The so-called Verizon Tower in downtown Harrisburg, which the telecommunications company will vacate in early 2016.
Harrisburg City Council considered for the first time publicly Thursday night the details of a proposed settlement with Assured Guaranty Municipal Corp., the insurer of a $41.6 million bond debt that the city must begin repaying in 2016.
The debt is tied to the so-called Verizon building, a 12-story office tower in downtown’s Strawberry Square, where the broadband and telecommunications giant, formerly the Bell Atlantic Company, has leased space since 1975.
The total debt, representing principal and interest on a 1998 bond issue of $6.9 million, starts coming due on Nov. 1, 2016, with payments ranging between $930,000 and $1,175,000 due every May and November thereafter through 2033.
A final payment of $6,175,000 is due on Nov. 1, 2033.
The city is obligated to make the payments under the terms of a guarantee agreement, which pledged the full faith and credit of city taxpayers as added security on the bonds at the time they were issued.
Under the proposed settlement, AGM will advance up to 20 percent of the annual debt service to bondholders each year through 2025, with the city later paying back any advances at a 6.07-percent interest rate.
The settlement also contains a forbearance agreement, so that as long as the city does not exceed a 20-percent advance each year or an aggregate $2.7 million through 2025, AGM will not declare the city in default under its insurance policy.
The city is not obligated to rely on AGM for a cash advance in any year, and any unused advance can be rolled over into the next year.
Steven Goldfield, a financial advisor to the state officials overseeing Harrisburg’s recovery, said the city should regard the advances from AGM as a “line of credit” to be drawn upon if the city can’t afford its full debt payments in a given year.
The settlement is the result of many months of work and will help the city realize “significant benefits,” said Fred Reddig, Harrisburg’s coordinator under Act 47, the state program for distressed municipalities.
Most of those benefits depend on the building’s expected new tenant, the state Department of General Services, which signed a 17-year lease in late September to locate around 900 workers in Strawberry Square.
The state will rent 765 parking spaces, which should produce around $600,000 in new parking taxes each year for the city, though Goldfield later acknowledged that may be offset slightly by the loss of Verizon employees who parked downtown.
The state’s rent payments are also projected to eat up about $12.8 million of the debt obligation from the 1998 bonds, reducing the city’s burden.
The settlement with AGM is a critical last piece of the negotiations towards the state lease, Goldfield explained, because it clears the way for a $17 million investment in the Strawberry Square property.
The investment, to be spent on an energy retrofit of the office towers and on fitting out the space for DGS’s use, depends in part on financing from First National Bank.
But the bank wants some assurance that the Strawberry Square assets won’t be tied up in litigation over the city’s debt payments, which the forbearance agreement with AGM would provide, Goldfield explained.
The deal is a major step in a long and complex chapter of the city’s involvement in the downtown real estate business.
In 1975, the city, the Harrisburg Redevelopment Authority and the Harristown Development Corporation embarked on an urban renewal project that included the development of the site at Strawberry Square.
Included in the development was the 12-story, concrete-and-steel structure that would come to be the Verizon building, comprising 239,841 square feet out of Strawberry Square’s more than 1 million square feet of total space.
The 1998 bond issue financed the redevelopment authority’s purchase of the land and facilities from the city, which had received fee title to the property in 1976 under the terms of the urban renewal project agreement.
The proceeds from the deal helped cover a deficit in the city’s 1999 budget, which then Mayor Stephen Reed celebrated for including “no tax increases of any kind” and “no layoffs of existing staff.”
He made the remarks at a November 1998 legislative session, on the same night council would vote in favor of the Strawberry Square property sale.
In theory, debt service on the bonds would never touch the city’s guarantee, as rent payments from tenants was supposed to cover the necessary payments.
But documents from the financing suggest that officials involved in the deal were aware of the city’s exposure.
The lease with Verizon, for example, was set at the time to terminate on Feb. 1, 2016, nine months before the first debt payment was due.
And at various points in the official statement for the bonds, investors were reminded of the downtown real estate market’s volatility, with the statement at one point stipulating that there was “no assurance that the authority will be able to lease the facilities to future tenants at rent levels sufficient to pay the 1998 bonds.”
Nonetheless, Standard & Poor’s rated the bonds ‘AAA,’ the highest possible rating.
During an interview in early January, Harrisburg Mayor Eric Papenfuse characterized the Verizon building debt as a “horribly bitter pill” for the city to swallow. He said he was reviewing documents from the deal, but that it was his current belief the city was obligated to repay the debt in its entirety.
Council members echoed the mayor’s sentiments Thursday night. Councilman Ben Allatt, the budget and finance committee chair, described the debt as “one of the worst deals the city ever entered into.”
He added that he was working with city officials on adopting a debt policy to ensure Harrisburg would never enter such deals again, which he expected to be one of council’s legislative initiatives this year.
Council President Wanda Williams concurred with Allatt’s statements, and then expressed her gratitude for the work of Reddig’s team on negotiating a solution. “I commend you both for what you’ve done, and I thank you,” she said.
City Solicitor Neil Grover told council he was still in talks with AGM over the terms of the agreement, and that there was a specific clause he wanted amended before he would recommend an affirmative vote from council.
If the matter was not resolved to his satisfaction, Grover said, he would urge council to reject the agreement.
Williams said that, so long as Grover addressed the issue, she would put the agreement on council’s agenda for next Tuesday’s legislative session for a vote.
This story has been updated with information about the bills council voted on at a November 1998 legislative session, which approved the sale of the city’s Strawberry Square properties.
