Two nights before Christmas, Eric Papenfuse, the Midtown businessman who was elected mayor in November 2013, was sitting in council chambers in city hall. Outside, in the atrium, was the 26-foot artificial holiday tree which, in a characteristic coaxing of largesse from area corporations, he had gotten donated from Giant Food Stores. While council members amended one of his proposed bills, the mayor spun a pen rotisserie-style between his fingers.

The bill proposed a policy, known as tax abatement, which attempts to incentivize development by providing tax breaks for improvements on certain properties. Ultimately, council amended it so extensively that the administration asked it to be withdrawn. (A subsequent effort to revive it last month was rejected by a split council.) As a result a major administration initiative, and one that Papenfuse announced his support for during his mayoral campaign, wound up on an indefinite backburner.

After the meeting, Papenfuse expressed his disappointment about the failure of the bill. But then he pivoted to a positive note—council had passed his 2015 budget without substantive disagreement, aside from a few quibbles over the salaries of his front-office staff.

A balanced budget, as political achievements go, is not particularly exciting (even if governments at every level seem to struggle to pull it off). Yet, given Harrisburg’s circumstances at the start of his tenure, it might be the most enduring legacy of Papenfuse’s inaugural year.

Tightening the Belt

The state’s recovery plan for Harrisburg, which was called the Harrisburg Strong Plan, included a promise—carefully hedged—of basic financial stability. The city, the plan said, would get a balanced budget in 2013, plus the “expectation” of future balanced budgets through 2016. For each of those years, the city could be “comfortable” that its revenues would cover “required operating expenses.”

There was a reason for the hedging. Four months later, City Council approved a 2014 budget that contained a $4 million “plug”—an accounting trick to conceal the fact that the budget included several expenses the city could not technically afford. Making up a little less than half of the total were savings expected from a new labor agreement with the firefighters union, which the city did eventually secure under Papenfuse in February. Most of the rest was attached to vacant positions, meaning that the city could keep a balanced budget simply by not hiring. But there was an additional challenge. The city was carrying about $4.5 million in unpaid bills over from 2013 into the new year.

Early in the year, Papenfuse met with his finance director, Bruce Weber, as well as the new controller, Charles DeBrunner, about a spending strategy. According to DeBrunner, he looked over the mayor’s wish list and told him, “You’re going to be a miserable mayor in 2014. We’re not doing any of this stuff.” They agreed on a tightened-belt approach: not only would they enact a hiring freeze, but they would also urge city departments to spend less than they were authorized to spend.

During an interview last month, Papenfuse presented a chart showing the results of that directive. In each of four spending categories, the city had significantly underspent its approved budget: $36.8 million on personnel, out of an approved $38.9 million; $1.6 million on supplies, out of an approved $2.6 million; and so on. (Some of the savings, Weber said, resulted from the use of lease financing for certain equipment, so that expenses were spread over several years.) As a result, the city had more than covered the plug, managing to pay down all but a few hundred thousand in 2013 payables while still having an end-of-year fund balance of $5.3 million.

“In my wildest dreams I never thought I’d see a fund balance like this,” DeBrunner told me. “The mayor’s had a terrific year. I’m really pleased with him. And controllers don’t get pleased.”

Nonetheless, in Papenfuse’s view, the city’s cash balance is still less than it ought to be. At the suggestion that the city could afford to cut taxes, he replied, “Let’s not get ahead of ourselves.”

“You should never run a business or a municipality to the point where you have to just stop paying people,” he went on. “The problem with Harrisburg is that, in the past, they just stopped paying the bills. And we now have enough of a cushion to be ensured to be able to pay our bills on time. But that’s it. And that cushion’s not going to be duplicated in the coming year.”

Weber, noting that $5 million represents about one month of city expenses, said that a city with a budget like Harrisburg’s should really maintain a balance of around $15 million. (A best practices document from the Government Finance Officers Association, approved by the organization in 2009, recommends that governments generally maintain a minimum unrestricted fund balance of two months’ worth of operating expenses.) But the surplus does leave him confident that, in 2015, the city will be able to pay its bills on time—and to do so, in contrast with the Harrisburg of the not-too-distant past, without borrowing any money.

Settling Debts

The Strong Plan settled Harrisburg’s historic debt tied to the city incinerator. But it left unresolved a substantial obligation, related to a downtown real estate deal from the late 1990s, which threatened to topple city finances only a few years later.

The debt is associated with the so-called Verizon building, a tower in Strawberry Square where the telecommunications company rents office space. In 1998, the Harrisburg Redevelopment Authority issued $23.6 million in revenue bonds to purchase Strawberry Square land and facilities from the city. The city, as part of the deal, guaranteed $6.9 million of these bonds. But the debt payments, which were supposed to be secured by tenant rents, would not begin until 2016—the same year the lease with Verizon is set to expire. Furthermore, the bonds were capital appreciation bonds, meaning that the full principal has been accruing interest since the bonds were originally issued, so that the debt load currently exceeds $20 million. (By the time the debt schedule concludes, in 2033, $41.6 million will have been paid back on the original $6.9 million borrowing.)

In September, the state Department of General Services agreed to a 17-year lease in the building beginning in 2016, relieving the city of part of the burden. DGS’s rent, however, will not be sufficient to cover all of the debt payments, and the city and its advisors are currently negotiating how the remainder will be paid.

The obligation weighs heavily on Papenfuse. When I arrived for our interview, a leather-bound book of documents from the Verizon-building debt issue was on his desk. “We feel we can meet the obligation,” he said. “It’s just such a horribly bitter pill for the city to have to swallow.” He called the debt the “worst of all of the Reed transactions,” referring to former Mayor Stephen Reed, under whose watch the borrowing occurred. “It’s preposterous. It should never have been recommended,” Papenfuse said. Yet, the debt was approved by a City Council vote; the city had pledged its credit, and though the mayor was reviewing the related documents, he felt that the city would likely have no choice but to pay it.

Last March, the city exited receivership, the period of direct state oversight that produced the Strong Plan. But it remains in Act 47, the state program for distressed municipalities, through which it continues to receive guidance from many of the same advisors who helped craft the plan.
One of those advisors is Steven Goldfield, who has been working closely towards a settlement on the debt related to the Verizon building. In a recent interview, Goldfield said it was his “mantra” that the city “would not have ascending debt service” under the Strong Plan. To achieve this, however, may require some postponement of some of the early payments the city owes under its guarantee. Under the proposed settlement, details of which were still being negotiated at press time, Assured Guaranty Municipal, which insured the original bonds, would advance some portion of the payments to bondholders and be paid back by the city with interest at a later date.

Even with a settlement, the city’s borrowing ability will be deeply constrained. In accordance with his mantra, Goldfield’s target is to limit annual debt service to 10 percent of the city’s revenues. According to a chart of projected debt payments under the proposed settlement, provided by the mayor’s office, a conservative estimate has city debts hitting the 10-percent-of-revenues mark through 2032—and that’s without any new borrowing. (Debt payments currently exceed the 10-percent cap and are projected to do so through 2022.) In other words, as Papenfuse put it, the city has “basically maxed out” its credit for the next 17 years.

A Fiscal Conservative

Given the city’s financial condition, a mayor with any ambitions for projects beyond the bare essentials—like spending on safer streets, for instance, or road repair—has two options: increase revenues or get somebody else to fund them. This context may help make sense of some of the mayor’s recent battles. When Papenfuse took up the issue of student safety, for instance, he supported the idea of police officers in city schools—he just wanted the district to pay for them. (The district, so far, has declined.) Likewise, he sees the debate over tax abatement as a debate about the best way to expand the city’s tax base over the long term.

Understanding these constraints also helps to form a picture of Papenfuse’s politics. He is in many ways an urban progressive, supporting same-sex marriage, standing by the city’s gun control ordinances, demanding better educational results from city schools and promoting city living. But he is also a fiscal conservative, who prioritizes paying the city’s bills on time over, say, filling a vacant position, even one he believes the city needs. Among his department heads, he said, he sought to instill a new ethos: “Just because it’s in the budget doesn’t mean you have to spend it.”

“I think that this particular time and this particular moment in the city’s history required a level of fiscal conservatism,” Papenfuse told me. He claimed to have operated under even more conservative estimates than the city’s state advisors, who projected higher revenues than Papenfuse was willing to believe. “Believe it or not,” he said, “we are more fiscally conservative than the Commonwealth of Pennsylvania.”