Harrisburg Receiver Issues Recovery Plan; Promises Balanced Budget, Debt Settlement

PART ONE GUIDING PRINCIPLES

Harrisburg deserves a bright future.  A financially strong pathway to that future and Harrisburg’s preeminence as Pennsylvania’s iconic capital city lie ahead with the plan that is today being presented for the Commonwealth Court’s consideration and confirmation.

While Harrisburg’s receivership plan is characterized as a “recovery plan” under the  legislation  adopted  by  the  Pennsylvania  General  Assembly,  and  while  that legislation formed the basis for reaching the plan being submitted, it seems more appropriate, as Harrisburg emerges from the financial challenges that it has faced in recent years, to refer to the proposed plan in a more positive and forward-looking manner; hence we chose to call that which is respectfully being submitted for this Court’s consideration and confirmation the “Harrisburg Strong Plan.”

The Harrisburg Strong Plan, unlike the preliminary recovery plan that had been confirmed by this Court in March 2012 (the “Preliminary Recovery Plan”), provides a comprehensive set of initiatives and funding to allow the City of Harrisburg (the “City”) to address the myriad financial challenges that have for many years plagued the City and impeded its growth.  The Preliminary Recovery Plan had pointed out the many and serious fiscal challenges faced by the City, and it had suggested, and this Court had confirmed as appropriate, numerous general approaches that would be pursued during the receivership designed to provide the City with near-term protection against its persistent annual budgetary shortfalls (what the Preliminary Recovery Plan referred to as the City’s “structural deficit” – the amount by which the City’s operating expenses exceed its revenues).   The Preliminary Recovery Plan had also suggested various longer term initiatives that, if implemented, could permit Harrisburg to achieve meaningfully increased revenues generated by a thriving city – additional revenues that could provide the basis for the City’s sustainable financial independence.  Furthermore, the Preliminary Recovery Plan put forth guiding principles that the governor appointed receiver for the City (the “Receiver”) would follow in an effort to address the very significant obligations arising from the City’s ill-fated financial undertakings associated with its incinerator.   In that regard, the Receiver’s goal was to implement a comprehensive plan that would, once and for all, resolve those obligations, thus permitting Harrisburg to prosper free of the historic uncertainties regarding the City’s obligations for incinerator-related debt – uncertainties that for much too long have dampened investment in the City and frustrated its growth.

The Harrisburg Strong Plan, it is submitted, accomplishes these previously announced goals.   Importantly, while the Preliminary Recovery Plan was aspirational and could only be accomplished if all meaningfully affected and interested parties were to reach agreement, though under no legal obligation to do so, the Harrisburg Strong Plan can be implemented because virtually all materially affected parties have in fact agreed to the Strong Plan’s terms.  Stated differently, what the Receiver asks this Court to confirm is a plan that can and will be put in place if the financial transactions that are to fund the Strong Plan can be consummated without interference.

As the public evaluates the Harrisburg Strong Plan, the Receiver asks everyone to understand that achieving a consensual resolution has been challenging and has required material compromises by all interested constituencies.   Moreover, making a plan workable has required more than well intended solutions; it has necessitated that parties  not  insist  on  receiving  the  full  benefit  of  their  legal  or  contractual  rights. Providing meaningful solutions for one set of interests necessarily means that others need to agree to some accommodations; and this has been true for all the significant parties or interests that have come together to forge a workable resolution for Harrisburg’s future.

The Strong Plan, if anything, illustrates how cooperation and leadership in a challenging environment can lead to workable solutions.  Necessary to achieving the Harrisburg Strong Plan has been the commitment of all the parties to look at the positives that are being offered to them by their agreement to the Strong Plan rather than evaluating the Strong Plan by focusing on aspects of it that are not ideal or fail to satisfy each of their goals.  Such is the nature of compromise.  And by their willingness to work towards a plan from the perspective of what it affords me and my constituency, and not from what it does not, civic, community and governmental leaders, as well as creditor interests, have come together to achieve a resolution that as recently as this year many thought not possible.  So, if the Strong Plan is confirmed and Harrisburg emerges from its challenging days, it is hoped that in the eyes of those looking for a template for solving persistent municipal distress, Harrisburg will be seen as a beacon – showing that a consensual path is much preferable to attempting a resolution in a dispute-laden environment that inherently brings with it protracted delays, substantial costs and uncertain results.

Before highlighting the significant components of the Harrisburg Strong Plan, a general cautionary comment should be made.  No plan, no matter how comprehensive, can take the place of the dedicated and diligent services by public officials and other civic leaders that will have to perform their work with a focused commitment to implementing the Strong Plan and achieving its goals.  For all who seek sustained growth for Harrisburg, please understand that the Strong Plan does not guarantee that Harrisburg will be financially vibrant and self-sufficient no matter how much positive effort to invest effectively the Strong Plan’s resources are made; rather, the Strong Plan offers a significant opportunity to achieve financial independence and a vital future only if motivated elected and appointed leaders are allowed to do their jobs without compromising on the Strong Plan’s mandate that spending be kept in check, during the four-year Strong Plan period, and beyond.

PART TWO

A SUMMARY OF THE BENEFITS THAT THE CITY AND ITS RESIDENTS ARE EXPECTED TO RECEIVE UNDER THE HARRISBURG STRONG PLAN

While the detailed components of the Strong Plan will be extensively described below, it seems appropriate to first highlight the central elements of the Strong Plan that are most meaningful to the City of Harrisburg and its residents.   In that respect, the public should understand  that  the  Receiver’s primary responsibility pursuant  to  the

What then are the key components of the Harrisburg Strong Plan?

          A balanced budget in 2013.

          The expectation of three additional balanced budget years, i.e.,  through 2016 — the “Harrisburg Strong Plan Period” — where in each year the City can be comfortable that it will have sufficient revenues to meet all of its required operating expenses.

           A  comprehensive  resolution  to  the  City’s  historic  incinerator-related financial obligation; going forward the City will have no responsibility in the future to pay for any of the hundreds of millions of dollars of liabilities for incinerator-related debts – debts that have increased enormously since 2000 and fundamentally plagued the City and deterred investment in the City’s revitalization.

          Ridding the City of its incinerator debt problems without requiring any increase in the real estate property tax rate currently imposed on the City’s property owners.

          $5.0 Million to serve as “working capital” and to pay down high levels of City payables owed to providers of goods and services.  In addition to needed funds to be provided this year to address the City’s anticipated operating shortfall, this additional $5.0 Million will assure the City that it will have funds on hand to operate in a normalized fashion at all times in its fiscal year, something that in recent years the City has been unable to achieve because of its tight financial circumstances.

          The  funding  of  up  to  $10 Million  to  be  made  available  over  the  next several years to foster meaningful economic development and investment within the City — development designed to make the City once again vibrant and expand the City’s revenues through new sources of tax revenues  paid  by  successful  new  or  expanded  businesses  or  by individuals investing in housing and improvements within the City.

          The funding of up to an additional $10 Million to be infused over the next several years for repairing, upgrading or building new City infrastructure, with those investments meaningfully geared to improving the City’s life quality which, too, can spearhead further investment in the City by businesses and the resident population.

          The Strong Plan contemplates the formulation of a task force to undertake decision making regarding the deployment of these economic and infrastructure development funds, with task force membership to be drawn in part from a diverse group of public officials, or their selected representatives, as well as from members chosen from leaders of civic, business, academic and community groups that are part of Harrisburg’s future.  It is anticipated that the teamwork that can be fostered through collaborative   investment   decisions   designed   to   improve   the   City’s economy should alone send signals to the investing public that Harrisburg is on the move, meaningfully fostered by cooperation and inclusiveness over investment decisions – hallmarks of a sophisticated, modern and growing City.

          The creation and funding of a trust fund to begin to address unfunded public employees post-retirement health care costs for active and retired city workers (often referred to as “Others Post-Employment Benefits” or “OPEB”), and the funding of the trust with up to $6.0 Million as the first important step to a disciplined approach, manifested by a legislative commitment of the City, to address this significant municipal obligation. The vast majority of cities across the United States have not begun to deal with this problem; but Harrisburg can and should be a leader in doing so, and by following through on this initiative, it can better assure a financially stable and strong City.

          A meaningful reduction of City labor costs, through the cooperation of Harrisburg’s public unions, and their agreement to material modifications to their labor contracts through 2016.

          A  reworking  of  the  City’s  obligations  owed  to  the  bondholders  and creditors  who  have  funded  the  City’s  general  operations  –  i.e.,  the “general obligation” debts as opposed to incinerator-related obligations. These modifications to the indebtedness incurred as part of the City’s normal operations will allow the indebtedness to be repaid over a longer period which the City can afford.  By working cooperatively to restructure these obligations, Harrisburg will be in a good position in the future, and more promptly than otherwise might have been thought possible, to have reasonable  access,  on  favorable  terms,  to  the  credit  markets  for  the normal types of financing for capital improvement needs that cities like Harrisburg require from time to time.

          As soon as possible, the return of the City’s control over its financial future to its elected officials, thus bringing the receivership to a conclusion.

PART THREE

A ROAD MAP TO THE PRESENTATION OF THE STRONG PLAN’S COMPONENTS

Part  Four  of  the  Strong  Plan  will  provide  a  description  of  the  two  key transactions – the sale of the incinerator and the monetization of the City’s parking assets – the proceeds from which are to provide the sources for funding the Strong Plan distributions to be received by the City or to be used to pay the creditors on terms to which each meaningful creditor has agreed.  The Strong Plan will describe the key components of each transaction, and the estimated proceeds to be realized from each transaction.   Part Four will conclude with a brief description of the on-going efforts related  to  the  City’s  waste  and  sewer  systems,  which  are  not  part  of  financial consensual agreement with the creditors but are critically important to Harrisburg’s future

In Part Five, the Strong Plan will present a summary of the sources and uses of City revenues that should provide for a stable budget for the City through the mandated four-year recovery period through the end of 2016.  After describing the estimated revenues and expenses that would be anticipated in the absence of the funding that is to be made possible under the proposed Harrisburg Strong Plan, this Part will highlight the adjusted budgets through 2016 based on the Strong Plan, including the portions of the transaction proceeds that are to be distributed to the City during the Harrisburg Strong Plan Period.  Each meaningful component of the sources and uses of funds contemplated by the Strong Plan to be relied upon or distributed to the City will be explained, such that all of the assumptions leading to the City’s balanced budget and to the fundings to spur economic development, improve the City’s infrastructure and create the initial capitalization of the OPEB trust fund will be explained.  Referenced and discussed extensively in Part Five, and otherwise referenced throughout the presentation of the Strong Plan, is a comprehensive one page snapshot of most of the key components of the Strong Plan that are designed to directly benefit the City.  This one page snapshot is attached hereto as  Addendum 1 and will be referred to herein as the Strong Plan’s “Financial Snapshot.”

In Part Six, the Strong Plan will set forth the distributions to be made to the City’s creditors upon the Strong Plan’s consummation and the material terms of the agreements between the Receiver and each creditor to resolve those creditor claims. To the extent any creditors are to receive payments in respect to obligations not fully satisfied at the time of the Strong Plan’s consummation from proceeds of the parking transaction, those future payments will also be described.  Furthermore, if payments are to be made to creditors during the Harrisburg Strong Plan Period or beyond from the primary fund of the City that captures all revenues and liabilities of the City that are not assigned to a special purpose fund, known as the “General Fund”, the Strong Plan will likewise demonstrate how those payments are to be addressed with funds drawn from the City’s annually budgeted revenues.

PART FOUR

FUNDING OF THE PLAN WITH PROCEEDS OF THE INCINERATOR AND PARKING TRANSACTIONS.

A.         Introduction.

In this Part, we will provide a description of the sale of the Incinerator (hereinafter defined) and the monetization of the City’s parking assets.  The Proceeds from these transactions will provide the sources for funding the retirement of debt, distributions that will be received by the City, and distributions to the creditors pursuant to the Harrisburg Strong Plan.   This Part will conclude with a brief description of the on-going efforts related to the City’s water and sewer systems.  The water and sewer systems, which were discussed in the Preliminary Recovery Plan, are not part of financial consensual agreement with the creditors but are critically important to Harrisburg’s future.

Throughout the receivership, the Receiver has focused on maximizing the value of the assets in order to create the broadest opportunities possible to address both the long-term debt and the structural deficit of the City.  As will be described in more detail below, the process started with finding the highest and best proposal for each of the assets and then working with the successful party and other third parties to enhance the value of the transaction.  In short, the Receiver has explored many ways to increase the value of the assets with the aim of resolving the City’s fiscal distress and the below descriptions summarize the net result of an extensive request for proposal (“RFP”) process and the subsequent negotiations.

 The pricing of bonds being used to fund the two transactions described in this Part Four has not yet occurred.   Thus, the exact amount of funds from those transactions, which are necessary to the successful consummation of this Strong Plan, are not yet known, and are tied closely to the prevailing interest rates in the municipal bond market.   Fluctuations in the municipal bond market have direct and immediate effect on the Incinerator transaction and the Parking Transaction (hereinafter defined), which effect can either be positive or negative and, if negative, could impact the ability to successfully consummate the Strong Plan.

 On June 19, 2013 Federal Reserve Chairman Ben Bernanke spoke about the Federal Reserve’s intention to phase out its quantitative easing efforts and those statements combined with other market conditions that had shortly before caused interest rates to increase, accelerated a rapid rise in interest rates in the municipal bond market.   The rapid rise in interest rates, the continued uncertainty about whether or when the Federal Reserve might phase out its quantitative easing, as well as other market conditions, currently combine to create uncertainty and create the risk of further volatility in the municipal bond market.   The rapid rise that was experienced in June, which has not abated, negatively impacted the amount available to fund the Strong Plan.  The Receiver and the City’s significant creditors, nonetheless have been working cooperatively to address the challenges created by the rise in rates and are and will continue to develop the possible means and mechanisms that best assure that the proceeds to be obtained from the Incinerator and Parking Transaction are sufficient to satisfy the financial condition to the consummation of the Strong Plan.

B.        Fair, Open and Competitive Process.

 In the Preliminary Recovery Plan, the then-Receiver informed this Court that he would need to have a much better understanding of the actual value of the assets prior to negotiating with creditors and addressing the City’s structural deficit.  In order to ascertain that baseline value, the Receiver developed a process to solicit, receive and evaluate proposals that focused on the following key principles:

Fairness and Openness.

No one party has a monopoly on good ideas; no party should be favored for any reasons other than its ability to help the Receiver to develop solutions to the City’s financial problems.

Confidentiality.

The Receiver desired proposers to deliver their most creative and best ideas including those viewed as proprietary to the proposer.

Competition.

 In order to drive value up to the highest possible level, as much competition as possible was desired.

Long-term commitment to the City.

 The Receiver was looking for a good fit for the City and the region with respect to both the Incinerator and the parking transactions.

 The Receiver developed an extensive process to achieve the above goals.  The Receiver issued Requests for Qualification in February 2012 and provided a systematic process by which potentially interested parties could obtain information.  The Receiver established a unique three-member screening and evaluations team for each of the assets.   The screening and evaluations teams were populated by individuals who brought industry expertise and were interested in the good of the public welfare so that they could provide the Receiver with independent advice, analysis and recommendations.  The screening and evaluations teams provided input pursuant to established criteria, procedures, and protocols and, as described in more specificity below  with  respect  to  each  asset,  that  process  resulted  in  a  counter-party  being selected for each of the transactions.  Final negotiations with those selected counter- parties, which included exploring additional enhancements of the transaction price, resulted in the two transactions described in Part Four, Sections C and D below.

C.        The Resource Recovery Facility (“Incinerator”).

 1.         Introduction.

 The Incinerator is an 800-ton per day, three unit, mass burn, waste-to-energy facility.  It is located on a 59.5 acre tract of land owned by The Harrisburg Authority (“THA”) located within the City.  Municipal waste from the City and surrounding areas, including waste Dauphin County is committed to provide to the Incinerator under its current County Solid Waste Management Plan, is transported to the Incinerator by haulers.  The incineration process generates electricity and ash.  The electricity is sold and the ash is disposed of on site or is transported for disposal to a landfill.  The revenues of the Incinerator are primarily comprised of tipping fees (which are amounts paid by haulers to dispose of their waste and constitute approximately 76% of the revenues) and electricity sales (which constitute approximately 21% of the revenues). To a lesser extent, revenues are also generated by sales of ferrous metals and other fees.  Although the Incinerator has been plagued by operating challenges in the past, it is functioning properly at this time, but the revenues generated only slightly exceed the operating expenses.  Therefore, the Incinerator cannot afford to pay the debt service related to it.  Standing alone, estimates are that the Incinerator is approximately 800% to 900% over-leveraged.

 When the debt-service obligations are included, the Incinerator loses money every day.  The Incinerator is a liability of the City, not an asset.  Thus, the goal from the outset has been to extract the maximum amount in a transaction and use the proceeds to reduce the indebtedness to the greatest extent possible.

2.         Selection of Lancaster County Solid Waste Management Authority.

In order to receive the best price possible, a request for qualifications was issued in February 2012 and,  in  addition  to posting on  applicable  websites,  the  Receiver actively contacted potentially interested parties, provided access to information and established a process by which questions could be answered.  The Receiver received five statements from potential counterparties and the screening and evaluations team recommended that the Receiver deem four to be qualified, which recommendation was accepted.  After site visits and additional information, three selected interested parties submitted bids which were then evaluated by the screening and evaluations team.  After input from the screening and evaluations team, the Receiver notified one party that it did not qualify to continue and requested additional information from the remaining two bidders so that the detailed assumptions behind each bid could be understood and analyzed.   The Receiver directed in-person meetings with the remaining two bidders, and,  subsequently,  the  screening  and  evaluations  team  recommended  that  the Lancaster County Solid Waste Management Authority (“LCSWMA”) be selected for final negotiations.  After consultation with the Board of THA, the Receiver accepted the recommendation of the screening and evaluations team and entered into exclusive negotiations  with  LCSWMA,  which  resulted  in  the  proposed  transaction  described below.

3.         Agreement as to the Terms of the Transfer.

After LCSWMA was selected, the Receiver, THA and LCSWMA negotiated a term sheet for the transaction based on the terms outlined in LCSWMA’s proposal. Assured Guaranty Municipal Corp. (“Assured Guaranty”) or (“AGM”) and Dauphin County (“County”), the secured creditors of the Incinerator, were briefed and submitted a joint letter requesting changes to the term sheet.  Negotiations among the parties continued and agreement was ultimately reached.  The agreed-upon terms are reflected in an Asset Purchase Agreement (the “Incinerator Asset Purchase Agreement”), pursuant to which the Incinerator will be sold by THA to LCSWMA.   The Incinerator Asset Purchase Agreement is included as  Exhibit 1 in the book of exhibits in support of the Strong Plan that is being filed contemporaneously herewith (the “Strong Plan Exhibit Book”).  The Exhibits contained in the Strong Plan Exhibit Book are hereby incorporated by reference in their entirety and are hereby submitted to the Court for consideration and approval as part of the Harrisburg Strong Plan.

While the Incinerator Asset Purchase Agreement has been agreed to among the parties to it, and is expected to be approved by the boards of the parties prior to the hearing of this Court on confirmation of the Strong Plan, there remains one component of the purchase price for the Incinerator that fluctuates because the purchase price is based in part on the cost of borrowing.  If tax-exempt interest rates rise, proceeds will be reduced.   If tax-exempt interest rates decline, proceeds will be increased.   A methodology for adjusting the purchase price based upon a sizing model and pricing model has been agreed to by the parties and is included within the Incinerator Asset Purchase Agreement.  This methodology will be utilized to set the final purchase price on the date the tax-exempt bonds are sold to the capital markets.   Based on market conditions that exist as of the filing of the Strong Plan, the purchase price is expected to be in the range of $126 Million to $132 Million.  The price paid by LCSWMA could also be reduced if the assets of the Incinerator are materially diminished or there is a catastrophic event, but these latter events are believed to be unlikely.  Part Six, Section C  of  the  Strong  Plan  addresses  how  any  increase  or  decrease  in  the  estimated purchase price will affect the closing of the Incinerator Asset Purchase Agreement and the consummation of the Strong Plan.

In addition to the price for the Incinerator, the Incinerator Asset Purchase Agreement contains the other material terms and conditions pursuant to which the assets will be transferred from THA to LCSWMA and provides for the rights and obligations of THA and LCSWMA.   In addition, the Incinerator Asset Purchase Agreement contains certain conditions precedent to the closing of the sale to and purchase by LCSWMA.  Among those conditions are requirements that Dauphin County and LCSWMA establish the terms of their going-forward relationship.  In order to do so, the County is filing with the Department of Environmental Protection a “Waste Management Plan Revision” which delegates to LCSWMA all the County’s duties and powers under Act 101 with respect to the disposal and processing of all regulated municipal waste generated within Dauphin County, except certain waste from construction and demolition activity and responsibility for the operation of the County’s Recycling  program,  pursuant  to  a  delegation  agreement  between  the  County  and LCSWMA.  In addition, prior to the closing of the sale of the Incinerator, the County and LCSWMA will enter into a 20-year cooperation agreement under which LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure certain minimum revenues of the resource recovery facility.   All of these documents have been negotiated and are in near final form and, along with the enabling ordinances, are expected to be approved in the coming weeks.

In addition, a condition of LCSWMA’s obligation to complete the transaction is that a Waste Disposal Agreement (the “Waste Disposal Agreement”) be entered into which will set forth the terms of the City’s relationship with LCSWMA, including tipping fees, host fees, and minimum and bonus thresholds for delivered tonnage.   The mechanism by which the parties will do so is that the City will restate the City’s current waste disposal agreement with THA upon its assignment from THA to LCSWMA at the closing of the transaction.  The Waste Disposal Agreement that will be entered into between the City and LCSWMA is included as  Exhibit 2 to the Strong Plan Exhibit Book and incorporated herein by reference.

It is anticipated that City Council of the City of Harrisburg (the “City Council”) will adopt a resolution approving THA’s transfer of the Incinerator through the Incinerator Asset Purchase Agreement and agreeing to amend and restate its current long term Waste  Disposal  Agreement.    The  resolution  will  be  filed  with  this  Court  upon  its approval.

4.         Additional Value.

As noted above, LCSWMA, which is a strategic buyer with access to low cost tax-exempt debt and a nearby incinerator of its own, had the highest bid for the Incinerator.  The Receiver sought out enhancements in order to maximize the amount available so that the parties would be in a position to arrive at a consensual resolution. By way of illustration, we highlight two of the enhancements here.

(a)       RACP Grant.

A Redevelopment Assistance Capital Program (“RACP”) grant of $8.0 Million to benefit the Incinerator was authorized by the 2011 Capital Budget Act and initially was intended to be used for, among other things, improvement of the steam lines at the facility.  Through efforts of the Receiver and the Department of Community and Economic Development, the RACP grant will be available to pay for other much needed improvements to the Incinerator and will be transferred from THA to LCSWMA as a condition of the closing of the Incinerator transaction.  In addition, LCSWMA will be able to access approximately $8.0 Million maintained under the THA trust indenture related to the THA Incinerator bonds as a match to the grant.  The combination of these amounts will result in at least $16 Million of improvements that are expected to be made during the next several years as well as a $16 Million increase in the purchase price for the Incinerator.  To assist in the RACP grant process, pursuant to a RACP Cooperation Agreement (expected to be executed on September 11, 2013) (the “RACP Cooperation Agreement”), Dauphin County will be the Applicant and Grantee for the RACP Grant, and LCSWMA will be the sub-Applicant and sub-Grantee.  The RACP Cooperation Agreement is in substantially final form.  LCSWMA has prepared the grant application and associated business plan and it has been filed with the Commonwealth’s Office of the Budget.

(b)       Power  Purchase  Agreement  with  Department  of  General Services.

 THA currently sells the electricity generated by the Incinerator into the spot market or procures short-term contracts if more economically beneficial.  The ability to lock into a long-term contract with a state or municipal purchaser of the electricity generated by the Incinerator has significant value and increases the price LCSWMA is willing to pay by a material amount.  There are two reasons for this.  First, the laws and regulations relating to issuing tax-exempt bonds do not permit a municipal authority to issue tax-exempt bonds for electricity output, unless it is sold to a state or local government.  Second, if LCSWMA were to take price risk for sale of electricity over the next 20 years, it would be forced to take a conservative view and use current rates (just over $.04 per Kwh) to project revenue from electricity sales and set the purchase price accordingly.  On the other hand, because current rates are historically low, it is advantageous to a purchaser of electricity to lock into a long-term contract with some predictable and affordable growth assumptions for rates.

Taking advantage of these realities, the Receiver, THA and LCSWMA have worked with Pennsylvania’s Department of General Services to develop a win-win arrangement.   LCSWMA will sell the steam output of the Incinerator to the Borough of Columbia, which will lease the Incinerator turbine from LCSWMA and sell the electric output to the Commonwealth of Pennsylvania (the “Commonwealth”).   In turn, pursuant to the Intergovernmental Power Purchase and Sale Agreement (the “Power Purchase Agreement”), the Commonwealth agrees to take substantially all of the output from the Incinerator at prices that are fixed for the next 20 years, and also to purchase electricity capacity from the Incinerator.   The arrangement enables the Commonwealth to lock in to an affordable, predictable cost for electricity and hedges against electricity price volatility or sharp spikes in prices.  LCSWMA through this arrangement is able to issue tax-exempt bonds to fund the purchase price (which reduces the interest costs and thereby increases the upfront price they are willing to pay).  LCSWMA can also monetize this payment stream at a significantly higher yield to the purchase price than that which would have been paid had LCSWMA had to assume the risk of future fluctuations in electricity pricing.  The material terms of the Power Purchase Agreement include:  A term of 20 years; range of prices per kWh are $.04022 in the first year to $.07169 in the 20th year; capacity charges are based upon agreed upon projections.   To further protect the Commonwealth, the Power Purchase Agreement  provides  for  certain  “clawback”  provisions  if  the  kWh  price  under  the contract exceeds the then market rate.  This arrangement helps all parties to manage or reduce risk while increasing the value made available to the Strong Plan.

The execution and approval of an electric plant agreement between LCSWMA and the Borough of Columbia (expected to be approved by the Borough of Columbia on September 9, 2013 and by LCSWMA on August 29, 2013) is one of the conditions of LCSWMA’s obligation to close the transaction.   The execution of the Power Purchase Agreement between the Borough of Columbia and the Commonwealth is also one of the conditions of LCSWMA’s obligation to close the transaction.   The Power Purchase Agreement is expected to be executed by the Borough of Columbia on September 9, 2013 and by the Commonwealth in September, 2013).

D.        The Parking Transaction.

 A transaction involving the City’s and the Harrisburg Parking Authority’s parking facilities (as further described below, the “Parking Transaction”) includes a tax-exempt bond financing which provides current proceeds and includes future payments to meet the needs of the City in four ways – (1) by increasing the amount of annual parking tax revenue that had been available to the City’s General Fund to 20% of the aggregate off- street parking revenue (as described in Part Four, Section D.4(d)(i) below); (2) by providing for enhanced annual cash payments from the operation of the Parking System (as described in Part Four, Section D.4(d)(ii)below); (3) by providing a lump sum of cash to the City at the closing of the Parking Transaction from the up-front portion of the transaction price (as described in Part Four, Section D.5 below); and (4) by providing that a portion of future surplus revenue from the Parking Transaction will be available to the City, (as described in Part Four, Section D.4(d)(iii) below).

1.         Introduction;  Parking  Operating  Revenues  Before  the  Proposed Parking Transaction.

The Harrisburg Parking Authority (“HPA”) and the City own and operate 10 public parking garages and five public parking lots, with approximately 9100 parking spaces.  It is currently expected that nine of the public parking garages and four of the public parking lots will be included in the Parking Transaction (the “On-Street Parking Assets”).  The City has approximately 1250 on-street parking meters in the Central Business District and adjacent areas.  The revenues from these facilities are pledged to secure approximately $106 Million of outstanding tax-exempt bonds issued by HPA. Payments by the HPA to the City of net parking revenues from the operation of the parking facilities and parking meters in the past were meaningful, but in recent years, for a variety of reasons, have been significantly less than in prior years.  Moreover, the amount  received  in  the  past  several  years  has  been  significantly  less  than  was budgeted by the City.   Specifically, payments have declined from historic highs of

$4.0-$5.0 Million in 2005 and 2008 to approximately $250,000 in 2012, with a similar amount expected in 2013.   The significant declines in net revenues resulted from increased capital and maintenance expenses, increased bond debt service (including bonds used to fund City operating expenses in 2010 through an expensive long-term working capital bond issue), and unpaid amounts due from Harrisburg University with respect to the Harrisburg University garage.  In addition, while parking tax revenues increased significantly in 2012 due to an increase in the parking tax rate to 20%, only about $1.9 Million of the $3.3 Million in parking tax revenue in 2012 was ultimately available to the City’s General Fund.   The remaining $1.4 Million was used to supplement debt service on the 2010 Series U Bonds issued to raise cash for the City and  used  to  cover  certain  payments  not  received  from  Harrisburg  University  with respect to the 2007 Series R Bonds issued to finance the acquisition of the Harrisburg University garage.

2.         Proposals for the Parking Monetization and Selection of Harrisburg First.

The Receiver issued a Request for Qualifications Related to the Assets of the Harrisburg Parking Authority (the “Parking RFQ”) on February 10, 2012.  Fourteen statements  of  qualification  were  received  by  the  March  12,  2012  deadline.    The Receiver established a three member screening and evaluations team to review the statements of qualification and report its recommendations to the Receiver as to which interested parties should be deemed qualified to submit proposals.  The screening and evaluations team recommended, and the Receiver agreed, that 12 of the proposers were qualified to participate in the second phase of the selection process.  Of those 12, nine teams actually submitted a term sheet and proposal by the deadline.  The nine proposals fell primarily into two categories, the “concession model” and the “tax-exempt bond financing model.” A number of the proposals included variations on these models.

The historical “concession model” provides a one-time upfront cash payment in return for giving “ownership” (usually in the form of a long-term lease) of the assets to a private party for a 50-75 year period in a transaction with a taxable capital structure.  This structure is comprised of private equity and taxable debt.  In return, the private party provides state-of-the-art technology and management of operations and assumes the cost and risk of capital expenditures.   The private taxable financing structures have a higher cost of capital associated with them in return for the private investors assuming these risks.  In addition, the private investors may benefit from the potential of the long-term operating income enhanced by the lower operating costs and advanced techniques for revenue optimization.  The municipality’s income during the concession term is typically limited to parking tax revenues and real property taxes. This structure has sometimes been criticized as a “give-away” of public assets at too low a price.  Some of the concession model proposals included sharing a portion of the upside of the operating income to permit the City some of the benefit from the ultimate performance of the Parking System; however, this approach would have resulted in reduced up-front proceeds.

The historical “tax-exempt bond financing model” provides a lower available cost of capital by taking advantage of tax-exempt interest rates (assuming an investment grade credit rating for the bond issue).  Under this model, the operating risk and the residual long-term operating income potential would be retained by the City. The City would retain the cost and risk of capital expenditures and operating income and long-term value could be limited by the absence of state of the art technology and operations management.  Several of the proposals provided a variation of this model to include a coupling of private management and in certain cases, some level of private at- risk capital.

The screening and evaluations team and the Receiver’s advisors favored the tax-exempt bond financing model with private management and some private at-risk capital due to the significantly higher up-front proceeds of the proposals and the opportunity  for  significantly  higher  continuing  payments  over  time.  In  addition,  this model provided for the possibility of minimizing the risk of closing because a subordinated unrated portion of the debt could be held by the participating financial institutions.    The  evaluation  and  review  resulted  in  the  recommendation  by  the screening and evaluations team and the determination by the Receiver on October 15, 2012, to select the “Harrisburg First” consortium as the finalist counterparty for the Parking Transaction.  The Harrisburg First team is comprised of the individual firms Guggenheim  Securities  LLC,  an  affiliate  of  Guggenheim  Partners  (“Guggenheim”), Piper Jaffray & Co. (“Piper”), AEW Capital Management, L.P. (“AEW”) and Standard Parking Corporation’s subsidiary Standard Parking SP Plus Municipal Services (“Standard”).

3.         Increasing the Value of the Parking Transaction.

The Receiver was concerned that the projected proceeds from the proposals would still not be sufficient to achieve a consensual resolution with the City’s creditors.   Consequently, the Receiver worked over time to find ways to increase materially the value of the Parking Transaction.  These efforts involve a number of different elements, with the two most significant being negotiating a long-term contract with the Commonwealth for the lease of a significant number of parking spaces and negotiating with Dauphin County and AGM for them to provide credit enhancement for a portion of the contemplated bond issue.

(a)       Lease of Parking Spaces by the Commonwealth.

The  Department  of  General  Services  of  the  Commonwealth (“DGS”) has an existing parking contract covering 1500 spaces that expires in 2016.  In addition, several other parking contracts with Commonwealth agencies or instrumentalities were identified by DGS and discussions began about a long-term contract consolidating the existing contracts and covering a significantly expanded number of spaces.  The potential arrangement offered the Commonwealth stable and affordable parking with predictable pricing over a long-term period and it offered the Parking Transaction a large predictable income stream backed by a credit-worthy entity, the Commonwealth.   The long-term lease with DGS (the “Commonwealth Lease”) is now expected to include more than 4,500 parkers.  Initial monthly rates are expected to be $140 per space per month, and after variable increases over the first four years, the price per space will increase by approximately 3% per year over the remainder of the term.  DGS has been very helpful and cooperative in working out the proposed contract and will in turn benefit from a more cost-efficient and stable long-term pricing model and increased efficiency through the use of technology and data to maximize the utilization of Parking Assets.  All or substantially all of the parking garages and parking lots owned and/or operated by the Harrisburg Parking Authority, and approximately 1250 metered parking spaces operated by the City, together with related contracts and personal property,  will  be  transferred  as  part  of  the  Parking  Transaction.     The  Parking Transaction will benefit from significantly higher proceeds based on the lower interest cost of the portion of the parking revenue bonds that will be secured by the Commonwealth Lease.   This win-win arrangement is one of the key elements of generating sufficient value from the Parking Transaction to make a consensual settlement with the City’s creditors possible.

(b)       Credit Enhancements.

The other material driver of increased value for the Parking Transaction are credit enhancement by Dauphin County and AGM of a portion of the bonds to be issued.  Such credit enhancements will materially lower the interest cost on the enhanced bonds.   In addition to credit enhancement on the bonds, AGM may provide a surety bond to replace or reduce the debt service reserve fund.  The surety bond would be substituted for the bond proceeds that would otherwise have to be used to fund the debt service reserve fund, further increasing the available proceeds.

4.         Structure of the Parking Transaction.

The Parking Transaction is being structured to minimize the interest cost and maximize the up-front proceeds, while maintaining a reasonable level of projected cash flows as debt service coverage and to provide future payments to the City for its fiscal needs and settlement of creditors’ claims.  The details of the Parking Transaction are provided in the Summary of Proposed Terms (the “Term Sheet”), which is attached hereto as  Exhibit 3 to the Strong Plan Exhibit Book and hereby incorporated into the Strong Plan.

In this Part Four, Section D.4 and the following Part Four, Section D.5, we will highlight what the Receiver considers the most salient aspects of the Parking Transaction.   In this Part Four, Section D.4, we will discuss (a) the role of the Pennsylvania Economic Development Financing Authority (“PEDFA”) in acquiring a leasehold interest in the parking assets; (b) the day to day operations of the Parking System and the roles of AEW and Standard; (c) the mechanism for monitoring, rate- setting and providing feedback regarding the operations of the Parking Transaction; and (d) the benefits to the City derived from the Parking Transaction and the distribution of annual proceeds from operations.  Part Four, Section D.5 will then conclude with the details of the bond issuance and the use of those proceeds.

(a)       PEDFA’s Role in the Parking Transaction.

The structure of the Parking Transaction with PEDFA is expected to qualify the parking revenue bonds to be issued by PEDFA (the “PEDFA Bonds”) as tax- exempt bonds for federal income tax purposes, resulting in lower interest rates and higher proceeds, an absolutely essential element to producing enough proceeds from the transaction and payments over time to achieve a consensual settlement with the City’s creditors.  The Parking Transaction will involve a transfer of Parking Assets from HPA to PEDFA pursuant to an “Asset Transfer Agreement” and through a lease of the parking garages and lots and a ground lease of the underlying land, all under a 40-year lease (the “Lease”) subject to extension until the PEDFA Bonds and certain other obligations are fully satisfied.   The Lease may also be terminated earlier if turbo redemption of the PEDFA Bonds occurs as projected and the other obligations are satisfied sooner.  Currently, title to three of the parking garages and one parking lot operated by HPA is in the name of the City, and these will be conveyed to HPA so that all of the Parking Assets can be transferred and covered by the Lease.  Upon expiration or earlier termination of the Lease in accordance with its terms, all of the Parking Assets transferred to PEDFA will automatically be transferred to the City, without payment. The Parking Transaction will also require the City to transfer to PEDFA a long-term franchise/license for the operation of the On-Street Parking Assets meters and to delegate rate-setting authority to PEDFA or another entity.  In addition, the Parking Transaction will require the delegation of parking enforcement powers by the City to a to-be-determined governmental agency which will in turn contract with Standard to perform   these   functions   (the   “Enforcement   Delegation”).      The   Asset   Transfer Agreement and the transfer of the parking garages and parking lot from the City to HPA, and the Enforcement Delegation will need to be approved by the City Council and are requirements to the closing of the Parking Transaction.

It is anticipated that City Council will enact an ordinance approving the transfer of the Parking Assets discussed above, the Asset Transfer Agreement and the Enforcement Delegation.   The ordinance will be filed with this Court upon its approval.

(b)       Day to Day Operations of the Parking System.

 PEDFA is expected to delegate its operational responsibility and functions as follows.   First, PEDFA is expected to select a qualified designee (“Designee”) to perform certain administrative functions and responsibilities of PEDFA under the Asset Transfer Agreement and the Lease.  PEDFA or the Designee will, in turn, enter into an “Asset Management Agreement” with AEW.  AEW is headquartered in Boston and currently actively manages approximately $23.7 billion of real estate assets and securities in North America on behalf of institutional and private investors. The Asset Management Agreement will have an initial term of up to 15 years and will govern AEW’s role in asset management, property management and supervision of operations of the Parking System.  AEW will be paid a fixed base management fee, plus a performance management fee, under certain circumstances.

 AEW on behalf of PEDFA is expected to enter into a Parking Management Agreement with Standard, which is the largest parking operator in the United States.  Standard’s corporate offices are in Chicago and it has regional offices throughout the Country, including in Philadelphia and Pittsburgh.   Standard has approximately 130 operations in Pennsylvania, including greater Philadelphia, Scranton, Allentown, Pittsburgh, Wilkes-Barre, and Harrisburg (at the Harrisburg International Airport).  Most of Standard’s operations are at locations with less than 2,000 parking spaces, thus the Harrisburg Parking System will be a large and important operation for Standard.   The Parking Management Agreement will have an initial term of up to 15 years  and  will  govern  the  management  of  the  operations  of  the  off-street  parking garages and lots and the On-Street Parking Assets.   Standard will be paid a parking management fee of $350,000 per year, increasing annually at the lesser of inflation or 3%, plus a performance management fee under certain circumstances.

Standard will offer employment to existing employees of HPA as well as six City parking enforcement employees.  Initial wages rates and health benefits have been negotiated by the Receiver with Harrisburg First.  The Receiver and HPA are also in the process of negotiating a transition agreement with the AFSCME bargaining unit  representing  HPA  employees,  which  is  a  condition  of  the  transaction.    The proposed transition agreement with AFSCME includes a separation benefits package that will be offered by HPA to all of the unionized employees of HPA and some of the management employees.  One important element of obtaining maximum value for the Parking Assets was substantially reducing operating costs.  At the same time, the Receiver believes it is important to treat HPA employees fairly and to soften the impact of the transition to private operation of the Parking Assets.

(c)       Monitoring, Rate-setting and Advisory Committee.

 AEW will be responsible for providing detailed reports with respect to the finances and operations of the Parking System to the interested stakeholders, including the City, and Standard and AEW will be required to prepare annual operating and capital budgets for approval.  AEW will also prepare and submit for approval a 10- year capital plan, which is updated annually and expected to be revised based on updated engineering studies every three to five years.  The Parking System will be required to be maintained and operated in first class condition and repair.

 As described in the Term Sheet, the City will agree to cooperate in a manner that is designed to best assure the success of the Parking Transaction. Additionally, as described in the Term Sheet, parking rates and parking fines will be increased at the outset of the Parking Transaction. As part of that initial rate adjustment, the relationships between parking rates for on-street parking and transient off-street parking rates and between parking rates for on-street parking and fines for overtime parking will be adjusted to make them more in-line with industry standards and best practices.  Going forward, rates will be set with fixed increases for the first four years.

An “Advisory Committee” comprised of one representative of each of AEW, Standard, HPA, PEDFA’s Qualified Designee, the Mayor, the City Council and DGS, will be established.  The Advisory Committee will annually review operations and provide feedback and input to PEDFA’s Designee, AEW, and Standard with respect to: (i) proposed expansion or contraction of the system or operations, (ii) contractual compliance, (iii) residential permit parking, (iv) enforcement, (v) technology and capital improvements,  (vi)  customer  enhancements,  (vii)  rates  and  budgets,  and  (viii) community relations and outreach.

(d)       Benefits to the City and the Distribution of Annual Proceeds.

As detailed above, the structure of the Parking Transaction permits the City to realize the potential benefits of low tax-exempt interest rates, a substantial up-front  payment  (as  described  in  Section  D.5),  technology  upgrades,  more  cost efficient private operation and management, not having to support a private capital return on equity of 11% or more, higher up-front proceeds, and the benefits over time of increased profitability via payments from surplus revenues.  Standard will develop and implement strategies designed to create turnover of parking spaces to accommodate visitors, patrons and citizens conducting business, which promotes and ensures economic vitality, and residential parking permit programs promoting quality of life for residents by managing parking supply, reducing traffic congestion and creating a safer environment for neighborhoods. The City will receive the specific annual financial benefits described below:

(i)        Priority Parking Payments.

The City will continue to receive parking tax revenue from all parking lots and garages open to the general public as well as certain payments from the Parking Transaction (the “Priority Parking Payments”).  As noted in the Introduction to this Part Four, Section D, the City currently collects parking tax revenue, but only approximately $1.9 Million in parking tax revenue was ultimately deposited to the City’s General Fund in 2012 and 2013.   The effects of the Parking Transaction and the ancillary agreements required to effectuate the Parking Transaction operate to make an estimated $3.3 Million in annual revenues in the form of the Priority Parking Payments and parking tax revenues available for use in the City’s General Fund.  This increase in revenue, which is derived from a combination of increased revenue and the elimination of obligations requiring payment from parking meter revenues and parking taxes is expected to be fully realized starting in 2014 and is included in the new budget for the City as is described in Part Five of the Strong Plan.

(ii)       Fixed Payments to the City from the Operation of the Parking System.

The City will receive a fixed payment of $1.5 Million per year (increasing annually at the rate up to 3%) for each year of the term of the Parking Transaction.   This amount, which is to be paid after operating expenses and debt service on the PEDFA Bonds and which commences at $1.5 Million is comprised first of the current budgeted amount of parking meter enforcement revenue of $1.1 Million; but that $1.1 Million is increased by $400,000 per year permitting the City to share in the anticipated increased parking revenue resulting from the expected rate structure, fines and gains in efficiency of operations.  The fixed annual fee replaces the City’s current reliance on the success of collecting budgeted enforcement revenue, thereby removing the uncertainty and fluctuation that have been a part of past annual budgets. Significantly, the City will no longer bear the costs of enforcement or maintenance of the meters.

In addition to the annual payment described above, after operating costs and debt service on the PEDFA Bonds are accounted for, the City will receive a new source of parking-related revenue in the nature of rent under the Lease of

$500,000 per year, increasing annually for the first six years at a rate up to 3% and thereafter continuing at a fixed amount throughout the term of the Parking Transaction. Starting in 2014 and continuing through 2018, the amount of rent is expected to be supplemented so that the aggregate of the amount of rent and the supplement are expected to equal $1.0 Million in 2015, $1.5 Million in 2016 and 2017 and $2.0 Million in 2018.

(iii)      Residual  Payments  from  Excess  Cash  from  the Operation of the Parking System.

 As noted above, the Receiver preferred the tax-exempt bond structure in part because residual cash flow would not be required for a return on equity or to pay higher cost taxable debt.  Under this structure of the Parking Transaction, annual revenue will first go to satisfy the operating expenses of the Parking System and then the management and administrative fees of the parties providing services to the Parking Transaction.  Next, the debt service on the PEDFA Bonds (as described below) will be paid to the bondholders.  Then, the City will be paid the two fixed payments described in subsection (ii) above.  A portion of any remaining funds will then be used to fund  and  maintain  a  capital  reserve  fund,  which  is  designed  to  ensure  funds  are available to maintain the Parking System.  The projected residual cash flow (the “Future Parking Operations Net Proceeds”) is significant and anticipated to grow over time, though most of the residual proceeds will not occur until a significant amount of the bond indebtedness has been satisfied.  The Future Parking Operations Net Proceeds is expected to be used to both assist the City with its General Fund budget requirements and to provide additional payments over time to certain creditors as is more fully set forth in Part Six of this Strong Plan.

5.         Bond Issuance and Use of Proceeds.

The PEDFA Bonds which will be issued to finance the acquisition of the Parking Assets will be tax-exempt parking revenue bonds and are anticipated to be rated in one of the two highest rating categories and issued in two or more series of bonds.  The up-front proceeds will be applied first to redemption and satisfaction in full of the existing HPA bond indebtedness (currently estimated to cost approximately $99

Million after the application of the funds in the existing debt service reserves).  The proceeds will also be used to commence funding the capital reserve account and pay the costs of issuance related to the Parking Transaction.  The remaining amount (the “Net Parking Proceeds”) under current market conditions is expected to be between

$258 Million and $268 Million.  The uses of the Net Parking Proceeds are explored in depth in Parts Five and Six of the Strong Plan.

The final structure of the PEDFA Bonds, including the investment ratings of each series of the PEDFA Bonds, the interest rates on the PEDFA Bonds, the principal amount of the PEDFA Bonds and the necessary documentation will depend upon a number of factors, including review by the rating agencies and market interest rates in the tax-exempt municipal bond markets as of the date of pricing of the PEDFA Bonds and the approval of the transaction by the parties, including PEDFA’s Board. There are a number of conditions precedent to closing which are being addressed by the Receiver and various parties as detailed in Part Eight of the Strong Plan.  The Receiver anticipates closing the Parking Transaction in mid-November 2013, subject to possible delays with satisfaction of the conditions precedent to the closing which will be detailed in the Asset Transfer Agreement.

E.        The Water and Sewer Systems.

As provided for in the Preliminary Recovery Plan, the Receiver analyzed the water and sewer systems and looked for ways to improve those systems’ impact on the City and its finances.  Although those systems will not be monetized as part of the Harrisburg Strong Plan, the Receiver has helped structure a path forward for those systems so that those systems are working in conjunction with and are supportive of the Harrisburg Strong Plan.  The operational changes and THA’s ability to access the credit markets, discussed below, relieve the City of a current stress on its budget while improving the physical condition of the water and sewer systems.

As  background,  THA  owns  and  the  City  operates  the  water  system  which includes supply, treatment and distribution systems.  The sewer system is comprised of both wastewater and stormwater systems.  The wastewater system serves the City and the surrounding suburban communities and its ownership is divided between the City and THA.  Its operations are governed by a series of arrangements between the City and THA.   The stormwater system serves the City and is operated by the City with funds derived from the City’s tax revenue.  Some of the complexities of the ownership and operation structure work to exacerbate the challenges facing the water and sewer systems.

Additionally, the City and THA have been in ongoing discussions with the United States Environmental Protection Agency (EPA) regarding the City’s compliance with the Nine Minimum Controls to limit Combined Sewer Overflows (CSO) and the six Minimum Control Measures to limit environmental impacts of the City’s Municipal Separate Storm Sewer System (MS4).  The outcome of these discussions will result in a significant increase in investment in these systems, both capital and operational.  THA is currently updating their “Long Term Control Plan” for the CSO system and is incorporating into it necessary MS4 projects utilizing the EPA’s “Integrated Planning” approach.   This approach is intended to create a prioritized critical path to achieve water quality objectives and optimize benefits of infrastructure improvement investments with more sustainable and comprehensive solutions, such as green infrastructure, that improves water quality as well as enhance communities.

Failure to complete the above will place the City and the systems in violation of regulatory requirements; with resulting fines, penalties, and court action from the DEP and EPA likely.  In order to complete these projects and initiatives, the City, THA or the City and THA together must be able to access the capital markets and sustain adequate rate revenues, both of which have been out of reach.  The City’s recent financial stress, failure  to  complete  audited  financial  statements  in  a  timely  manner  and  lack  of borrowing capacity have caused both the City and THA to lose access to the capital markets.  Additionally, financial rating agencies point to the City’s control of rates, revenues and budgets as significant credit-negative factors against THA.   Further complicating the financial situation, there is a significant reduction of funds available to support operations because the suburban communities have taken action that resulted in reduced revenues into the Sewer Fund due to alleged past practices by the City that retained significant sewer revenues.

To overcome these barriers and position THA to access the capital markets, the City and THA have agreed to (1) terminate the existing agreements related to the City’s operation of the THA-owned water and wastewater systems, (2) transfer all operating assets (including labor) and debt liabilities to THA and (3) transfer ownership of the City- owned sewer collection and stormwater systems to THA.  THA will then serve as operator of all water and sewer facilities.  As the operator, THA would set rates and budgets (including possible new stormwater fees), control billing and collections, and undertake asset management, renewal and replacement, and capital improvement planning and implementation.  THA will engage the City to provide certain services necessary for the proper operation and maintenance of the systems.

As an independent agency of the Commonwealth, THA is able to separate the utility operation from other responsibilities of local government and buffer the operation from other local political and financial decisions facing local governments.  These utility operations are highly complex, demanding significant attention from the overseeing officials.  THA Board members appointed by the City are able to concentrate on the financial, engineering and environmental decisions that impact the operation and maintenance of the infrastructure systems.  This transfer of responsibility relieves the City from this burden and assures that the City can focus on the important process of fiscal recovery and the provision of core and essential services.  This structure will provide comfort to (1) suburban customers, since operations are removed from the politics of local government, (2) government regulators, since THA will be able to focus solely and expertly on the utilities, and (3) lending agencies, since finances will be rate- supported and separate from the City’s financial liabilities.  THA and the City have been working cooperatively to negotiate governing agreements and legislation to effectuate this transition as soon as practicable and currently are targeting October 1, 2013 to finalize the transition agreements and legislation.   Pennsylvania Infrastructure and Investment Authority (“PENNVest”) has agreed to loan $26 Million to the project conditioned   upon,   among   other   things,   the   transfer   of   operations   occurring. Additionally, potential lenders are beginning to express interest in a water bond facility for THA, which if it can be closed upon in early 2014 as anticipated, has the possibility for saving rate payers nearly $2.0 Million in 2014.

PART FIVE

HOW THE STRONG PLAN BENEFITS THE CITY OF HARRISBURG

 A.         Introduction.

In this Part Five, we will provide a comprehensive description of the aspects of the Harrisburg Strong Plan that are of critical importance to the people who make the City of Harrisburg their home, as well the businesses located in the City, which, as such, have chosen to invest in Harrisburg’s economic future.  Accordingly, we will focus here on the financial benefits that the Strong Plan will provide to Harrisburg — benefits that will best assure a balanced budget through 2016, remove the long-standing financial clouds over Harrisburg that arose from its many guaranties of the Incinerator-related debt, and provide meaningful capital to stimulate economic development, infrastructure improvements and initially fund an OPEB health care trust fund.

B.        The City’s 2013 Budget Before Considering the Benefits of the Harrisburg Strong Plan.

It is appropriate to start a discussion of the Strong Plan’s benefits by looking at the City’s budget before considering the funding that the Strong Plan is to provide.

Budget as of August 15, 2013 Showing Revenues and Expenses Before Debt Service and Before Consideration of Strong Plan Components (the “2013 Summary Pre-plan Budget”).   The above-described currently estimated 2013 operating revenues and expenses for Harrisburg before the Strong Plan’s implementation are the same as the amounts that appear in Column 1, Rows 1 and 7 respectively of the Financial Snapshot.

The first thing to observe about Harrisburg’s 2013 operating revenues, before the Plan’s modifications and the additional revenues that are being generated by the increase in EIT for 2013 are considered, is that they are meaningfully less than the City’s operating expenses.  Indeed, the City’s operating costs, before even considering the City’s contractual obligation to pay its debts – debts totally aside from any Incinerator-related obligations – well exceed the City’s revenues.  In that sense, before the Strong Plan is implemented, Harrisburg is now and has for many years been operating with a significant structural deficit.  Necessarily, the first aspect of the Strong Plan was to effect efficiencies and cost containment measures in an effort to minimize, to the extent possible, the financial demands on the City’s budget.  Based on the projected impact of the efficiencies and cost containment measures, the next step in formation of the Strong Plan was to find sources to increase the City’s operating revenues and to reduce its expenses so that during the Harrisburg Strong Plan Period the revenues would be sufficient to pay the aggregate of the City’s operating costs and its debt repayment obligations, and, as such, allow the City’s budget to be structurally balanced.   The various components of  revenue  increases and expense  reductions called for by the Strong Plan will be described in this Part Five and will provide the means to achieve that structural balance through at least 2016.

The  starting  point  for  determining  what  the  City  would  require  by  way  of additional revenues or reduced expenses to achieve a structurally balanced budget through 2016 was to first estimate the projected revenues and expenses that could be achieved by the City in the absence of a workable recovery plan, not only for 2013, but for each of 2014-2016 as well, and to also determine the debt repayment obligations that would otherwise be required in each of those years.

In developing the Harrisburg Strong Plan, and as reflected in the Financial Snapshot, the Receiver made revenue and expenses projections for each of 2014-2016 before considering the Strong Plan’s effect, and those revenue projections appear in Columns 2 through 4 of Row 1 and expense projections on Row 7 of the Financial Snapshot.      The   2014-2016   revenue   and   expense   estimates   were   based   on assumptions as to how the City would likely perform in the ensuing three years based on the considerable actual experience to date in 2013 as well as the near-term projections for the balance of this year.  The Receiver’s projections of the City’s General Fund revenues for 2014-2016 on Row 1 were premised on the conservative assumption that the City’s economic growth and increased revenues would not happen immediately after the Strong Plan went into effect.  Accordingly, during the Harrisburg Strong Plan Period, the Strong Plan assumes a very modest growth of revenues per year from the revenues that the Receiver has anticipated for 2013.  The City’s projected operating expenses for 2014-2016, which appear on Row 7 of the Financial Snapshot, and which are driven somewhat upward by the prospect of rising health care costs, were estimated to grow by 2% per year from the amount that the Receiver has projected in 2013.

C.        Description  of  the  Harrisburg  Strong  Plan  Adjustments  to  the  City’s Projected Operating Revenues for 2013-2016.

 1.         The Debt Repayment Obligations.

Based on the pre-Strong Plan projected revenue and expense assumptions, the Receiver worked to shape the repayment of the City’s general obligation debts, as well as other existing debt obligations, in a manner that would afford the City breathing room to repay those obligations over a period that the Receiver determined the City could realistically afford.  A further description of those obligations is provided in Part Six of the Strong Plan.  For now, and to understand how the structurally balanced plan was developed, the Financial Snapshot first reflects the amount of the annual debt payments that are to be paid on the City’s general obligation debt in each of 2013 through 2016.   These amounts are less than that which would have been required under the City’s existing contractual obligations on its general obligation bonds.  The adjustments to the schedule for repayment of the City’s general obligation bonds has been agreed upon with the bond-insurer, despite the fact the City has been in default of its bond repayment obligations since early 2012.  But, with the agreement of the bond-insurer, who will otherwise make the contractually required bond payments to the bondholders, all as more fully described in Part Six below, the City’s obligations on its general obligation bonds in each of 2013-2016 are fixed.  In 2013, the payment is set at $5,970,000 and in each of 2014 through 2016 at $7,670,000 per year. These payments, rounded, are reflected on Row 9 of the Financial Snapshot.

Row 10 of the Financial Snapshot reflects that the Receiver has estimated

$3.0 Million per year in each of 2013 through 2016, as the amount that the City is expected to pay on existing loans or leases for equipment and other short term capital needs and for the purchase of new replacement equipment and capital items over the Harrisburg Strong Plan Period.  The terms of repayment of these existing obligations are addressed in Part Six of the Strong Plan.

Having estimated the projected pre-plan revenues and expenses, and having also estimated the aggregate total of debt payment obligations for the period through 2016, the Receiver then developed other Plan components which, taken together, would permit the City to be structurally balanced through 2016.

2.         Priority   Parking   Payments   and   Parking   Meter   Enforcement Revenues.

 The  Financial  Snapshot  reflects  an  adjustment  to  the  City’s  revenues based on the assumption that the Parking Transaction described in Part Four would be put in place late in 2013.  First, by reason of the implementation of the Strong Plan, the City will receive the Priority Parking Payments from the parking operations.  When combined with estimated parking tax revenues, these distributions will equal approximately $3.3 Million  per  year  in  2014  through  2016.    These  Priority Parking Payments were referenced above in Part Four, Section D of the Strong Plan.  These payments are included in the City’s General Fund Revenues that appear on Row 1 of the Financial Snapshot for 2014-2016.

Second, as addressed above in Part Four, Section D of the Strong Plan, parking meter enforcement revenues are expected to be at least $1.5 Million per year starting in 2014, and are to grow at the rate of inflation, not to exceed 3% per year.  In the past, while the parking meter enforcement revenues collected have been lower than budgeted,  by  reason  of   the   Strong  Plan’s   implementation,  the   parking  meter enforcement revenues to be paid to the City after debt service are going to be paid to the City in an amount at least equal to $1.5 Million annually, growing as part of the Parking Transaction. In the absence of the existing HPA bond issues and the Cooperation Agreement for Downtown Parking System, which will both be eliminated as part of the Parking Transaction, the City is at far less risk with respect to receipt of projected parking revenues.  Moreover, the operator of the parking facilities will be responsible for meter collection and enforcement, reducing the cost of those functions previously the obligation of the City.

Because  the  City  had  budgeted  $1.1 Million  of  the  parking  meter enforcement revenues in its 2013 budget, in the hope that such revenues could be achieved, that portion of the $1.5 Million in parking meter enforcement revenues is included among the City’s General Fund revenues, in each year of the Strong Plan and constitutes part of the General Fund Revenues which amount appear on Row 1 of the Financial Snapshot.   The additional $400,000 per year of fixed parking meter enforcement payments to be made to the City under the Parking Transactions are reflected on the line denominated “Increase in Parking Meter Revenues” that appears on Row 4, Columns 2-4 of the Financial Snapshot.

3.         Parking Lease and Additional Payments to be Received by the City Through 2018.

 As referenced above in Part Four, Section D of the Strong Plan, under the Parking Transaction, the City is to receive a lease payment for the lease of the parking facilities which will be $500,000 a year commencing in 2014, and which will grow by up to 3% a year for six years.  The lease payment will be paid to the City for the entire lease term of the parking facilities.

$1.0 Million in 2015, $1.5 Million in each of 2016 and 2017 and $2.0 Million in 2018. These amounts, which are inclusive of the lease payment, are reflected, for 2014-2016, on the Financial Snapshot at Row 5, Columns 3 and 4, and denominated “Lease Payment and Additional Parking Revenues”.

4.         Additional  Funding  to  the  City  of  Harrisburg  by  the  General Assembly.

 Already constituting part of the projected revenues reflected on Row 1 of the Financial Snapshot for each of 2013-2016, is the amount of $5.0 Million per year that has been appropriated by the General Assembly to supplement the City’s public safety operations.  This additional amount is already reflected in the 2013 projected budget and is projected to be appropriated by the General Assembly in each year of the Harrisburg Strong Plan Period; and the City’s balanced budget projections, at least through the end of 2016, are premised on those same amounts being similarly appropriated in each of 2014 through 2016.

5.         Earned Income Tax.

In 2012, to be effective as of January 1, 2013, Harrisburg’s City Council adopted, for a one-year period, an increase in the City’s EIT, bringing the aggregate EIT to benefit the City’s General Fund in 2013 to 1.5% (which amount is apart from the 0.5% per year separate EIT tax that is charged by and which benefits the Harrisburg School District).   As was reflected in papers filed before this Court in conjunction with this court’s 2012 approval of the EIT increase under Act 47, the additional 1% EIT was essential to assist the City in coming closer to achieving a structural balance in 2013, whether a recovery plan could or would be implemented this year.  Clearly, absent the adoption of the 1% EIT increase, the City would have had substantially insufficient funds to meet its operating expenses and debt payment obligations it owed both on its general obligation  bonds  and  on  other  capital  expense  borrowings  related  to  the  City’s operations (i.e., excluding any payment on any of the City’s Incinerator-related debts).

On  Column  1,  Row  2,  the  Financial  Snapshot  reflects  $5.9 Million  of projected income that the Receiver has been advised the City could expect to receive in 2013 from the enacted 1% EIT increase.  Revenues from the standard 0.5% EIT that existed before the EIT increase are already incorporated in the 2013-2016 pre-plan budgets that appear on Row 1 of the Financial Snapshot.

As a necessary element of the Harrisburg Strong Plan, and to assure that the  City  will  have  sufficient  funds  to  operate  on  a  balanced  basis  in  2014-2016, including its ability to make payment on the City’s rescheduled debt obligations, the Strong Plan requires that the EIT increase remain in place through at least 2016.  As such, a necessary component of the Strong Plan is City Council’s approval of legislation extending the EIT increase through 2016.  Between the filing of the Strong Plan and the hearing by this Court to consider whether to confirm the Strong Plan, it is expected that City Council will enact that required legislation.   That enactment is a condition of the Strong Plan consummation. If it does, the Receiver will file supplemental evidence reflecting City Council’s approval with this Court.  In compliance with, and pursuant to Chapter 7 of Act 47, and as part of the Strong Plan’s confirmation, the Receiver will seek a court order from this Court approving the 1% EIT increase to be effective through 2016.

Referencing Row 2 and Columns 2-4 of the Financial Snapshot, the projected increase in the City’s revenues attributable to the 1% increase of EIT in 2014-2016 are shown at $7.9 Million per year.  This amount is greater by one-third than the $5.9 Million estimated increase in EIT revenues in 2013 because, as the testimony adduced at the hearing before this Court in August 2012, demonstrated, the proceeds in the initial phase of implementation of an EIT increase are materially less than the stabilized revenue stream that can be expected once implementation becomes fully effective.

Importantly, the increase in the EIT is the only obligation that residents or taxpayers of the City of Harrisburg will incur in order to effectuate the Harrisburg Strong Plan.  As stated at the outset of the Strong Plan’s presentation, no increase in any other locally imposed taxes, including any increase in the real property tax rates beyond those now in place, is a component or requirement of the Harrisburg Strong Plan.

Any  decision  regarding  whether,  subsequent  to  2016,  the  City  of Harrisburg should continue to impose an EIT in an amount greater than the standard .5% EIT to benefit the City’s General Fund, and as a source to meet its then existing operating expenses, is something that the City Council will need to determine based on the then existing financial condition of the City.  If, in the years following 2016, the revenues of the City derived from its property tax digest were to increase materially because  of  improved  economic  conditions  in  the  City,  generated  in  part  by  the economic development and infrastructure funding provided under the Harrisburg Strong Plan (as discussed below), or were the City’s revenues otherwise to materially improve or expenses to decrease meaningfully, the continuation of all or a portion of the 1% increase in the EIT may not, as the City Council may then determine, be required.  Any continuation of the EIT beyond 2016 would also require judicial approval by the Court of Common Pleas pursuant to Chapter 2 of Act 47.

Having reviewed the various revenue adjustments contemplated by the Strong Plan, we next turn to adjustments to the City’s projected expenses during the Harrisburg Strong Plan Period.

1.         New Labor Union Contract Agreements.

From the inception of the receivership, and as reflected in the Preliminary Recovery Plan, it was anticipated and expected that modifications to the existing labor contracts that currently run through 2016 would need to be agreed upon by the three public unions whose membership are employed by the City.  These anticipated and contemplated labor-contract modifications were consistent with the Receiver’s view that to solve the City’s financial challenges, all meaningful constituencies would need to contribute to a workable solution.  As early as the Preliminarily Recovery Plan, the Receiver anticipated that, in the aggregate, the labor-contract modifications would need to provide cost savings to the City of approximately $4.0 Million to $4.8 Million per year during the Harrisburg Strong Plan Period, increasing in later years to assist in covering increasing unfunded costs for post-retirement health benefits.

The Receiver is pleased to advise this Court and the public that two of the City’s three public unions — the Fraternal Order of Police (“FOP”) and the American Federation  of  State  County  and  Municipal  Employees  (“AFSCME”)  –  have  each reached agreements to reduce a combination of wages and other employment terms and benefits through 2016, with the result that the City can, starting in 2013, receive the benefit of those savings to the General Fund in an estimated annual aggregate amount of approximately $2.4 Million to $2.7 Million per year.  In 2013, the City will recognize approximately $800,000 in saving from the unions’ willingness to hold wages at 2012 levels.  In that sense, the goal set by the Receiver, and his challenge to each the three unions to help achieve that goal, has been already partially successful; and the FOP and AFSCME unions and their membership are to be sincerely applauded for their willingness and commitment to be part of the solution to the City’s future financial stability and growth.  No agreement has as yet been achieved with the International Association of Firefighters (“IAFF”).   This circumstance, and its potential implications, are discussed below.

Helpful to the City’s future economic stability is the fact that many of the modifications  to  the  existing  FOP  and  AFSCME  labor  contracts  are  in  respect  to reducing the City’s obligations to pay for health care costs in the future. These labor contract modifications also eliminate post-retirement health care benefits for future employees, and limit post-retirement health care benefits for current employees.  These adjustments, aside from the present savings they create, have a growing cumulative effect in the future and better protect the City against its obligations to fund those costs beyond the Harrisburg Strong Plan Period.  These healthcare contract adjustments, coupled with the initial funding of an OPEB trust discussed below in Part Five, Section G, act as protection for Harrisburg against rising public employee health care costs – something most cities have as yet not meaningfully addressed.

In the aggregate, the reduction to the City’s operating expenses resulting from the modifications to the FOP and AFSCME contracts and proposed modifications to the IAFF contract, discussed below, are reflected on the Financial Snapshot in Columns 2-4 and on Row 11, denominated “Labor Contract Modifications.”  These adjustments are expected to have a more limited effect in 2013 of $700,000, and they are reflected as ranging from approximately $4.0 Million to $4.8 Million per year in each of 2014-2016.

Included in the Strong Plan Exhibit Book as  Exhibit 4 and  Exhibit 5 are contract modification agreements approved respectively by the Harrisburg bargaining units of the FOP and AFSCME.  It is anticipated that these modified agreements will be approved by the Mayor and City Council, and the Mayor’s and Council’s approval of them will be supplemented seasonably to the Strong Plan before the Court’s consideration of its confirmability.

Although workable, cost-saving, and consensual resolutions have been achieved with both FOP and AFSCME, as noted above, no agreement has as yet been reached with IAFF.  The Receiver continues to actively engage in negotiations with representatives of IAFF.

2.         Payments to Be Made by the City of Harrisburg in Settlement of Suburban Community Sewer Overcharges.

Commencing in 2013, it is anticipated that certain settlement payments will be made under the Strong Plan to customers in various suburban municipalities who historically have been ratepayers and users of sewer treatment services.   Those suburban customers, by contract and pursuant to Pennsylvania law, were to have been charged for sewer services at a cost that did not permit the servicing entity to charge a premium to the users, but, to the contrary, limited the servicing entity to recovering only from customers its costs for the use of its plant and equipment.

As  this  Court  is  aware,  subsequent  to  the  filing  of  the  Preliminary Recovery Plan, and before a hearing was conducted to seek its approval, the initially appointed  Receiver  learned  that  the  City  of  Harrisburg,  based  on  policies  and procedures that, unbeknownst to the current administration, had been implemented by prior City officials, had overcharged suburban ratepayers living outside the City of Harrisburg who received sewer services provided by the City and/or THA.  These overcharges were a result of setting sewer rates in amounts greater than that which would allow the servicer to recapture its operating and capital costs, and, as such, contrary  to  applicable  contracts  and  Pennsylvania  law.    Upon  investigation,  what became readily apparent was that the City of Harrisburg, which set the rates, had done so at levels higher than were authorized under Pennsylvania law and the applicable contract.  By doing so, the City had been taking into its General Fund, on an annual basis, more than the suburban ratepayers in the aggregate should have been charged for their sewer services.

As this Court will recall, the Receiver immediately instructed the City to cease further use any of the sums in the account that already reflected proceeds from suburban user overcharges, freezing that sum, and he further advised this Court that the sums previously estimated in his earlier submitted Receiver plan which he had filed only weeks before, and which had contemplated the continued receipt of overcharged rates, were being adjusted downward starting in 2012.  The reality that the City would not perpetually have available to it the annually overcharged sewer revenues only further compounded Harrisburg’s already serious budgetary shortfalls.

While the overcharging of sewer rates was to and did cease, the suburban customers served by THA, aggrieved by the years of significant overcharges, and represented by counsel (the “Suburban Claimants”), asserted an aggregate claim of approximately $25 Million (the “Suburban Overcharge Claim”) against the City of Harrisburg, which had benefited from the use of the overcharged amounts since 2006, or perhaps earlier.

The Receiver, with the cooperation and agreement of the Suburban Claimants,   through   their   counsel,   negotiated   a   compromise   of   the   Suburban Overcharge Claim.   In addition to the City’s agreement to deposit the previously referenced frozen funds then on hand and to credit that amount as part of the Suburban Claimants’ prospective financial commitments to the comprehensive overhaul of THA’s water and sewer system (which is as discussed in Part Four, Section E of the Strong Plan presently being negotiated as a separate undertaking not comprehended by Harrisburg Strong Plan), the Receiver and counsel for the Suburban Claimants have negotiated an agreement that is intended to satisfy the Suburban Overcharge Claim and any other claims that Suburban Claimants may have for the overcharging of sewer rates,  and  counsel  for  the  Suburban  Claimants  has  and  will  recommend  to  the Suburban Claimants that they legislatively approve such negotiated settlement terms. More specifically, subject to obtaining the necessary legislative approvals by the Suburban Claimants (which is anticipated to happen in the near-term), and subject to the approval and consummation of the Strong Plan, the City will make payments as more fully set forth in the payment schedule included in the Strong Plan Exhibit Book as Exhibit 6 (the “Suburban Claimants’ Payment Schedule”).  The payments to be made in respect to this settlement agreement during the four years of the Harrisburg Strong Plan Period are reflected on Row 13 of the Financial Snapshot.  Payments will continue thereafter pursuant to the Suburban Claimants’ Payment Schedule.

3.         Reductions in Force Based on Changes in THA’s Operations of the

Water and Sewer Systems.

As part of anticipated changes in how THA’s water and sewer operations are to be structured, the Receiver believes that the City will experience a reduction in its work force, effective likely in 2014, with employees historically employed by the City henceforth to be employed by THA with respect to water and sewer support staff and employees in charge of meter enforcement working for Standard Parking.  The net financial effect of that reduced labor cost to the City’s General Fund in 2014-2016 and, presumptively thereafter, is estimated to be approximately $600,000 in each year, and that reduction is reflected on Row 12, Columns 2 through 4 of the Financial Snapshot.

E.        Achieving a Balanced Budget in 2013-2016.

Adding the benefits of all of the various adjustments to the City’s operating revenues and expenses budget that were above-discussed in Sections C and D of this Part, the Financial Snapshot reflects on Row 15 the net effect on the 2013 through 2016 budgets based on the various Strong Plan initiatives.  These amounts do not include any proceeds of the one-time immediate infusion of revenues from the Parking Transaction that are to be provided to the City later this year upon the Strong Plan’s consummation. Such infusions are discussed immediately below.

Focusing on Row 15, the Court and public should first discern that, based on the various Strong Plan contemplated adjustments discussed in Sections C and D of this Part, the City is expected to generate sufficient revenues in each of 2014 through 2016 to be structurally balanced in those years, with projected revenues equal to or greater than  the  City’s  anticipated  operating  expenses  and  debt  repayment  obligations. Columns 2 through 4 of Row 15 illustrate that expectation.  This demonstration is key to satisfying a requirement of a receivership plan under Act 47.

In 2013, in contrast, it is apparent that the City, absent its receipt of substantial proceeds from the Parking Transaction upon the Strong Plan’s consummation, would have insufficient revenues to meet its anticipated operating costs and scheduled debt repayment obligations. For calendar year 2013, the anticipated shortfall, short of receipt of Parking Transaction proceeds is estimated at $8.2 Million.  This shortfall is illustrated in Column 1 of Row 15 of the Financial Snapshot.  Hence, the first benefit to the City from the Parking Transaction is to provide to it, from the consummated Parking Transaction, the sum of $8.2 Million which will solve what otherwise would be the City’s projected 2013 operating shortfall.  With that distribution to the City, the City’s budget will be structurally balanced in 2013, and have sufficient funds not only to pay all its operating expenses, but also to pay the scheduled debt repayment obligations that it has agreed to pay this year, as more fully set forth in Part Six below.

F.         Working Capital and the Means to Reduce Chronically High Payables.

For  many  years,  the  City  of  Harrisburg’s  strained  financial  condition  has translated into it not having sufficient funds on hand at various points in the year to pay for required services.  In short, revenues flowing into the General Fund have frequently been less than amounts needed to meet current payroll and other expenses.   In the past, that condition has led to some imprudent borrowing or challenging financial decisions that were necessitated to meet an immediate shortfall.  The Harrisburg Strong Plan contains two immediate cash infusions that are designed to provide the City with adequate “working capital,” so it can manage the intra-year low points which would otherwise create payment challenges even though the City may otherwise to be structurally balanced when a full year’s revenues are matched against a full year’s operating expenses and debt repayment obligations.

The Strong Plan calls for an immediate infusion from the Parking Transaction proceeds of $5.0 Million in addition to the $8.2 Million just referred to in Section E of this Part Five, to balance the 2013 budget, affording the City the ability to operate in a professional manner throughout the year without the chronic concern about its liquidity that has frequently arisen in low-revenue months during the year.  A portion of this $5.0

Million is intended to permit the City, on a one-time basis, to reduce the level of its outstanding payables – the amount owed to creditors who regularly provide recurring goods and services to the City and whose products or services are needed as part of the City’s normal day-to-day operations (“trade vendors”).   As Harrisburg’s distressed condition has worsened, and in order to allow the City to meet payroll, the obligations owed to these trade vendors have repeatedly been stretched, and instead of paying them regularly and consistent with the normal time for paying its bills, the City has been forced for several years to impose on its trade vendors by substantially delaying payments to them.  This cash infusion is intended to bring immediately the stretched payment to the City’s trade vendors back in line and, together with the working capital infusion next discussed, put the City in a position where it will not have to impose on its trade vendors in the future.  This may allow the City to obtain better credit terms from its normal vendor community; and it will certainly be further evidence that Harrisburg is being run in a smooth and fiscally sound basis, and this, too, should help further the perception that the City is showing signs of financial health and independence.

In addition, the $5.0 Million is also to be used to provide the City with adequate working capital.  It is expected that the working capital that is being provided will be maintained at that level on an annualized basis, and while the amount of working capital will decrease during certain months of the year, the City’s projected revenues are expected to be such that the full complement of working capital can be restored in revenue-positive months.  As such, the portion of the $5.0 Million dedicated to working capital is not to be used to satisfy annual operating shortfalls.  The maintenance of the City’s working capital, and its compliance with the purpose for funding it, will be an aspect of its operations reviewed from time to time.

The aggregate working capital and trade vendor payment amount of $5.0 Million is reflected on the Financial Snapshot in Column 1, Row 16.  This amount, when added to the infusion of $8.2 Million in 2013 needed to balance the 2013 budget and appearing in Column 1, Row 15, constitute what the Financial Snapshot reflects as the “Total 2013

Budget Balancing Amount.”  That total, $13.2 Million, appears on Row 17, Column 1 of the Financial Snapshot.  When this Total 2013 Budget Balancing Amount is added to the three additional infusions of cash to be provided to the City in 2013 for other than structural deficit purposes, which are next discussed and total an additional $16 Million, that aggregate sum constitutes the total amount of proceeds to be initially received by the City from the Parking Transaction upon the Strong Plan’s consummation later this year.

In sum, under the Harrisburg Strong Plan, the City will receive initial cash proceeds from the Parking Transaction of $29.2 Million in 2013 (hereinafter the “2013 Total Strong Plan Initial Cash Infusions”).   Additional cash infusions derived from the Parking Transaction and from other sources, some certain and others contingent, are discussed further in this Part Five, and also in Part Four, Part Seven and Part Nine of the Strong Plan.

G.        The Funding of Not-for-Profit Corporations for Economic Development and

Infrastructure Improvements and for an OPEB Health Care Trust.

1.         Description of the Initial Fundings and the Intended Use of the

Funds to Benefit the City of Harrisburg.

Heretofore in this Part Five, the Strong Plan has focused on achieving a structurally balanced budget for the City in each of 2013 through 2016.  We next turn to the additional financial benefits that the City is to receive under the Harrisburg Strong Plan — amounts earmarked for economic development, infrastructure improvements and to fund an OPEB health care trust (referred to herein as the “Harrisburg OPEB Trust”).  In Part Seven of the Strong Plan, the creation of the three entities to oversee the use of the funds committed to them consistent with their specific goals and investment criteria, the means for administering each of the oversight entities and the composition of the boards that will oversee these important aspects of the Strong Plan will be addressed.  Here, the Strong Plan will focus on the amount and timing of the funding of the two Strong Plan not-for-profit corporations and one Strong Plan trust.

Upon the Strong Plan’s consummation, the aggregate sum of $16 Million will be placed into an account that, pending the creation of the three entities in compliance with Part Seven of with the Plan, will be controlled exclusively by the Receiver.  The funds will be invested in a safe and risk free “money market” account, or other permissible investment of public funds pursuant to applicable law, pending further distribution to the respective  entities,  and  any  interest  paid  on  said  funds  will  be  disbursed  to  the respective entities in a ratable amount upon their formation.  The $16 Million will be referred to below as the “Initial Harrisburg Growth Funding”, as distinct from additional amounts that the City will receive under the Strong Plan, referred to as the “Supplemental Harrisburg Growth Fundings”, as further discussed below.

Of the $16 Million constituting the Initial Harrisburg Growth Funding, and upon the formation of the entities to oversee the respective allocations to them, $3,692,308, will be contributed to the Harrisburg OPEB Trust; $6,153,846 will be contributed to a not-for-profit economic development corporation, to be known as the “Harrisburg Strong Economic Development  Corporation”  (referred  to  herein as the “Strong EDC”) and

$6,153,846 will be contributed to a not-for-profit infrastructure improvement corporation to be known as the “Harrisburg Strong Infrastructure Improvement Corporation (referred to herein as the “Strong IIC”).

Under what circumstances the proceeds received by the Strong EDC and the Strong IIC can be deployed for their intended purposes will be determined by the boards of each entity.   That said, the Receiver believes that much of the Strong IIC’s investments should be  made during the earlier part  of  the  Harrisburg Strong Plan Period, so that those investments can optimally benefit the City’s improved appearance, hopefully stimulating an increased commitment of businesses and residents to invest in the City’s future.  While the Receiver also assumes that a material portion of the funds to be deposited in the Strong EDC should occur in the reasonably near term, i.e., in the first eighteen months after that entity is formed, there is some merit in spreading the economic development funding over time to assess the benefits achieved from the early investments, thus affording the opportunity to make potentially more targeted and incrementally more prudent investments based on the success of the initial funding decisions.  Generally, too, it is assumed that a meaningful portion of the investments to be made by the Strong EDC, though not necessarily all the funds allocated to that entity, will be accomplished through low interest or otherwise borrower supportive loans, grants or a combination thereof to entrepreneurs or businesses that intend to locate or expand in Harrisburg and, as such, create jobs and like others in the City, pay property taxes into the City’s General Fund.

The sums to be allocated to Harrisburg OPEB Trust will be paid to that Trust upon its formation and the entirety of those funds are anticipated to be invested as the Harrisburg OPEB Trust’s board and retained financial advisors deem most appropriate.

Each of the three described entities are to operate such that, under their express governing documents, the amounts deposited in each of them, and where applicable, the income generated by them, are not ever to be transferred or loaned for any purpose to the City’s General Fund or other account of the City or to any of the City’s authorities or instrumentalities.  In that sense, the sums allocated to each respective entity are permanently to be used for the exclusive purpose of each such entity.  No sums may be transferred from one entity to another,  except that,  if  more  than  $4.0 Million  is on deposit in the Strong EDC after December 31, 2018, then, and not more frequently than once every three years, the Strong EDC may, in the discretion of its Board, and upon a determination that all such sums are not needed to further stimulate the economy of the City, transfer as much as fifty percent of the sums on hand to the Harrisburg OPEB Trust or the Strong IIC or to a combination of the two, and if to be made to both other entities, with an allocation of such funds to the two other entities as the board of the Strong EDC shall determine in its sole discretion.

As  mentioned  earlier  in  this  Part  Five,  Section  G,  Supplemental  Harrisburg Growth Fundings are expected to be deposited into each of the three respective entities over time.  If and when such supplemental funds become available and are to be deposited into the three entities as next discussed, 38.5% of any such supplemental funds shall be deposited into each of the Strong EDC and the Strong IIC, and 23% shall be deposited into the Harrisburg OPEB Trust (the “Supplemental Harrisburg Growth Allocation Formula”).

2.       Supplemental Allocations of Additional Parking Proceeds to Fund Economic Development, Infrastructure and the Harrisburg OPEB Trust.

Under the Harrisburg Strong Plan, and at its consummation, in addition to the 2013 Total Strong Plan Initial Cash Infusion of $29.2 Million, the sum of an additional $6,666,667 will be immediately deposited into an account (to be denominated the “Supplemental  Harrisburg  Growth  Reserve  Account”).  The  amounts  in  the Supplemental Harrisburg Growth Reserve Account shall be invested in a safe, interest bearing,  money-market  account,  or  other  permissible  investment  of  public  funds pursuant to applicable law, and shall be subject to distributions as next provided.  This account  will  be  established  by  the  City,  at  the  direction  of  the  Receiver.    Any distributions from this account will be at the direction, initially, of the Receiver, or the Office of the Receiver, and if the receivership shall have ceased, then at the direction of the Pennsylvania Department of Economic and Community Development (“DCED”).

There is the prospect that, at some point over the next five years, through 2017 and before the end of that calendar year, and perhaps as early as this calendar year, the General Assembly may enact legislation related to allocating a portion of fuel tax receipts  received  by  the  Commonwealth  to  fund  the  needs  of  cities  experiencing financial challenges, which cities are subject to oversight under Act 47.  If the General Assembly were to enact such legislation, there is the prospect that, through at least  2017, and perhaps beyond that time, Harrisburg, a city operating under Act 47, and whether under Chapter 7 of Act 47 or otherwise, could receive an allocation of up to $2.0 Million per year from the Commonwealth’s fuel tax fund.  To the extent that the City were to receive such an allocation in any year through the end of calendar 2017, it would be obligated by the Strong Plan to deposit the amount it received in each of the three above-referenced entities, allocating the amount to them according to the percentage set forth in the Supplemental Harrisburg Growth Allocation Formula.

To the extent in any year commencing in 2013 and continuing through 2017, and in respect to each such year, the City of Harrisburg were to receive an allocation of fuel tax proceeds from the General Assembly of $2.0 Million per year or any lesser sum, the Receiver, the Office of the Receiver or the DCED, as the case may then be, and simultaneously with the City’s receipt of such fuel tax funds to be allocated to the three previously described entities, shall be required to immediately make a transfer from the Supplemental Harrisburg Growth Reserve Account of 66.66% of the amount of such fuel tax allocation that was received by the City and deposited into the respective accounts of entities, and as part of the satisfaction of the claims more fully discussed in Part Six, pay such amount, with accrued interest thereon, to and in the manner that Assured Guaranty and Dauphin County may jointly direct.  If in any calendar year, commencing in 2013, however, the General Assembly were not to make any allocation of fuel tax proceeds to the City of Harrisburg, then in each such year, $1,333,200 of the funds in the Supplemental Harrisburg Growth Reserve Account, together with accrued interest thereon, shall be deducted therefrom and deposited in each of the three above- referenced entities with the allocation of that amount to be made among them in accordance with the Supplemental Harrisburg Growth Allocation Formula.

To the extent the General Assembly were to allocate fuel tax proceeds to the City of Harrisburg in any year, but such allocation were in an amount less than $2.0 Million in any calendar year through December 31, 2017, then said amount shall be deposited into the three above-described entities pursuant to the Supplemental Harrisburg Growth Allocation Formula.  Furthermore, were there to be an allocation of fuel tax proceeds by the General Assembly to the City of Harrisburg in any year through 2017 in some amount, albeit less than $2.0 Million, the fractional percentage that the fuel tax proceeds received by the City of Harrisburg to benefit the three described entities were to bear to  $2.0 Million   (the   “Fuel  Allocation   Fraction”)  shall  be   utilized   to   determine   the distributions to be simultaneously made to, and at the direction of, Assured Guaranty and Dauphin County from the Supplemental Harrisburg Growth Reserve Account for the year in question, such that in any year that some amount less than $2.0 Million of fuel tax proceeds were to be received by the City to benefit the three entities, the aggregate amount to be distributed to Assured Guaranty and Dauphin County shall be equal to the sum of $1,333,200 multiplied by the Fuel Tax Allocation Fraction.  The Receiver shall be authorized to simultaneously deposit the sums of $1,333,200 multiplied by (1 minus the Fuel Tax Allocation Fraction) into the three entities, with the amount to be distributed to each  such  entity  being  in  conformity  with  the  Supplemental  Harrisburg  Growth Allocation Formula.

Distilled, if fuel tax allocations of $2.0 Million per year were to be received by the City starting in 2013, and continuing each year through 2017, an additional aggregate $10 Million  will  be  made  available  to  fund  the  three  above-described  entities  in  a manner consistent with the Supplemental Harrisburg Growth Allocation Formula incremental to the $16 Million Initial Harrisburg Growth Funding.  In that event, a total of

$26 Million would have been deposited into the three entities.   If, however, the City never is allocated any fuel tax proceeds through 2017, all $6,666,667 deposited initially into the Supplemental Fund Reserve Account will be allocated to the three entities.  In sum, under the Harrisburg Strong Plan, the City of Harrisburg will receive distributions from some combination of the Initial Harrisburg Growth Funding, the Supplemental Harrisburg Growth Fundings or from fuel tax proceeds that total at least $22,666,667 and could be as much as $26,000,000, to fund the three above-described entities, with the amount depending on whether, when and to what extent the General Assembly were to provide fuel tax proceeds to the City between the Strong Plan’s consummation and the end of calendar year 2017.

3.       Possible  Additional  Source  of  Funds  to  Benefit  the  City  of Harrisburg Derived from the Successful Pursuit of Incinerator Claims.

In addition to the foregoing, if the City were to recover, from time to time, recoveries from the pursuit of Incinerator Claims, as more fully defined and discussed below in Part Nine of the Harrisburg Strong Plan, then, the portion thereof that the City receives of such recoveries shall be allocated as follows:  30% of the sum received by the City from recoveries on Incinerator Claims shall be deposited in each of the three above-described entities; and the remaining 10% shall be available for the City’s use as the then Mayor and the City Council shall jointly agree and direct (hereinafter the “City of Harrisburg Incinerator Claim Recovery Allocation Formula”).

H.        The Possibility of Additional Revenues to Benefit the City of Harrisburg

Derived from the Future Operations of the Harrisburg Parking Facilities.

In Part Four, Section D, the Strong Plan identified the possibility that, in the future, and after the repayment of a significant portion of the aggregate amount of bonds issued to consummate the Parking Transaction, there may be proceeds generated by the parking operations which are in excess of amounts necessary to pay interest on the remaining and outstanding bonds or to fund required interest reserve and capital expense accounts to levels needed to assure the soundness of the parking transaction that will be paid to the City as a deferred portion of the purchase price.  If so, under the terms of the Parking Transaction, a portion of said amounts will be paid to the City for its use, including to balance the City’s budget, but in any event in a manner as City officials would from time to time determine.  These future potential proceeds are referred to in Part Four as “Future Parking Operations Net Proceeds”.

The City’s payments from such Future Parking Operations Net Proceeds will be twenty-five percent (25%) of such Future Parking Operations Net Proceeds, until such time as the aggregate amount of payments of such Future Parking Operations Net Proceeds to Assured Guaranty and Dauphin County, who are to receive seventy-five percent (75%) of such payments from Future Parking Operations Net Proceeds (as described in Part Six), were to total the face amount of $97 Million.  Thereafter, 100% of such Future Parking Operations Net Proceeds shall be paid to the City during the term of the Lease.  In the aggregate, the collective rights of the City to receive a 25% share of such Future Parking Operation Net Proceeds, and after AGM and Dauphin County are paid the face sum of $97 Million, all Future Parking Operations Net Proceeds are referred to as “Harrisburg’s Rights to Receive Future Parking Proceeds”.

While significant Future Parking Operations Net Proceeds are anticipated and discussed  in  Part  Four,  the  public  needs  to  understand  that  whether  such  Future Parking Operations Net Proceeds will ever be distributed to the City, in what amount and when, are totally uncertain and cannot be assumed, as they are premised on myriad assumptions built into the Parking Transaction model regarding the performance of the parking facilities over a long period of time; and even the experienced parking professionals who have been involved in the Parking Transaction cannot possibly know what amounts will in fact be achieved through the Parking Transaction and, as such, to what extent the parking operations will generate future net proceeds to benefit the City of Harrisburg.   Importantly, however, if those operations over time prove to be successful, the City will meaningfully share in the benefits of those operations.

PART SIX

THE TREATMENT OF CREDITORS UNDER THE HARRISBURG STRONG PLAN

A.         The Virtues of Achieving Settlements with the City’s Creditors Through

Negotiations Rather than Litigation.

A fundamental component of the Strong Plan was achieving the consensual agreement to its terms by virtually all impacted creditors whose consent to the Strong Plan’s treatment was required.  Stated differently, for a plan formulated under Act 47 to provide a viable solution to the array of financial issues faced by the City of Harrisburg, those affected by it and whose contractual rights were to be modified, had to agree to those modifications.  The alternative to reaching a comprehensive set of agreements with the City’s creditors would have been the necessity that the Receiver seek the required modifications in an adversarial setting — a Chapter 9 bankruptcy proceeding for the City.  While some in the City will likely suggest that the City could

have perhaps pursued the possibility of obtaining even more than the Strong Plan will provide to it by putting the City through an arduous, complex and protracted bankruptcy process, the Receiver believes that most of Harrisburg’s residents and businesses will certainly understand that such a heavily-disputed approach would have brought with it a host of significant adverse consequences, and for that reason, on balance, will support the Harrisburg Strong Plan which provides the City with substantial resources to build a strong financial future.   Before detailing the treatment of creditors under the Strong Plan, it is important to reinforce why the Strong Plan is vastly preferable to the risk of foregoing a comprehensive and agreed upon and sound financial restructuring by instead pursuing the highly speculative hope that the City could do better in bankruptcy.

First, serious delays in reaching a court-approved plan, over strenuous objections by those to be treated in a manner unacceptable to them, has been the rule, not the exception, in cities that have chosen to use the federal bankruptcy courts as a forum to attempt achieving a workable set of financial solutions.  There is no reason to file a Chapter 9 and engage in contentious disputes if a financially distressed city can obtain essentially the same result without resort to the bankruptcy courts; and there is absolutely no evidence that filing a Chapter 9 makes parties more amenable to reaching an   agreement   than   working   to   resolve   their   differences   through   non-judicial negotiations.  It is also noteworthy to recognize that, in the end, the cities which have filed Chapter 9 proceedings, after much rancor, have all ultimately worked out a consensual plan rather than pursuing efforts to impose judicially a plan on creditors against their will.

Second, Harrisburg has already suffered for years in a limbo financial state.  Protracting the City’s fiscal uncertainty, possibly for many more years to come, would be unfair, not only to the immediate community but to the region and the Commonwealth as a whole.  Simply stated, implementing a viable plan now, rather than litigating for the foreseeable future whether a plan would be approved and, if so, what the plan would provide, is certainly a much more prudent approach that is respectful of the fact that the populace has already, and for much too long, suffered from the uncertainties about whether, when and how the City’s financial challenges might best be put to rest.

Third, the costs of proceeding in a contested environment would be enormous.  How ironic it would be for a city, already saddled with much more debt than it can possibly repay, to have to incur the kinds of massive expenditures to fund the very heavy costs of a Chapter 9 proceeding.  One need only look at the costs associated with Chapter 9 proceedings in other cities that have chosen that route to underscore how much more it costs to litigate about the terms of a plan than reaching agreement in a consensual setting and without resort to the bankruptcy process.  In sum, is it not preferable to put the amounts that would be spent on heavily-contested litigation toward ameliorating budgetary shortfalls, rather than spending substantial sums on disputes without any knowledge that those expenditures would yield improved results?

Finally, those who might advance the proposition that filing a bankruptcy could have yielded a better result for the City ought to recognize that our Nation’s

bankruptcy and appellate courts have not as yet rendered any meaningful opinions determining, in a municipal bankruptcy setting, the most central issue — whether and to what  extent  creditors  will  be  judicially  required  to  accept  modifications  to  their contractual rights over their opposition.  Stated succinctly, litigating Chapter 9 issues in an environment where little in the way of important rulings exists to predict results is risky — for all parties.  That is why, given the unpredictable legal landscape, an agreed- upon resolution of Harrisburg’s financial distress is best achieved under the Strong Plan and is far preferable to “rolling the dice.”  Moreover, the Strong Plan brings certainty to what the City is to receive in a timely way, so its residents, businesses and creditors can move forward knowing the outcome, rather than waiting years and protracted appeals before the rights of all parties were determined.

With those observations put before this Court and the public, and having just explained in Part Five the significant benefits that the Strong Plan will, if confirmed and consummated, confer on the City, this Part Six will set forth how the various creditors of the City would also be treated in a fair and balanced manner under the Strong Plan.

B.        Payments to Creditors Generally.

As  is  evident  from  the  discussion  of  the  two  financial  transactions described in Part Four of the Strong Plan, the principal sources to effectuate the Strong Plan’s consummation and implementation are the proceeds that are expected to be derived from the sale of the Incinerator and the monetization of Harrisburg’s parking facilities.

In the discussion that follows, the use of proceeds to make payment to creditors from the sale of the Incinerator will be described separately from the proceeds that are expected to be generated from the Parking Transaction.   The separate discussion is appropriate for at least two reasons.  First, many of the creditors whose claims result from financings made in conjunction with the Incinerator, were pledged Incinerator assets as security for the repayment of the amounts loaned, and, as such, and under our laws, have a preferred right to those proceeds.

A second reason for addressing the transactions separately is that, contrasted with the Incinerator, the proceeds from the Parking Transaction, other than first satisfying all the outstanding bonds currently secured by the City’s parking assets, are not otherwise pledged to any creditor to secure obligations owed to them.  As such, how those proceeds are to be used under a plan are not governed by security agreements that confer priority rights to the proceeds, but rather is based on what the Receiver has determined to be a fair allocation of those parking proceeds.  In Part Five, the Strong Plan fully described the financial benefits that the City would receive under the Strong Plan that are to be derived from proceeds of the Parking Transaction.  In this Part Six, the Strong Plan will explain how the balance of the Parking Transaction proceeds will be used to resolve the claims of certain of the City’s creditors.

C.        Use  of  the  Incinerator  Sale  Proceeds  to  Reduce  or  Satisfy  Certain

Incinerator-Related Claims.

1.         The Effect that the Recent Experience of the Credit Markets has on the Proceeds to Be Generated from the Incinerator’s Sale.

As the discussion in Part Four, Section C.3 reflects, it is anticipated that, net of closing costs, the Incinerator’s sale is expected to generate net proceeds in the range of $126 Million to $132 Million.  The reason to express the proceeds that might be obtained at the consummation of the Incinerator sale as being in a range of many millions of dollars is because the actual amount that will be generated from the sale is dependent on the condition of the credit markets at the time the sale is to be consummated, as well as the pricing of tax-exempt bonds that are to be issued to finance the LCSWMA’s acquisition of the Incinerator at the time the sale is consummated.  For the reasons addressed earlier in Part Four, Section A of the Strong Plan, market pricing of the required tax exempt financing can materially vary over time, and  for  that  reason,  the  actual  amount  of  proceeds  to  be  generated  from  the Incinerator’s sale cannot be known until the bonds are priced in the market, just prior to the time that the sale will be consummated.

2.         Treatment  of  Incinerator-Related  Creditors  Whose  Recoveries

Under the Strong Plan Are Fixed if the Plan Is Consummated.

With those initial observations, we will proceed to discuss the allocation of the anticipated Incinerator sale proceeds among various specified creditors.   We will first address certain Incinerator creditors whose recoveries are not dependent on the proceeds that might be generated at consummation of the sale, but who are to receive their specified benefits unrelated to the proceeds that are generated, provided that the Strong Plan is confirmed, all contingencies for its consummation, as discussed below in Part Eight, are satisfied, and both the Incinerator’s sale as well as Parking Transaction are funded through bond financings and fully consummated.

(a)       CIT.

CIT Capital USA, Inc. (“CIT”) holds a federal judgment arising out of a funding by its affiliate to THA of $25 Million in 2005, in connection with the financing of certain aspects of the Incinerator’s retrofitting.  The judgment amount is in excess of

$19 Million, and CIT claims that it is entitled to additional amounts in the nature of licensing fees, which, together with the judgment, CIT estimates, on a present value basis, to exceed $37 Million.  CIT has claimed that its judgment and contractual rights afford it a lien on Incinerator assets superior to that of all other Incinerator-related creditors.  CIT’s entitlement to such secured treatment is not resolved by the settlement with the Receiver, though all challenges to the $19 Million judgment that was appealed are anticipated to be withdrawn as part of a settlement reached with CIT.  Under the negotiated settlement terms, the Receiver (acting on behalf of the City and THA), Dauphin County and CIT, have each agreed to satisfy CIT’s entire asserted claims in exchange for $21.5 Million and the execution of mutual releases.  Under the settlement,

CIT  is  to  promptly  receive  payment  of  the  $21.5 Million  from  proceeds  of  the consummated Incinerator sale.  The terms of the CIT settlement agreement will be set forth fully in a written settlement agreement (the “CIT Settlement Agreement”) which will be seasonably submitted to the Court for approval.

(b)       Covanta.

Covanta Energy Services, Inc. and/or its affiliate Covanta Harrisburg, Inc.  (collectively “Covanta”) was hired in 2007 to first design and implement a  plan  to  complete  the  Incinerator  and  to  thereafter  operate  and  maintain  the Incinerator.  It also financially assisted in the completion of the retrofit of the Incinerator in 2007 and, as such, helped the Incinerator come on line after construction cost overruns and defects occasioned by the prior operator had delayed the reopening of the facility. When Covanta agreed to complete and then operate the facility, it also provided THA with certain funding for the project’s completion.  At present, Covanta claims that it is owed a total of as much as $26 Million for the sums it advanced to complete the retrofit.  The Receiver (acting on behalf of THA and the City) and Covanta have reached agreement to settle all of Covanta’s claims, for the sum of $9.5 Million, said amount to be paid to Covanta from the Incinerator sale proceeds.  Covanta is also to receive other consideration  from  LCSWMA,  the  purchaser  of  the  Incinerator.    Covanta,  which operates LCSWMA’s facility in Lancaster, Pennsylvania, is also expected to operate the Harrisburg Incinerator under a contract with LCSWMA.  The specific details of the terms of the agreement with Covanta will be reflected in a written settlement agreement (the “Covanta Settlement Agreement”).   The Covanta Settlement Agreement will be seasonably submitted to the Court for approval.

(c)       JEM and Other Identified Contractors.

JEM Group, LLC (“JEM”) as well as other contractors (collectively the  “Contractors”)  identified  on   Exhibit  7  to  the  Strong  Plan  Exhibit  Book,  (the “Schedule of Contractors”), performed certain contractual services in conjunction with the completion of the Incinerator’s retrofit.  JEM, which holds the largest of these claims, asserts that it is owed more than $800,000.00  (the “JEM Claim”).  In addition, certain subcontractors to JEM are asserting claims against JEM with respect to their work under JEM (the “JEM Subcontractors”).  The Receiver is engaged in, or will engage in, negotiations  with  the  Contractors  to  resolve  the  claims  of  the  Contractors  and anticipates reaching agreement with each of the Contractors prior to confirmation of the Strong Plan, pursuant to which the claims of the Contractors will be satisfied at a discounted amount.  The payments to settle these claims are to be made from net Incinerator proceeds upon the Strong Plan’s consummation.   These negotiated agreements with the Contractors will be documented in written agreements by and between   each   of   the   Contractors   and   the   City   (the   “Contractor   Settlement Agreements”), which agreement will be seasonably submitted to the Court for approval.

3.         Other Possible Incinerator-Related Claims for Work Performed or

Services Provided.

It is possible that entities other than the above-referenced parties may assert claims against the City or THA associated with the Incinerator’s retrofit.  To the best of the Receiver’s knowledge, there are no such additional meritorious claims which the City, by reason of any contractual agreement, is under an obligation to pay.  If any such Incinerator-related claims were henceforth to be asserted, the City and THA, by and through the Receiver, reserve the right to defend against any such asserted claims, and by consummating the Strong Plan, none of their rights are waived, all such rights being preserved to the fullest extent provided by law.  For the avoidance of doubt, to the extent any Incinerator-related claims were found to be valid, none of the Receiver, the City or THA, shall be obligated by reasons of consummation of the Strong Plan to treat such a claim in a manner comparable to that of any of the creditors whose claims have been settled as part of the Strong Plan.  Further, neither the confirmation of the Strong Plan and its consummation shall be deemed to preclude such a claim, nor deemed to waive any rights of the claimant to pursue a claim.  Similarly, neither the confirmation of the Strong Plan and its consummation shall be deemed to have waived any defenses thereto, or another right of the party or parties against whom such a claim were to be asserted.

4.         Payments  to  be  Received  by  Dauphin  County  and  Assured

Guaranty From Proceeds of the Incinerator Sale.

Extensively discussed in the Preliminary Recovery Plan which was filed by the Receiver in February 2012 and confirmed by this Court in March 2012, were the significant bond financing obligations incurred by THA in connection with various Incinerator’s financings, including the retrofit of that facility.  Those claims will not be reiterated here, but together with the claims of CIT, Covanta and the contractors, total approximately $362.5 Million (“Total Incinerator-Related Claims”).  Alone, the aggregate Incinerator-related  claims  of  AGM  and  Dauphin  County  total  approximately  $298.5

Million (the “Total AGM/Dauphin County Incinerator-Related Claim”).  By reason of the separate reimbursement obligations executed by the City, the City is contractually obligated to AGM and Dauphin County for all of THA’s obligations to those entities.

In partial settlement of the Total AGM/Dauphin County Incinerator-Related Claim  that  is  described  in  the  preceding  Section,  Assured  Guaranty  and  Dauphin County are collectively to receive all proceeds from the sale of the Incinerator as set forth in Part Four, Section C, net of the amounts to be paid to those creditors identified in Section C.2, of  this Part  Six and  as may otherwise  be  required  to  be  paid  as discussed  below  in  Section  C.5  of  this  Part  Six  (hereinafter  the  “Net  Incinerator Proceeds Paid to AGM/Dauphin County”).   The allocation of said Net Incinerator Proceeds paid to AGM and Dauphin County shall be distributed between them as they jointly shall determine and direct.  This sum will constitute a portion of the aggregate amount that such creditors are to receive under the Strong Plan; and together with additional payments and consideration to be provided to them as described below in

Sections  D.2  and  D.4  of  this  Part  Six,  are  to  be  in  full  satisfaction  of  the  Total

AGM/Dauphin County Incinerator-Related Claim.

The understanding set forth in this Section C.4 of the Strong Plan will be reflected in a written settlement agreement which shall be between Assured Guaranty, Dauphin County and the Receiver (acting on behalf of the City of Harrisburg and THA) (the “Comprehensive AGM/Dauphin County Settlement Agreement”).     The Comprehensive AGM/Dauphin County Settlement Agreement will be seasonably submitted to the Court.

5.         Claim Associated with a Certain Swap Transaction.

In addition to the claims asserted by AGM, Dauphin County and the creditors whose claims were discussed in Section C.3 of this Part Six of the Strong Plan, an additional “termination” fee obligation in the approximate amount of $4.6 Million may be asserted by a financial institution that provided a certain “swap transaction” for a bond issued by THA and insured by AGM and Dauphin County, which termination-fee obligation is subject to the City’s reimbursement obligations and secured by the Incinerator assets under the terms of various bond documents.  The swap transaction was put in place to “swap” THA’s contractual obligation associated with a certain bond issued in 2003, the proceeds of which were to be used to retrofit the Incinerator.  The swaps entered into in 2003 were ostensibly designed to first convert THA’s contractual obligation to a variable rate and then place a cap on these variable rates.   In the absence of an agreement to otherwise resolve the possible claim of the financial institution that issued the swap, that party will assert a swap termination fee claim of approximately $4.6 Million.  If the swap issuer asserts a termination-fee claim, then in order to retire the bond for which the swap was issued, which retirement is a necessary condition to LCSWMA’s acquisition of the Incinerator and the consummation of the Incinerator sale, the swap-termination-fee claim would have to be paid, and, as such, deducted from the amount that AGM and Dauphin County would otherwise receive as the Net Incinerator Proceeds Paid to AGM/Dauphin County.  The Receiver intends to proceed with efforts to resolve the swap termination fee claim before the Strong Plan’s consummation.

D.       Use of a Portion of Proceeds to Be Derived from the Parking Transaction to Further Pay and Completely Settle the Total Incinerator-Related Claims of AGM and Dauphin County.

1.         Introduction.

As  noted  earlier,  the  Total  Incinerator-Related  Claims  of  AGM  and Dauphin County are to be paid primarily from two sources – proceeds from the sale of the Incinerator and proceeds to be derived from the Parking Transaction that is described in Part Four, Section E of the Strong Plan.  In this Part Six, the Strong Plan will describe the various proceeds that AGM and Dauphin County will receive under the Strong  Plan  from  the  Parking  Transaction.    Like  the  Incinerator-related  proceeds

discussed earlier, the Parking Transaction-related proceeds are more fully described in the AGM/Dauphin County Settlement Agreement.

In Section D.2 of this Part Six below, the Strong Plan will first address the proceeds from the Parking Transaction that AGM and Dauphin County are collectively to receive upon the Strong Plan’s consummation.  In Section D.4 of this Part Six, the Strong Plan will describe other distributions that AGM and Dauphin County are to receive in the future, which, together with possible distributions they could receive as discussed in Part Nine of the Strong Plan, are in full satisfaction of the Total AGM/Dauphin County Incinerator-Related Claim owed to them by the City and THA.

2.        Amounts to Be Paid to AGM and Dauphin County from the Parking

Transaction upon the Strong Plan’s Consummation.

The first point to be observed about the Parking Transaction is the uncertainty of the amount of Net Parking Proceeds to be generated from the Parking Transaction upon the Strong Plan’s consummation, which amount is to be the source to fund both the various City benefits under the Strong Plan discussed in Part Five as well as the payment to AGM and Dauphin County upon the Strong Plan’s consummation. This uncertainty is primarily due to credit market conditions as discussed in Part Four, Section A and as also referenced in Part Six, Section C.1, when describing the uncertainties in the amount of Incinerator sale proceeds that are expected to be generated from that sale.

Nonetheless, based on current market conditions as of the filing of this Plan, it is estimated that the aggregate parking–related proceeds to be paid to AGM and Dauphin County at the Strong Plan’s consummation (as those proceeds may change due to market conditions and other circumstances, hereinafter referred to as the “Aggregate Parking Proceeds Paid to AGM/Dauphin County Upon The Plan’s Consummation”) is in the range of $120 Million to $130 Million.

3.        Conditions  to  AGM’s  and  Dauphin  County’s  Agreement  to  the

Strong Plan’s Consummation; Execution of Mutual Releases.

The  Comprehensive  AGM/Dauphin  County  Settlement  Agreement provides that AGM and Dauphin County will be bound to consummate both the Incinerator sale and the Parking Transaction, and agree to settle all their Total AGM/Dauphin County Incinerator-Related Claim against the City and THA, with comprehensive releases and discharges of all obligations owed by the City and THA to AGM and Dauphin County related to the financing of the Incinerator, provided that, and unless waived in writing by both AGM and Dauphin County:  (a) the Strong Plan is confirmed by this Court; (b) City Council approves the various ordinances called for under the Strong Plan and by various other documents, and those ordinances become effective; (c) the City, THA and the Receiver execute comprehensive releases and discharges of any and all claims against AGM and Dauphin County; (d) AGM and Dauphin County, upon the Strong Plan’s consummation will collectively receive a total sum of at least $210 Million from both the total of Aggregate Parking Proceeds Paid to

AGM/Dauphin County Upon The Plan’s Consummation plus the Net Incinerator Proceeds Paid to AGM/Dauphin County (hereinafter, in the aggregate, the “Minimum AGM/Dauphin County Aggregate Plan Consummation Payment”); (e) this Court approves the additional distribution benefits that the City and the Receiver have agreed to provide AGM and Dauphin County subsequent to the Strong Plan’s consummation, as more fully set forth below and as more fully detailed in the Comprehensive AGM/Dauphin County Settlement Agreement; (f) bond documents are agreed upon by the parties to the Parking Transaction, as well as by those parties who are providing credit enhancement for the bond financing of both the Incinerator’s sale and the Parking Transaction; (g) other conditions to consummation of the Strong Plan and to the execution of releases and discharges set forth in the Comprehensive AGM/Dauphin County Settlement Agreement are satisfied; and (h) all other conditions to the Plan’s consummation as set forth in Part Eight of the Strong Plan have been satisfied (all of (a)

– (h) above hereinafter referred to as “AGM/Dauphin County Conditions to the Plan’s

Consummation”).

4.         Post-Consummation  Distributions  to  Be  Made  To  AGM  and

Dauphin County Under the Strong Plan.

Assuming the Strong Plan’s confirmation by this Court and its consummation, the Comprehensive AGM/Dauphin County Settlement Agreement provides that, as additional consideration for their satisfaction of any and all obligations of the City and THA in respect to the Total AGM/Dauphin County Incinerator-Related Claim, they are to receive additional distributions, subject to certain conditions.

The first potential source of additional distributions to AGM and Dauphin County, relates to the possibility that they might receive additional escrowed proceeds from  the  Parking  Transaction  if  the  Commonwealth  were  to  provide  the  City  of Harrisburg with fundings during the period of 2013-2017 derived from the Commonwealth’s fuel tax.  This possible source of distributions is described above in Part Five, Section G.2 of the Strong Plan.

A second post-consummation source of potential distributions to AGM and Dauphin County is in respect to their sharing in a portion of possible recoveries if the Receiver is successful in his pursuit of Incinerator Claims.  Part Nine of the Strong Plan will further discuss the Incinerator Claims, and will set forth the formula by which proceeds generated through the successful pursuit of such claims are to in part be shared between AGM and Dauphin County with the balance to benefit the City.  The Comprehensive AGM/Dauphin County Settlement Agreement likewise addresses this agreement, as does Part Five, Section G.3 of the Strong Plan in describing the distributive share of such possible Incinerator Claims proceeds that are to be paid to or for the benefit of the City, on the one hand, and to AGM and Dauphin County, on the other.

The third additional post-consummation source of payments to AGM and Dauphin County derives from future anticipated payments that, over time, are anticipated, though not guaranteed, to be made to the City of Harrisburg, AGM and

Dauphin County from the future operations of the parking facilities.  These potential future parking-operation payments, and the sharing of them by the City, AGM and Dauphin County are more fully set forth in the Comprehensive AGM/Dauphin County Settlement Agreement, in Part Four, Section D.4, which describes the Parking Transaction and the various sources of funds that are anticipated to be generated, as well as in Part Five, Section H of the Strong Plan, where the formula for sharing such proceeds between the City, AGM and Dauphin County is discussed when describing the distributive share benefitting the City.

E.        Treatment of Other Creditors of the City of Harrisburg.

1.         Ambac.

As highlighted in Part Three of the Strong Plan, a meaningful element of the Strong Plan that is beneficial to the City (and as also referenced in Part Five, Section C.1 of the Plan), is that the Receiver and the insurer of the City’s general obligation bond debt, Ambac Assurance Corporation (“Ambac”), have agreed to a restructuring of the City’s general obligation indebtedness, subject to this Court’s approval of the Strong Plan, which settlement will become an obligation to the City upon the Strong Plan’s consummation.   By reaching agreement in a manner acceptable to Ambac, the City will be seen to be respectful of the credit markets; and by taking an approach that accommodates the mutual needs of both the City and Ambac, the Receiver believes that the City has meaningfully increased its ability to have access to the credit market when it may need to borrow for the types of prudent capital improvement financings that all cities from time to time require to assure the delivery of quality essential services and to maintain their infrastructure.

The treatment of Ambac’s claim is set forth in the amended settlement agreement (the “Ambac Settlement”).   The public should understand that Ambac has made all required payments to the holders of the City’s general obligation bonds since March 2012, when the City defaulted on its bond repayment obligations due to its adverse financial condition which left it with insufficient funds to make that payment. Since March 2012, the City defaulted on payments due in September 2012 and March

2013, and will be unable to pay the September 2013 repayment obligation until and unless this Strong Plan is confirmed by this Court and consummated later this year.  In the aggregate, the defaulted payments, including the payment due in September of this year exceed $17 Million.

Under the Ambac Settlement, Ambac, as insurer on the City’s general obligation bonds, will continue to timely pay the bondholders all amounts due until the entire bond indebtedness is repaid.  In that sense, the bondholders of the City’s general obligation debt will never experience any loss in timely repayment of the amount they loaned to the City.  For its part, Ambac will not only have made the bondholders whole, notwithstanding the City’s prior defaults, but also, will keep the bondholders current as the City is afforded the opportunity to repay its obligations to Ambac on a timeline more relaxed than the contractual schedule upon which the bondholders themselves are to be repaid by Ambac.

The Ambac Settlement permits the City to repay its obligations on terms that reduce the annual debt-repayment obligations to levels lower than were contractually required under the bonds, and, necessarily over a longer period of time. The Ambac Settlement permits the City to extend the repayment of the bonds, at its election, up to 10 years longer than the bond repayment schedule had required.  To the extent that the City timely repays portions of the bond debt on a basis consistent with the original terms of the bond, it will pay Ambac interest at the rate of 5.48% per annum, the same rate implicitly set when the City incurred this indebtedness.  To the extent the City has defaulted on its repayment obligations, thereby requiring Ambac to shoulder the responsibility for the repayment of the bonds to make the bondholders whole for the City’s shortfall in payment, Ambac, for that risk, is to be compensated through the City’s payment of interest at an effective rate of  6.02% per annum.

A condition of the Ambac Settlement is that the City make a payment to Ambac of $5,970,000 by December 15, 2013.  Sufficient funds to make that payment are to be derived from proceeds of the Parking Transaction that the City is to receive under the Strong Plan and at its consummation.  Ambac is under no obligation to proceed  with  the  Ambac  Settlement  if  it  is  not  paid  the  required  amount  by December 15,   2013.       The   Ambac   Settlement   is   expected   to   be   executed contemporaneously with the filing of the Strong Plan and will be seasonably submitted to the Court for approval.

2.         SunTrust Leasing Corporation.

SunTrust Leasing Corporation (“SunTrust”), as assignee of Municipal Capital Corporation, is owed approximately $2.6 Million in respect to certain equipment lease financing arrangements, executed by and between the City, as lessee, and Municipal  Capital  Corporation,  as  lessor.     These  lease  financing  arrangements permitted the City to obtain various equipment, including vehicles, computer equipment and other equipment, for use in the City’s day to day operations.  The City is in arrears in its payments to SunTrust in the amount of approximately $1.3 Million. The Receiver is engaging in settlement discussions with SunTrust, which agreement will be subject to this Court’s approval of the Strong Plan.  Under the terms of the Receiver’s proposed settlement with SunTrust, provided the Court confirms the Strong Plan and it is consummated, SunTrust will receive a lump-sum payment contemporaneously with the consummation of the Strong Plan and, thereafter, will receive restructured payments in accordance with an agreed upon payment schedule, which final payment is anticipated to be made by early 2017, in advance of the original final payment date of October 15,

2017. Upon arriving at final settlement terms with SunTrust (the “SunTrust Settlement Agreement”), the Receiver will submit the SunTrust Settlement Agreement to the Court for approval.

3.         Metro Bank.

Metro Bank (f/k/a Commerce Bank/Harrisburg, National Association) (“Metro Bank”) asserts that it is a secured creditor of the City of Harrisburg by reason of the City’s guaranty of debt service payments on a certain loan Metro Bank made to the

Redevelopment Authority Of The City Of Harrisburg, on or about December 29, 2006 (“Metro Bank Loan”).  Metro Bank’s claim totals approximately $2.4 Million.  Collateral security for the City’s guaranty of the Metro Bank Loan included certain artifacts owned by the City. It is believed that some of these artifacts were sold in an auction conducted by the Guernsey Auction Company in July of this year (the “Auction”).

Pursuant to an Order dated June 3, 2013, the Receiver is to report the proceeds of the Auction to this Court, and discuss the use of the proceeds to satisfy obligations of the City. As noted above, it is believed that Metro Bank held a security interest in the artifacts sold at the Auction.  As such, at such time as the Receiver has received (1) documentation sufficient to support that Metro Bank held a properly perfected security interest in the assets sold at the Auction, (2) a calculation of the net Auction proceeds, and (3) an itemized payoff statement from Metro Bank showing the amounts Metro Bank claims it is owed as of an anticipated payment date, the Receiver will ask the Court to permit it to pay over to Metro Bank the net proceeds derived from the sale of artifacts that constituted Metro Bank’s collateral, up to an amount equal to the amount guaranteed under the guaranty agreement executed by the City.  As Metro Bank’s entitlement to the collateral securing its claim is not dependent on the Court’s confirmation of the Plan or the Plan’s consummation, the Receiver will ask the Court to permit the City to pay off the Metro Bank claim independent of the Plan’s confirmation, and will seek a separate order permitting that to occur.

If the Court allows payment to Metro Bank to proceed, it is anticipated that such payment will satisfy a significant portion of the Metro Bank claim.  The Receiver intends to engage in settlement negotiations with Metro Bank with respect to the satisfaction of any indebtedness remaining owed to Metro Bank subsequent to the anticipated payment of Auction proceeds to Metro Bank.  Any negotiated settlement terms will be documented in a written agreement and seasonably submitted to the Court for approval.

4.         Suburban Claimants.

As discussed in detail above, the Suburban Claimants have asserted the Suburban Overcharge Claim, in the aggregate amount of approximately $25 Million, as a result of certain overcharges in sewer rates imposed on the Suburban Claimants by the City over a period of a number of years.  The Receiver, with the cooperation and agreement of the Suburban Claimants, through their counsel, has negotiated a compromise of the Suburban Overcharge Claim and other amounts that might be owed to the Suburban Claimants as a result of the overcharging of sewer rates. In settlement of these claims, in addition to the City’s agreement to credit certain amounts as part of the Suburban Claimants’ prospective financial commitments to the comprehensive overhaul of THA’s sewer system (as discussed more fully above), and subject to obtaining the necessary legislative approvals by the Suburban Claimants (which is anticipated to happen in the near-term) and approval and consummation of the Plan, the City will make payments to the Suburban Claimants pursuant to the Suburban Claimants’ Payment Schedule included in the Strong Plan Exhibit Book as  Exhibit 6. Under the terms of the settlement agreement reached with the Suburban Claimants,

and provided the Court confirms the Strong Plan and the Strong Plan is consummated, the Suburban Claimants will promptly be paid the sum of $4.5 Million in 2013 and $1.5

Million in each of 2014-2016 and, thereafter, will receive payments totaling $2,225,000 in accordance with the Suburban Claimants’ Payment Schedule, which final payment is to be made in 2019.  This negotiated agreement will be documented in a written settlement agreement by and between the Suburban Claimants and the City (the “Suburban Settlement Agreement”).  It is anticipated that the Suburban Settlement Agreement will provide, among other things, that, should a default occur under the terms of payment, as set forth in the Suburban Settlement Agreement, then, in that event, tax revenues due the City shall be paid into a “lockbox” escrow account administered by a third party, and not otherwise remitted to the City, in an amount sufficient to guarantee the scheduled payment to the Suburban Claimants until such time as such default is cured.  The final, agreed Suburban Settlement Agreement will be seasonably submitted to the Court for approval.

5.         City  of  Harrisburg’s  Contingent  Liability  for  Bonds  That  Were

Secured By The Verizon Tower.

Totally apart from anything to do with the Incinerator financings, the City of Harrisburg is obligated under a reimbursement agreement to AGM which acted as the insurer of bonds issued by the Redevelopment Authority of the City of Harrisburg in conjunction with a financing transaction that provided the City with approximately $7.0

Million in 1998.   The bonds that were issued were secured by a lien on the Verizon Tower in Strawberry Square (“Verizon Tower”).  Currently, the building is occupied by and  leased  to  Verizon,  but  that  lease  expires  in  2016  and  is not  expected  to  be renewed.  Annual payments on these bonds are due to first be made starting in 2016.

Because the bonds are “capital appreciation bonds”, no payment of principal or interest have been paid since 1998.  Since interest accruing on the bonds has been capitalized and added to the principal since 1998, the indebtedness that will be owed in 2016 will have risen to approximately $20 Million.  By the terms of the bond documents, interest and principal payments on the bonds are to commence in 2016, with the entire indebtedness due to be fully paid by 2033.

The City’s reimbursement agreement is essentially akin to a guaranty on the repayment of the bonds, with that obligation to do so in favor of AGM.  To the extent the operations of the Verizon Tower were not to generate funds sufficient to make the contractually required bond payments in 2016 and thereafter, AGM, in its capacity as bond insurer, will be obligated to pay the amounts scheduled to be paid from time to time to the bondholders, and AGM will then look to the City, and require payment from the City under its reimbursement agreement.

Facing the City’s potential exposure under its reimbursement obligation, the Receiver has been actively pursuing efforts to locate a tenant or tenants for the building and to create a lease structure that will provide sufficient net revenues to either recapitalize or pay in full over time the bond debt in a manner that does not require AGM as insurer to make up any scheduled bond repayment shortfall.  If an acceptable

lease solution that provides AGM with full protection against its exposure on the bonds can be achieved, AGM will be prepared to treat the City’s reimbursement obligation as satisfied.

The Receiver’s efforts to fund a resolution of this Verizon Tower exposure is ongoing, but as the Strong Plan is being filed, no assurance can be given that the City’s reimbursement liability will be satisfied by a new lease that will assure full repayment of the bond indebtedness.   That said, the discussions that have been conducted to date provide a favorable prospect that at least a meaningful portion of the City’s exposure of its reimbursement obligation can be achieved.  To the extent that the Receiver has further information to report regarding the potential resolution of this contingent obligation, it will be provided before the Court’s consideration of the Receiver’s request for the Plan’s confirmation.

In the likely event that a complete satisfaction of the City’s reimbursement obligation cannot be fully achieved through a new Verizon Tower lease, but, as hoped, a rather meaningful amount of that exposure can be repaid through rent payments, the portion of any remaining reimbursement obligation owed by the City to AGM needs to be postponed to allow the City time for the Strong Plan to take effect.

To protect the City against the possibility it might otherwise have to commence making reimbursement payments to AGM as early as 2017 for the portion of bond payments that revenues derived from a new lease agreement were insufficient to cover,  the  Receiver  and  AGM  have  agreed  to  work  cooperatively  to  fashion  a repayment schedule that will afford flexibility to the City in repaying its obligations in full over time.   By reason of that agreement, should the City have a reimbursement obligation after factoring in the revenues to be generated under the new lease, the repayment of its reimbursement obligation would be scheduled in a manner such that AGM would be compensated at the rate of 6.02% for any amount it were required to pay to bondholders from and after the obligations owed to the bondholders were to be first commenced by AGM until all amounts that AGM advanced to the bondholders were to be repaid.

6.         Ambac Related Stadium Transaction.

In 2005, the Redevelopment Authority Of The City Of Harrisburg (“RAH”) issued two series of bonds (“2005 A1” and “2005 A2”), in order to fund certain renovations and upgrades to the baseball stadium located in Harrisburg in which the Harrisburg Senators baseball team (“Senators”) plays its home games (the “Stadium”). Each issuance was $9.0 Million.  The 2005 A1 bonds were not insured.  The 2005 A2 bonds are insured by Ambac.  The City guaranteed debt service payments on the 2005

A1 and 2005 A2 bonds pursuant to a certain Stadium Guaranty Agreement.

Until 2007, the Senators were owned by the Harrisburg Civic Baseball Club, Inc. (“HCBC”), an entity owned by the City.  The Senators baseball team was sold in 2007 for approximately $12.5 Million to Senators Partners, LLC (“Partners”).   A portion of the proceeds were used to satisfy in full the 2005 A1 bonds.  Annual debt

PART SEVEN

FUNDINGS FOR ECONOMIC DEVELOPMENT, INFRASTRUCTURE IMPROVEMENTS AND FOR A HEALTH CARE TRUST

A.         Overview.

The  Strong  EDC,  Strong  IIC”  and  the  Harrisburg  OPEB  Trust  are  key components to sustaining and enhancing the stability and vitality of Harrisburg that will result from the implementation of the Strong Plan. As set forth in detail in Part Five above, certain funds, subject to certain restrictions and limitations, will be established and maintained in order to fund the activities of each of Strong EDC, Strong IIC and the Harrisburg  OPEB  Trust.    In  this  part  of  the  Strong  Plan,  we  provide  a  general description of additional guiding principles that are to govern the use of proceeds that will be allocated to each of Strong EDC, Strong IIC and the Harrisburg OPEB Trust.

B.        Strong EDC and Strong IIC.

1.         Introduction.

 As described in further detail, below, Strong EDC is intended to be organized and operated for the purpose of engaging in a wide-range of economic development  and  related  activities  for  the  benefit  of  the  City,  including  activities designed to revitalize and expand the City’s revenues through new sources of tax revenues by successful new and expanded business activity and investments in infrastructure and other improvements within the City.  Strong IIC is intended to be organized and operated for the purpose of engaging in a wide-range of maintenance, operation, repair and improvement projects related to City infrastructure, including a focus on improvement of the quality of life in the City to encourage investment in the City by existing and new businesses and the resident population.

 It  is  intended  that  both  Strong  EDC  and  Strong  IIC  be  organized exclusively  for  charitable  purposes  within  the  meaning  of  Section  501(c)(3)  of  the Internal Revenue Code of 1986, as amended (the “Code”).   Specifically, each organization is intended to lessen the burdens of government, promote commerce, encourage economic development and employment, attract new businesses, combat community  deterioration,  encourage  stabilization  and  stimulation  of  new  job development and retention of jobs.  The actions taken pursuant to these goals shall be taken, in each case, exclusively for the benefit of and in order to facilitate, perform, or assist with the performance of the purposes and functions of the City.  To this end, it is anticipated that one or both of the entities will engage in some or all of the following functions:  (i) development, whether through co-development with other organizations or investors or otherwise, acquisition, ownership, lease and divestiture of facilities to existing businesses, relocating businesses, or start-up local businesses; (ii) solicitation and acceptance of funding, including in the form of loans, grants, other financial assistance or issuance of debt obligations, from public and private sector entities engaged in economic development activities; (iii) provision of technical and grant assistance,  low-interest  loans  or  grants  to  individuals  and  businesses for  creation,  expansion and relocation to the City, including increasing the opportunities and capacity for minority and other disadvantaged groups, women-owned businesses and others; (iv) provision of resources and funding for local job training and development for the retention, expansion, creation and attraction of jobs and businesses to the City; and (v) investment in other entities, agencies and organizations that provide funds to new and existing businesses that foster local job creation and diversity in workforce, supplier chains and area assets.  The performance of these functions by Strong EDC and/or Strong IIC are not intended to exclude the performance of such functions by the City or other agents or instrumentalities of the City, as contemplated by the Strong Plan or otherwise.  Rather, the actions to be taken by Strong EDC and Strong IIC are intended to be performed in addition and complementary to any such actions taken by others.

With the charitable purposes outlined above, it is envisioned that Strong EDC and Strong IIC will be recognized as exempt from federal income tax as organizations described in Section 501(c)(3) of the Code and that each will also qualify for exemption from Pennsylvania corporate income tax and from certain other state and local taxes.  Accordingly, it is anticipated that each of Strong EDC and Strong IIC will be eligible to receive:    (i) tax-deductible charitable contributions from individuals, corporations and other business entities under Section 170(c) of the Code; and (ii) grants from other Section 501(c)(3) tax-exempt organizations such as public charities and private foundations.  The Receiver will cause each of Strong EDC and Strong IIC to be formed under Pennsylvania nonprofit law and will cause to be filed with the Internal Revenue Service (the “IRS”) applications on IRS Form 1023 requesting that the IRS issue  a  “determination  letter”  to  each  of  Strong  EDC  and  Strong  IIC  formally establishing federal tax-exempt status for each of them under Section 501(c)(3) of the Code.  Once issued, this IRS determination letter would relate back to the date of incorporation of each of Strong EDC and Strong IIC, and all charitable contributions received by them after their respective dates of  incorporation would be treated as having been made to a qualifying charity.

2.         The Task Force.

In order to best position the City for an economically sound future, continued stimulation and diversification of the City’s economic base should be aggressively pursued.  Creative efforts need to be undertaken to attract new investment in existing businesses and to successfully recruit new businesses to the region. Correlative to the need to stimulate and diversify the City’s economic base is the need to improve or rehabilitate the infrastructure of the City to the necessary state of function of repair.  Strong EDC and Strong IIC are to be formed with these overarching goals in mind. To those ends, a task force will be established that will consist of various stakeholders  in  the  economic  and  community  development  of  the  City  (the  “Task Force”).

Using the guiding principles described above, the Task Force will be constituted to:  (A) further refine the purposes of Strong EDC and Strong IIC; (B) identify and assign priorities to Strong EDC’s and Strong IIC’s respective proposed activities; (C) make recommendations concerning certain governance features of Strong EDC and Strong IIC; and (D) create an action plan for each of Strong EDC and Strong IIC, in each case of not fewer than 5-years, in which Strong EDC and Strong IIC will, as appropriate and among other things, identify and prioritize strategic initiatives which, it is envisioned, will be aimed at some or all of the following objectives: (i) repairing and improving the City’s infrastructure, (ii) retaining and strengthening the City’s existing businesses, (iii) attracting new business investment, (iv) maintaining and developing a quality affordable housing stock in the City, (v) providing attractive residential neighborhoods and commercial areas for City residents and visitors, and (vi) expanding the City’s tax base.  More specifically, the Task Force will develop and submit to the Receiver a proposal which sets forth, among other things, the proposed governing policies and administrative and operating procedures of each of Strong EDC and Strong IIC, as well as the proposed 5-year action plan for each.  The proposal to be generated by the Task Force shall be referred to herein as the “Governance Proposal and Action Plan.”  Some of the matters to be included in the Governance Proposal and Action Plan are identified on  Exhibit 8 to the Strong Plan Exhibit Book.   It is anticipated that the Task Force, in developing the action plan for each of Strong EDC and Strong IIC, will consult with City officials, professionals and staff.  It is further anticipated that the initiatives undertaken by the Strong EDC shall be undertaken with due regard for the initiatives outlined in the Operational Initiatives and Progress Report and in such in a manner that is complementary to those initiatives.

3.         Appointment of the Task Force.

The Task Force will be composed of nine (9) members.  Each member of the Task Force shall possess professional qualifications directly relevant to the mission of Strong EDC and Strong IIC. The members of the Task Force shall be appointed by the Receiver; provided, however, that the Receiver shall endeavor to appoint the members  of  the  Task  Force  upon  recommendation  from  varies  constituencies  as follows:

(a)       three (3) individuals selected and appointed by the Receiver; (b)  two  (2)  individuals  to  be  appointed  by  the  Receiver  and selected from a list of six names submitted by the Mayor of Harrisburg to the Receiver;

(c)      two  (2)  individuals  to  be  appointed  by  the  Receiver  and selected from a list of six names submitted by the City Council to the Receiver; and

(d)      two individuals to be appointed by the Receiver and selected from a list of six names submitted by Dauphin County to the Receiver.

Recommendations for potential appointments to the Task Force shall be provided to the Receiver on or before the date that is ten (10) days after the date of consummation of the Strong Plan.  The Receiver shall appoint the members of the Task Force on or before the date that is thirty (30) days after the date of consummation of the Strong Plan.   In an effort to ensure diverse and meaningful participation, both in expertise and experience, within the Task Force, it is anticipated that its members will be drawn from the following constituencies within the City:  (1) local leadership; (2) the private business community; (3) local charitable, religious and civic associations; (4) local academic or research groups focused on the region; and (5) individuals with expertise in urban development and planning.

The Receiver shall utilize funds maintained in the trust accounts to be established for each of Strong EDC and Strong IIC in an amount not to exceed an aggregate amount of $100,000.00 to be used to fund the costs associated with the formation of Strong EDC and Strong IIC and related costs

4.         Completion and Approval of the Governance Proposal and Action Plan.

Once constituted, the Task Force shall be given a period of (4) months in which to complete the Governance Proposal and Action Plan and submit it to the Receiver for review and approval.  The Receiver shall then review and, to the extent the Receiver deems necessary and in consultation with the Task Force, modify the Governance Proposal and Action Plan.  Thereafter, upon final approval by the Receiver, the Receiver will submit the Governance Proposal and Action Plan to this Court and ask this Court to approve the Governance Proposal and Action Plan in furtherance of the implementation of the Strong Plan.

Upon approval by this Court, the Receiver will then: (1) cause Strong EDC and Strong IIC to be formed under the Pennsylvania Nonprofit Corporation Law; (2) appoint the members of the board of directors for each of Strong EDC and Strong IIC; (3) cause each of Strong EDC and Strong IIC to complete its respective organization and to file IRS Form 1023 and all related documents necessary to support application for recognition of exemption under Section 501(c)(3) of the Code; (4) cause each of Strong EDC and Strong IIC to complete any and all additionally required state and local registrations to conduct fundraising activities; and (5) cause each of Strong EDC and Strong IIC to begin implementation of its respective 5-year action plans.  The Harrisburg City Council and the City will assist and cooperate, as necessary, in the formation of Strong EDC and Strong IIC and the implementation of the Governance Proposal and Action Plan.

C.        Harrisburg OPEB Trust.

 1.         Introduction.

The purpose of the Harrisburg OPEB Trust is to provide a source of future funding for the City’s OPEB obligations, improve the City’s financial statements, and demonstrate the City is proactively addressing its unfunded OPEB liability through prudent fiscal management.  The Government Finance Officers Association (“GFOA”) recommends prefunding OPEB in a trust as they are earned on an actuarial basis (i.e. over the working life of the employee) as opposed to paying for each year’s OPEB expense through budgeted contributions on an annual “pay-as-you-go” basis. Historically, the City and other public entities have funded OPEB on a pay-as-you-go- basis, which is the simplest and cheapest option in the short term.  In the long-term, however, prefunding all or a portion of the OPEB liability offers significant advantages and, when coupled with responsible cost-containment measures and benefit design, will help ensure the sustainability of the City’s OPEB obligations.

Another advantage of the Harrisburg OPEB Trust is its favorable impact on the City’s financial statements.   The Government Accounting Standards Board (“GASB”) has prescribed certain requirements for a trust used to prefund OPEB that, if met, will allow the City to reduce the reported OPEB liability on its financial statement and calculate its unfunded OPEB liability using an advantageous discount rate, both of which should positively impact its credit rating.   To comply with the GASB trust requirements, the Harrisburg OPEB Trust must be irrevocable and the assets generally must (1) not revert to or be used by the City other than for provision of OPEB to retirees and their beneficiaries, (2) be legally protected from the City’s creditors, and (3) be held in a tax-exempt trust.  The Harrisburg OPEB Trust will be tax-exempt under Section 115 of the Code, which allows the City to exclude income derived from performing an essential governmental function (i.e. funding OPEB liabilities for the benefit of its retirees).   A Code Section 115 trust is the preferred OPEB funding vehicle for many public employers because it is administratively less burdensome than other tax-exempt trust options, which require an Internal Revenue Service filing to confirm the trust’s tax- exempt status and ongoing compliance with applicable Code requirements to maintain such tax-exempt status.

2.         Approval and Formation of the Harrisburg OPEB Trust.

The Receiver shall establish the Harrisburg OPEB Trust as a separate legal entity governed by a board of trustees (“OPEB Board”).  The OPEB Board will be comprised of nine (9) members who will be appointed as follows:

 (a)       one (1) individual will be appointed by the FOP; (b)   one (1) individual will be appointed by AFSCME; (c)    one (1) individual will be appointed by the IAFF;

(d)       two (2) individuals to be appointed by City Council;

(e)       two (2) individuals to be appointed by the Mayor; and

(f)        two (2)  individuals to be appointed by the Receiver.

Proposed appointments to the OPEB Board shall be submitted to the Receiver on or before the date that is ten (10) days after the date of consummation of the Strong Plan.  Thereafter, the Receiver shall submit to this Court for approval certain documents necessary for the formation of the Harrisburg OPEB Trust, including, without limitation, a trust agreement, an investment policy statement and a custodial agreement (the “OPEB Trust Documents”), together with a list of the names of the proposed OPEB Board member.  Upon approval of the OPEB Trust Documents and the proposed OPEB Board members by this Court, the City and the City Council, shall take all necessary action to facilitate and effectuate the appointment of the OPEB Board and the formation of the Harrisburg OPEB Trust, pursuant to the OPEB Trust Documents and the Strong Plan.  The OPEB Board members will be fiduciaries with the duty to act in the exclusive interests of the beneficiaries of the Harrisburg OPEB Trust and not the City.

The Receiver shall utilize funds maintained in the trust account to be established for the Harrisburg OPEB Trust in an amount not to exceed $60,000.00 to fund the costs associated with the formation and establishment of the Harrisburg OPEB Trust and related costs.

3.         Actions of the Harrisburg OPEB Trust.

Distributions from the Harrisburg OPEB Trust will be made only at the direction of the OPEB Board.  The City may not, without unanimous OPEB Board approval, access the funds in the Harrisburg OPEB Trust to satisfy current OPEB payments to participants if at the time such OPEB payments are due, the City has any “unfunded actuarial accrued liability” so that the present value of OPEB benefits that have accrued to date exceeds the funds set aside in the Harrisburg OPEB Trust, as determined by the City’s independent enrolled actuary under Government Accounting Standards Board Statement 45 (“GASB 45”).

The OPEB Board will select a custodian for the trust assets and an independent third-party investment adviser to oversee the investment funds and establish an investment policy subject to any City requirements and procedures for entering into similar contracts and arrangements.  The OPEB Board will separately pay from the funds maintained in its trust account all fees related to the ongoing administration of the Harrisburg OPEB Trust.   Additionally, although the City will generally retain the power to amend the Harrisburg OPEB Trust, no amendment will be permitted without approval of the OPEB Board.  No such amendment will be permitted to the extent it would cause the Harrisburg OPEB Trust to lose its status as a GASB trust, to be revocable, or to provide for distributions when the City has any “unfunded actuarial accrued liability” for OPEB so that the present value of OPEB benefits that have accrued to date exceeds the funds set aside in the Harrisburg OPEB Trust, as determined by the City’s independent enrolled actuary under GASB 45.  Further, during the pendency of receivership, no amendment will be permitted without the approval of the Receiver.   Similarly, in the event the receivership is vacated or terminated and a coordinator is appointed by the Secretary of DCED (“Coordinator”) to oversee the continued implementation of the Plan, no amendment will be permitted without the approval of such Coordinator.

Although the Strong Plan does not require the City to make additional contributions  to ] the  Harrisburg  OPEB  Trust,  the  City  is  encouraged  to  annually contribute towards reducing its unfunded actuarial accrued liability for OPEB, in addition to any amounts that may be transferred to the Harrisburg OPEB Trust by the Strong EDC and as otherwise described in Part Five, Section G.  Although prefunding the Harrisburg OPEB Trust will result in higher initial costs than if the City continues each year to only pay its current OPEB liabilities on a “pay-as-you-go” basis, the additional contributions will yield significant cash flow savings in later years, better secure funding of OPEB liabilities for current and future retirees, and lower the burden that increased OPEB liabilities will have on future taxpayers.

PART EIGHT

CONDITIONS TO THE STRONG PLAN’S CONSUMMATION

In this Part Eight, we will discuss briefly the contingencies that will be need to be satisfied in order for the Strong Plan to be consummated.

First and foremost, this Court must have determined that this Strong Plan should be confirmed and issues an order to that effect.

In addition, the following must have transpired:

1.       All settlement agreements contemplated throughout the Strong Plan will have been executed unless any such agreement not so executed were to be found by this Court to be insubstantive and not to meaningfully affect the integrity and viability of the Plan.  All executed settlement agreements will be filed with this Court when received by the Receiver.

2.       City Council must have approved legislation extending the 1% Earned Income Tax increase through 2016.  Between the filing of the Strong Plan and the hearing by this Court to consider whether to confirm the Strong Plan, it is expected that City Council will enact that required legislation.  The Receiver will file supplemental evidence of City Council’s approval with this Court.  If the required legislation for the EIT increase has not been approved by City Council prior to this Court’s consideration of the confirmability of the Strong Plan, the Receiver requests that this Court confirm the Strong Plan subject to the City Council’s adoption of the EIT legislation.

3.       The conditions agreed to between the Receiver with each of AGM and Dauphin County as set forth in Part Six, Section D.3 of the Strong Plan shall have been satisfied or waived by the affected party or parties.

4.       The appeal period with respect to this Court’s confirmation of the Strong Plan will have run, or any appeal that were to be filed, finally determined and overruled in its entirety, or at a minimum, overruled as to any aspects that could affect the integrity of the Strong Plan or the rights of the parties to or affected by it, unless the parties to each of the Incinerator transaction and the Parking Transaction, the Receiver and AGM and Dauphin County each determine to proceed to consummation during the pendency of an appeal or an appeal period.

5.       The coordinated closings of the Incinerator transaction and the Parking Transaction shall have occurred.  Each of these transactions must be approved by the respective parties thereto, including in each case by ordinance by City Council.  These approvals are anticipated between the filing of the Strong Plan and the hearing by this Court to consider whether to confirm the Strong Plan and the approvals will be provided to  this  Court  when  received  by the  Receiver.    If  any required  legislation  or other approval has not been acted upon prior to this Court’s consideration of the confirmability of the Strong Plan, the Receiver requests that this Court confirm the Strong Plan subject to obtaining any such approvals.  Additionally, the closing of each of the transactions is conditioned upon a series of conditions that will be set forth in each of their respective Asset Purchase Agreements.  The closing of the transactions themselves will occur simultaneously with the consummation of the Strong Plan and the respective parties to those transactions could decide to waive individual conditions to their closing and, thus, the only anticipated pre-consummation filings with this Court with respect to the Incinerator transaction and the Parking Transaction are the filings of the approvals of the board of each of the parties to the transactions.

Apart from the foregoing conditions, the Receiver anticipates further filing with this Court both before and after the consummation of the Strong Plan to provide status updates and to seek further guidance and approval from this Court.  In addition to the approval-related filings enumerated above, the Receiver may file additional documents and agreements in furtherance of the Strong Plan prior to its consummation.  The additional documents and agreements will be entirely consistent with the Strong Plan and simply contain further details.

After consummation of the Strong Plan, the Receiver will continue to update this Court and seek guidance and approval from this Court as the Strong Plan is implemented.  For example, as provided in Part Seven of the Strong Plan, with respect to establishment, initial operations and anticipated plans for Strong EDC, Strong IIC and the Harrisburg OPEB Trust which are key components to sustaining and enhancing the stability and vitality of Harrisburg that will result from the implementation of the Strong Plan.

PART NINE

PURSUIT OF INCINERATOR-RELATED CLAIMS

 A.         The Nature of The Incinerator Claims and the Receiver’s Intention To Pursue Them.

 In the Preliminary Recovery Plan which was submitted to this Court in February 2012  and  approved  in  March  2012,  the  then  Receiver  discussed  his  intention  to evaluate the possibility of pursuing what this Strong Plan has, as a short hand, denominated the “Incinerator Claims”.  To expand the definition, “Incinerator Claims” generally includes claims against professionals or entities that are alleged to be responsible for:  (a) THA’s imprudent determination to retrofit the City Incinerator facility at great expense and with enormous potential financial exposure; as well as (b) the City’s decision to financially expose itself to serious liabilities when it determined to backstop THA’s huge undertaking by agreeing to reimburse the insurer of bonds issued to finance the project for every dollar of net revenues needed to pay off the bonds in full that the project did not generate.

As this Court and the public are well aware, in January 2012, shortly prior to the filing of the February 2012 Recovery Plan, a comprehensive forensic report was issued by the current Board of THA (the “Forensic Report”).  The Forensic Report provided significant details and raised myriad concerns relating to the various financings of the Incinerator’s retrofit.  The Forensic Report, among other things, highlighted the fact that the project’s completion necessitated the borrowing and expenditure of tens of millions of dollars more than had originally been contemplated when the decision to repair and overhaul the Incinerator — a facility which had already been closed for some time due to environmental and other issues — was first made in the early part of the last decade by the then officials of the City of Harrisburg and THA.  Additionally, the Forensic Report brought to light that when the Incinerator finally reopened in 2007, after protracted construction delays, it was never able to generate sufficient revenues, net of paying the operating expenses of the facility, which remotely came close, or would ever come close in the future, to repaying the very significant financial obligations that THA had incurred to retrofit the plant.

As is apparent to anyone reading the Forensic Report, the fundamental proposition that the Incinerator could realistically have “paid for itself” from its net operating revenues appears to have been ill-conceived from the outset.  The public expects that there be a means to obtain redress for these ill-fated decisions if there is evidence to support the allegation that highly imprudent actions were taken by those charged with protecting the City and its taxpayers against these very types of circumstances.  The current Receiver agrees with the public that these matters merit full consideration.  Indeed, while the Preliminary Recovery Plan had indicated that the Receiver had retained legal counsel to review and evaluate the Forensic Report, the Receiver now reports to this Court that such analysis has been made, and that the Receiver intends to consider using every measure available, including discussions seeking consensual resolutions or litigation if deemed warranted, to seek redress from those professionals and entities alleged to be responsible for the various decisions to proceed with the Incinerator retrofit project.

Of course, to the extent not legally constrained, the Receiver intends to keep elected City of Harrisburg officials apprised as best is appropriate regarding the status of his pursuit of Incinerator Claims, whether before suit were to be brought or, if suits are commenced, thereafter.  And, while the Receiver as best he can within the bounds of the law will seek input from City officials, the decision to pursue Incinerator Claims, including whether and on what terms to settle or to institute suit, necessarily must be the Receiver’s to determine in the fulfillment of his legislatively assigned duty to take actions that he deems appropriate to prudently and responsibly complete the implementation of the Strong Plan, of which the Incinerator Claims are a part.

As was made clear when the Preliminary Recovery Plan was submitted and confirmed, it is not possible at this time to begin to estimate what amount of proceeds could possibly be achieved either through settlement, litigation or some combination. Nor can the Receiver predict how long it might take to achieve settlements, or if matters were to be pursued in court, whether the claims would be successful after all appeals were completed, and how long the litigation process could take.  For these reasons, as also explained in the Preliminary Recovery Plan, the Receiver could not and cannot now rely upon potential recoveries from Incinerator Claims as a reliable source to base a solution to the City’s existing structural deficit or as the near-term source to benefit the City’s immediate need to make infrastructure improvements, ignite economic development or fund the Harrisburg OPEB Trust.   Unquestionably, however, if Incinerator Claim recoveries that benefit the City were to be obtained, most of the portion of the proceeds earmarked to benefit the City will be deployed to further improve the City’s infrastructure, enhance economic development efforts and additionally fund the Harrisburg OPEB Trust.

It is possible that the resolution of Incinerator Claims could take a period of time longer than the time the Receiver will be serving.  In the event that the Receivership were to terminate prior to the completion of this Incinerator Claims process, the duties of the Receiver will be transferred to the person or entity otherwise responsible for oversight of the City’s financial condition, as addressed in Part Eleven of the Plan, or the oversight of the Incinerator Claims will be conducted in the manner as this Court shall direct, if prior to the termination of the Receivership, the Receiver shall seek authorization from the Court regarding the appointment of a person to conduct that oversight.    By  the  terms  of  the  Strong  Plan,  this  Court  is  being  asked  to  retain jurisdiction, among other reasons, for this purpose.  If the Receiver shall seek the aid of this Court to appoint someone to specifically oversee the Incinerator Claims as provided for in the preceding sentence, the Mayor, City Council, AGM and Dauphin County will be given reasonable notice thereof, and they will be provided an opportunity to be heard on the appointment of the person or entity to serve in the role previously served by the Receiver with respect to the pursuit of Incinerator Claims as set forth in this Part Nine.

B.        Allocation of Net Proceeds.

If the Receiver or his successor is successful in the pursuit of the Incinerator Claims, then, from time to time, in his determination, distributions of available proceeds shall be made for the benefit of the City, and to AGM and Dauphin County.  The allocation of distributable proceeds between AGM and Dauphin County on the one hand, and for the benefit of the City on the other, shall be as follows:  (a) AGM and Dauphin County shall receive 100% of the Incinerator Claims proceeds that might result from a resolution of the matter described in Part Six, Section C.5 of the Plan up to the sum of $4.5 Million, less legal fees and expenses, if and to the extent those incremental proceeds were to occur because the swap claimant waived its termination fee; and (b) as relates to all other recoveries, net of legal fees and expenses, that are to be distributed in respect to Incinerator Claims, seventy-five percent (75%) of those distributions, up to the first $4.0 Million, shall be distributed for the benefit of the City and twenty-five percent (25%) of up to that first $4.0 Million amount shall be distributed collectively to AGM and Dauphin County, with the allocation between them to be as they mutually and in writing direct.  As to distributions in excess of $4.0 Million, sixty percent (60%) of such distributions shall be distributed for the benefit of the City, and forty percent (40%) collectively to AGM and Dauphin County, allocated between them in the manner they mutually and in writing agree; provided, however, that if and at such time as distributions totaling $15 Million to AGM and the County collectively were to be paid to them, including amounts, if any, that they might receive pursuant to Part Five, Section G.3 of the Strong Plan, all future distributions of Incinerator Claim recoveries thereafter would be for the benefit of the City.

All distributions of Incinerator Claim recoveries made to benefit the City shall be allocated to in the manner set forth in the City of Harrisburg Incinerator Claim Recovery Allocation Formula, as defined in Part Five, Section G.3 of the Strong Plan.

PART TEN

OPERATIONAL INITIATIVES AND PROGRESS REPORT

 The Strong Plan provides a solution to the City’s critical debt issues and secures funding  that  will  be  leveraged  to  grow  the  local  economy  and  improve  City infrastructure.  The solutions outlined in the Strong Plan are critical steps forward on the City’s path toward achieving financial stability and their importance cannot be underestimated.  However, it is equally important to ensure that the City of Harrisburg is able to meet its fundamental responsibility, which is to deliver critical public services such as police and fire protection, transportation infrastructure maintenance, and code enforcement.  The task is therefore not only to address the City’s debt crisis, but to do so while building a sustainable local government that can effectively and efficiently deliver those critical public services long after the Receivership has concluded.

In March 2012, the Commonwealth Court confirmed the Preliminary Recovery Plan, which contained 130 initiatives designed to address the City’s structural budget deficit and improve the effectiveness and efficiency of local government operations. Since then, the City, DCED, and the Office of the Receiver of the City of Harrisburg (the “Office of the Receiver” or “OTR”) have worked collaboratively to implement initiatives outlined in the Preliminary Recovery Plan.

Addendum 3 of the Strong Plan, entitled “Operational Initiatives and Progress Report”, provides a description of what has been accomplished to date and the tasks that lay ahead.  In addition, the exhibit includes four new initiatives, which are defined in the “New Initiatives” section of the report.  These initiatives build upon the successes of the past 18 months and take into account the evolving financial and operational environment.  These new initiatives focus on four key areas: 1) Building upon the City’s efforts to create a modern fleet maintenance and management operation; 2) Improving the City’s workers’ compensation program; 3) Implementing an energy conservation program, and; 4) Conducting a quantitative workload-based staffing analysis of the Police Department patrol function.

The initiatives outlined in the Operational Initiatives and Progress Report are a component of the Strong Plan and represent important steps toward building a strong, sustainable local government.

PART ELEVEN

PLAN IMPLEMENTATION AND RETENTION OF JURISDICTION

 Provided the Court, pursuant to Section 703(e) of the Municipalities Financial Recovery Act, as amended (the “Act”), confirms the Strong Plan, then, in that event, subsequent to the date of its Consummation, the Strong Plan shall be implemented (i) by the Receiver, or (ii) in the event the receivership is vacated or terminated, either by operation of the Act or by further Order of the Court, then by the Coordinator in accordance with the provisions of Section 221(b)-(d) of the Act.

In the event the receivership is vacated or terminated and a Coordinator is appointed by the Secretary of DCED to oversee the continued implementation of the Strong Plan, the City shall continue to be subject to the provisions of Chapters 2, 3, and

4 of the Act, until such time as the Secretary of DCED has issued a determination pursuant to Section 253 of the Act that the City’s status of municipal financial distress is rescinded.

Provided  the  Court  confirms  the  Strong  Plan,  then,  except  as  specifically provided herein, the Receiver and the City, including, without limitation, the Mayor of the City, the City Council and other City officials, shall be free to take all actions necessary for the implementation of the Plan without approval of the Court.  Following the date of the consummation of the Strong Plan, the Court shall retain jurisdiction over the Strong Plan  and  over  any  subsequent  modifications,  if  any,  to  the  Strong  Plan.  More specifically, the Court will retain jurisdiction with respect to, among other things, the following matters and for the following purposes: (1) To determine any motion to modify the Strong Plan; (2) To determine all questions and disputes regarding any settlement agreements or other contractual arrangements executed pursuant to the Strong Plan; (3) To correct any defect, to cure any omission, or to reconcile any inconsistency in the Strong Plan, and/or any order confirming or otherwise pertaining to the effectuation or implementation of this Plan as may be necessary or desirable to carry out the purposes and intent of this Plan; (4) To interpret and construe the terms and conditions of this Plan and to determine all questions arising in connection with implementation of this Plan; (5) To enter any order, including injunctions, necessary to enforce the terms and conditions of the Plan and/or to carry out the purposes and intent of this Plan; and (6) To resolve any objections that may be filed regarding any action taken or proposed to be taken in order to implement and enforce the terms of this Plan.