew or should have known that there was substantial risk that the facility would not generate enough revenue to service the debt being issued;

• Proceeding with the Barlow retrofit and the financings in 2003 enabled the city to delay having to pay debt service on then-existing facility debt, and proceeding with the further retrofit project and related financings in 2007 had the same effect.

The auditors said both projects and related financings worsened the authority's financial condition;

• The structure of the financial transactions related to the debt issued to fund the retrofit projects, including multiple swaps, was unnecessarily complex and resulted in the payment of excessive fees, increased risks and the potential for greater financial burden on the authority.

The report said it appears that some swaps were entered into and terminated for short-term gains, despite additional risks or negative long-term effects of the transactions.

"The use of swaps in this manner does not appear to be consistent with prudent management of interest rate risk or costs," the report said.

The auditors said the authority's and county's independent financial advisors do not appear to have seriously challenged the plan of finance, suggested alternatives to the recommended swap transactions or expressed concerns to their clients about management of interest rate risk or cost; and

• Contractor Reynolds Construction played numerous and conflicting roles on the retrofit project, including simultaneously working as a contractor for both the authority and Barlow, and former authority board member Fredrick Clark had a conflict of interest arising from his dual roles as board member and Reynolds employee.

Harrisburg case history

As previously reported, Harrisburg's city council made a Chapter 9 bankruptcy filing on behalf of the city in October.

That case was subsequently dismissed in November after several objectors claimed the city did not quality as a Chapter 9 debtor.

All of the objections cited a Pennsylvania law that was recently amended to prohibit a third class, financially distressed city from filing bankruptcy until July 1, 2012.

Harrisburg's Chapter 9 case number is 11-06938.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.