It was, as others observed at the time, a kind of public shaming. The administration of Mayor Linda Thompson, at a time when Harrisburg was on the brink of financial collapse, released a list of businesses that owed the city money.
A bakery that borrowed $175,000 in 2009 and soon closed without making a single payment. A bar that got a $160,000 loan in 2005, shut down after running afoul of the law, and never paid back a $150,000 balance—even after its owner won $1 million in the lottery. A downtown restaurant and jazz club that got almost a quarter-million in 1990 and has been in and out of default ever since, having paid back less than a sixth of what it borrowed more than two decades earlier.
They had all received money under a city loan program started under former Mayor Stephen Reed and strongly critiqued by the Thompson administration. “There was not a proactive approach to collecting delinquent loans,” Jack Robinson, then head of the Department of Building and Housing Development, said in 2012. Thompson’s successor, Mayor Eric Papenfuse, questioned the program, too—a year before running for office, he suggested its origins fit into a pattern of “secretive, unsupervised spending” under Reed.
And yet, after more than five years of successive initiatives to improve collections and enable a new round of loans, the city has made little progress. Program records remain incomplete or missing. The city’s security filings with the state, which ensure a creditor’s priority in the event a business declares bankruptcy, have been allowed to expire. With rare exception, businesses that collectively owed $850,000 in past-due payments in July of 2011 have not made a payment since. As of this past July, the total overdue amount owed to the city was $1.1 million—money that could have been used to help fund new enterprises or perhaps even, because of its source, been spent on a variety of non-business projects citywide.
When a government makes economic development loans, past program officials say, they should be expected to default at a higher rate than what might be found in the private sector. “Remember, you’re taking the next-tier loans,” said Jeffrey Schaffer, who headed Harrisburg’s economic development office in the 1990s. “You want to take the ones that don’t quite make it.” The program targeted speculative or risky projects that traditional investors were reluctant to fund. “They’re coming to the city because the city is the last possible resort,” said Kathy Possinger, whose department briefly oversaw the program during the first months of the Thompson administration. “The potential for default is pretty high.”
In many cases, however, the city appears to have increased the risk of loss with its own policies. For several years, the program operated without the involvement of an independent review committee, which had previously vetted prospective borrowers. Many of the now-delinquent loans were made in years where there was no committee oversight. Jeff Baltimore, a City Council member who was a deputy director in the city’s economic development office in the late 1990s, said the loan policies could be “very uncomfortable.” He told the story of one large loan that Reed described at a meeting as “self-amortizing.” The term normally refers to a loan, like a mortgage, where the principal is gradually paid off over the life of the loan. But the mayor was describing something more like a grant—a loan that would be forgiven if the business stayed in town five years.
The Papenfuse administration has said it is pursuing delinquent accounts and reviewing its legal options. Jackie Parker, director of the Department of Community and Economic Development, which now oversees the loan portfolio, said the city sends notices each month to businesses with past-due loan payments. “The approach is review, find out what our standing is, and then go after them legally,” Parker said. “I don’t know about the shaming method.” But Papenfuse, when I asked him about the delinquent accounts, said the city had limited expectations. “In order to collect on some of these loans, it would take a legal strategy and a deployment of legal resources which the city can neither afford nor has the capacity to do at the present moment,” he said. Given the costs of trying to collect the money, and the odds that, in many cases, there is nothing to collect, he said he is not sure the investment would yield a worthwhile return.
The longer-term goal, Parker said, is to start lending again, with a particular emphasis on moderate-sized loans—less than $50,000—to smaller businesses. If the city is going to go back into the banking business, it’s worth asking what can be learned from the first time around.
The city’s original revolving loan program was created in 1984. It was termed “revolving” because it was meant to be self-perpetuating: payments from early borrowers would provide the funding for future loans. A five-person loan review committee, with two members from financial institutions and three from the business community, would approve or reject loan applicants at public meetings. At least a fifth of the loans, by dollar amount, were to go to minority-owned businesses and at least 5 percent to businesses owned by women.
The program’s initial seed money came from federal block grants, according to a budget approved by City Council. But in March 1990, Reed issued an executive order creating a second “special projects” loan program. According to the order, federal grant guidelines were too limiting; the program rules were “appropriate and applicable to some types of economic development projects but not all opportunities related to City economic development.” Among other things, Reed wanted to increase the maximum loan amount from $100,000 to $250,000 and relax a job creation requirement. The order said the mayor’s office would create its own rules for this second program, although the same staff and review committee approved the loans. “The mayor was very hands-off,” Jeffrey Schaffer said.
The source of funding for the “special projects” loans would later become a point of controversy. In the spring of 1990, the city sold its water system to a related government entity, the Harrisburg Authority. In a series of executive orders, Reed dictated how the city would spend around $7 million in proceeds from the sale. He hoped to set aside $4 million for the special projects loan program. In February 1992, a group of residents sued Reed, claiming that City Council alone had the power to spend the money. In an opinion more than four years later, Dauphin County Judge Joseph Kleinfelter agreed. By then, the question of who should spend the money was moot—it had all either already been spent or moved back under council’s control. But Kleinfelter sided with the residents on the question of law, writing that Reed should have known better from a prior decision. Though Reed may have “had the best interests of the City in mind,” Kleinfelter wrote, “it is always a serious matter when a city official disregards a judicial ruling and yields to Machiavellian precepts in assuming authority which is not vested in him.”
For all that, the first round of big-ticket loans seemed to fit within the description of economic development. In 1991, in one of his executive orders, Reed had referred to a “high need” for the loans “during a time of national economic recession hallmarked by tightened commercial bank and other lender credit.” A development company owned by a man named Douglas Russell got a $250,000 loan to renovate a Herr Street building into offices and apartments. A married couple, Sandra Buckley-Rusnov and her husband Cornelius, got a $350,000 loan to build houses along Rudy Road. Richard Engle, who owned a company called Central Business Systems, received $250,000 to relocate to S. 13th Street. “We were competing for businesses,” Schaffer said. “A business might be looking at locating in either Harrisburg or Lemoyne. Well, did Lemoyne have a revolving loan program?”
Minutes from the first two years of loan committee meetings reveal little about how applicants were vetted. Occasionally members tabled a vote, asking for further documentation from an applicant. Here and there, a note might reflect a requirement to create a certain number of jobs or record that the loan was contingent on additional financing from other sources. But for the most part, city staff simply recommended a loan be made, and the committee unanimously approved. Schaffer recalled a time when some reporters showed up to watch a meeting, and afterwards asked him, “Is that it?” “I don’t know what they were expecting, but it wasn’t very exciting,” he said. The companies’ financial records, which were deemed proprietary, were not made public. But aside from that, Schaffer said, the committee “was very transparent.”
Nonetheless, some wondered whether the loans might reflect political influence or favoritism. In September 1991, the Patriot-News wrote about the number of Reed campaign donors who received either loans or grants out of the proceeds of the water system sale. Russell, the Herr Street developer, had given $100 to the Reed campaign; Engle, of Central Business Systems, had given $350. Those amounts might seem small; in fact, one impression you get from the article is that, for a certain period in Harrisburg, the unusual thing was not to donate to Reed’s campaign. (According to the report, Schaffer himself had given $700.) Reed, for his part, told the paper there had been “no undue influence and no action taken by these boards based on political mayoral intervention.”
Still, it’s hard not to wonder about the provenance of some of the program’s early loans. In 1995, the city loaned $250,000 to James Pianka, at the time a city magistrate, to construct batting cages on City Island. The loan came with a 25-year term and a 2-percent interest rate, at a time when the national prime rate was between 8 and 9 percent. Schaffer said he had initially come up with the batting cage idea himself, but that after speaking with the mayor, he had concluded it would be improper for a city employee to have a concession in a city park. He said Reed later asked if Pianka could develop the project instead. (Pianka, after saying he didn’t know who Schaffer was, declined to answer questions for this story.)
Pianka “was always appreciative,” Schaffer said, though he added that the business “could easily have failed.” He suggested that those who saw overly generous terms didn’t understand the business risks. “People said, ‘He got it because he was a magistrate.’ No, he got it because he had the idea and put up the collateral.” Pianka, who still owns the batting cages, continues to make a $1,200 payment each month. He is one of only a handful of recipients current on their loans.
Another of the up-to-date borrowers is Char Magaro. In 2007, Magaro took out a $135,000 city loan to buy a liquor license for Bella Mundo, a fine-dining restaurant in Shipoke. (The restaurant has since relocated to Front Street, as Char’s Tracy Mansion.) She found the application process and the terms—10 years at 4-percent interest—to be “very reasonable.” “They didn’t put me through too many hoops,” she said. The loan was a safe bet, in part, because the liquor license was pledged as collateral. “Liquor licenses are self-collateralizing,” Magaro said. “They have value.”
The city has nearly twice as many delinquent loans as current—25 to 13. In a way, though, it’s remarkable the city has any current accounts at all. In 2010, a consulting firm called Management Partners published an audit of Harrisburg government, as part of an early intervention during a period of mounting financial distress. Included in their report was a survey of the loan program, whose portfolio at the time encompassed more than 60 small-business loans totaling almost $7 million. Or so they believed. According to the report, the city “was unable to provide the exact amount of outstanding loans,” and other information about the program could not be verified. “The fact that they’re making loans to people and don’t have records of it is a problem,” Jerry Newfarmer, one of the consultants who worked on the report, told me recently. “That makes no sense to me.”
The recordkeeping problem seems to date to late 2009 and early 2010, during the transition from the Reed to the Thompson administration. The Mayor’s Office of Economic Development, which had previously overseen the loan program, was dissolved, and the loan portfolio was merged into the Department of Building and Housing Development. The staff did not follow. Linda Walker, a deputy director in MOED who closely oversaw the loan program for many years, told me that was politics—when you took a supervisory position under one mayor, you could expect to leave when the seat changed hands. “Linda Thompson wanted everyone gone, and that was the end of the program,” she said. (Ed Nielsen, MOED’s director at the time, described the transition somewhat differently. He suggested the decision to dissolve MOED started with Reed, who “didn’t see any need for a cabinet-level department like that”; he believed the rationale had been, “Thompson was gonna kill the program anyways, we might as well close it down.”)
Walker starting working for the city in 1985. To this day, she stands by the loan program’s accomplishments. “We were proud of the fact that we could create so many businesses,” she said. She described the loan criteria, and particularly the rules for securing collateral, as strong. “You have to dig deep sometimes to find collateral,” she said, but the city always got a lien on something—buildings, equipment, accounts receivable, liquor licenses. Walker felt the program opened the door to entrepreneurs, especially women and people of color. “Back in the day, minority- and female-owned businesses couldn’t get a loan from the downtown banks,” she said. When she would talk to people in the community, she kept hearing the same complaint: “lack of capital, lack of capital.”
Walker said the loan files were kept in accordion folders, and were voluminous, with some businesses having two or three folders of material. They were stored in a set of lateral cabinets on the fourth floor, which people often mistook for a dividing wall between MOED and the neighboring offices of the Redevelopment Authority. A couple of months after she resigned, she said, she went to city hall to meet some former colleagues for lunch and saw the cabinets were empty. According to Walker, Thompson accused Walker and her colleagues of taking them. She said she got calls from the district attorney asking if she knew where they were. She denied having anything to do with it. “What the hell would I do with loan files?” she asked me. “We left everything there.” Indeed, Kathy Possinger, who stayed on as acting director of the housing department for several months in 2010, said the former MOED staff had been diligent in closing down and transferring their programs. “Everything we needed to know about—hot files, hot topics—we knew about,” Possinger said. She said that the Thompson administration rearranged many things in city hall upon arriving, and that they may have relocated the loan files.
Neil Grover, the city solicitor, told me recently that he suspects there are more files at city hall than people think. The rumor that files were deliberately removed or destroyed “is, frankly, scurrilous,” he said. “That’s accusing someone of a fairly significant crime.” But there are undeniably problems with the records the city does possess. “We have what we have,” Jackie Parker, the economic development director, told me. “But the files are not uniform. Not everybody has collateral. Not everybody had a recorded mortgage. Not everybody had signed papers. And obviously, if they hadn’t signed it before, they aren’t signing it now.”
The program has suffered from other lapses. The committee that used to review the loans has been defunct since 2005. Nielsen, the former MOED director, said that the committee’s dissolution, for him, marked “a real seminal moment figuring out how things work in la-la land.” According to his account, Reed, having concluded he wouldn’t be able to push any nominees through City Council, simply told the office to keep making loans without a committee. Nielsen asked Linda Thompson, then council president, about it. “That was the oddest part—Reed saying council won’t approve anything, and then the conversation with Linda Thompson right after, verifying it,” he said. As mayor, Thompson tried to restart the committee, successfully appointing three members. One of them, a banker named Brittany Brock, told me they met several times to review things like underwriting and eligibility guidelines. But the effort went nowhere, in part because of a lack of direction from the administration. “It just didn’t go,” she said.
With few exceptions, loan clients currently on the books as delinquent stopped paying sometime after Reed left office. This doesn’t account for loans supposedly written off, which reportedly totaled $1 million or more, though confirmation is hard to come by. Grover, the city solicitor, said he had yet to verify that any loans were officially forgiven. “I’m not sure who would have that authority,” he said.
In the case of non-real estate collateral, the city, as a creditor, is also required to renew certain filings with the state every five years, under what’s known as the uniform commercial code. These UCC filings preserve the priority of the city’s claim in the event a business liquidates or goes bankrupt. According to state records, all of the city’s filings on its loan portfolio have expired, some as recently as this year. Juliet Moringiello, a professor of bankruptcy law at Widener Commonwealth Law School, told me that, when a UCC filing lapses, it’s not that a creditor loses all rights to its collateral. It’s more that it loses its place in line with other creditors. “There’s a big burden of monitoring on the lender in the code,” she said. When I told her the city’s claims had all expired, she was astonished. “That is insane,” she said.
Jeffrey Schaffer, who now works on economic development in the Pittsburgh office of U.S. Rep. Mike Doyle, urged me not to think of a loan program’s default rate as the only measure of its success. “There’s a return that isn’t in the books,” he said. A business that fails may nonetheless have brought benefits while it lasted—as a provider of jobs, as encouragement for other investment, even as just a presence on a struggling block. “It helped a lot of people,” he said of the city’s program.
One of the delinquent accounts is held by Steve Pearlman, who sells vintage clothes and 1950s- and ‘60s-era antiques and furniture out of a store on Market Street called Atomic Warehouse. In the early 2000s, the city gave him $60,000 in loans to help finance the renovation of his building, which had previously been vacant and in deep disrepair. “It was horrendous,” he told me. The store now has a bright, teal-colored façade and a retro-looking logo splashed over the door.
As a delinquent borrower, Atomic Warehouse makes an interesting case. Pearlman’s last payment was in 2011, and he is $35,000 in arrears. Even if he pays it all back, as he says he plans to do—he wouldn’t go into details, although there’s a for-sale sign in front of the store—he won’t have been the perfect client. Yet he has stayed open for 13 years on a block that has since seen incremental development.
From another perspective, though, a promise is a promise. Another of the city’s loan clients I spoke with was Matt Tunnell, who, along with his business partner John Tierney, bought the Midtown Cinema on Reily Street in 2008. As part of the purchase, they took over what was then a delinquent $350,000 city loan.
The loan, which is now in good standing, makes an interesting case of its own. “I feel stupid,” Tunnell joked, when I asked him about it. “We’re paying our loan, and no one else is!” But, he added seriously, the cinema was actually happy to pay it off. “That was always part of the revitalization, to pay our obligations and then maybe see it circle back to other businesses,” he said. He gave credit to the original owners, who “poured hours and hours” into the venture at a time when investing in the area was much less certain. “They were trying to jump start Reily Street,” he told me. “They were really the pioneers.”