On Tuesday night, Harrisburg City Council voted 6-0 in favor of an agreement with Assured Guaranty Municipal Corp., the bond insurer familiarly known as AGM, to help the city avoid default on a $41.6 million debt that starts coming due in 2016.
The settlement represents a last, critical piece in a complex negotiation to resolve the debt in a way that would keep Harrisburg’s finances stable, a year and a half after the city adopted a state-sponsored plan to avert bankruptcy.
Council’s vote, however, passed the settlement to Mayor Eric Papenfuse, who on Friday had a message for the folks who brokered it: he’ll sign, but he isn’t happy.
In a 770-word open letter to Fred Reddig, Harrisburg’s coordinator under the state oversight program for distressed municipalities, Papenfuse critiqued what he saw as the deal’s numerous flaws, saying Reddig’s team had put “enormous pressure” on him to sign the documents before he had time to review them thoroughly.
The mayor attacked the city’s share of the proceeds from the deal, saying they ranged from “anemic” to “disappointing.” He accused the coordinator of having failed to consider the city’s best interest, and blasted an energy contract that wasn’t publicly bid. And he claimed he’d been threatened with the loss of $5 million in annual state funding if he didn’t sign off on the deal.
Several of the involved parties did not return calls on Friday. But a few who did stuck up for the arrangement. Steven Goldfield, a financial advisor to Reddig, said the state Department of General Services, whose 17-year downtown lease is a key piece of the transaction, “bent over backwards” to make things work for the city.
And Brad Jones, the CEO of Harristown Development Corporation, the manager of the downtown properties involved, said he and his colleagues “really feel like we’ve been thrown under the bus.”
Under the arrangement, Harristown had assumed the risk of a new loan and had waived its customary management fee, Jones said. The deal was difficult, he added, but “we did the best we could.”
The deal is the culmination of two years of negotiations to resolve an outstanding debt burden from a city-backed borrowing in 1998.
That year, the city sold three office towers in Strawberry Square to the Harrisburg Redevelopment Authority, at the same time guaranteeing around $24 million in bonds the authority issued to finance the purchase.
Some of the bonds were secured by rent payments from the Commonwealth, which is under contract to lease office space in two of the towers through 2025.
But about $7 million of the original debt was secured by the rent in a separate tower, whose primary tenant, Verizon, was set to depart in 2016.
Under the terms of the original debt issue, the only security for the bonds beyond tenant payments was city tax revenues, meaning that the empty office building would leave Harrisburg on the hook for the full principal and interest on the original debt, for a total of $41.6 million.
In September, the state Department of General Services agreed to pick up where Verizon lets off, with a 17-year lease that will pay off a portion of the city’s obligation each year, for a total of around $11 million through 2033.
As a condition of that lease, however, the Commonwealth required renovation of all three buildings, which Harristown agreed to undertake by way of a $16 million retrofit, financed with a guaranteed energy savings contract with Siemens.
In turn, the lender for the retrofit, First National Bank, required the settlement agreement with AGM that council voted for Tuesday, which would provide some assurance that the Strawberry Square assets wouldn’t get tied up in litigation in the event of a city default.
The mayor’s complaint about the no-bid contract was a reference to Siemens, which Jones acknowledged was awarded the contract without a bid. But, Jones added, Harristown was not a government entity and was not required to seek bids.
Additionally, Jones said, Harristown chose Siemens because the company had already done no-fee work auditing the energy consumption of the Strawberry Square facility, which he described as having high maintenance costs and being badly in need of upgrades.
The mayor ultimately signed the agreement around noon on Friday, he said. But in his released statement, and again at a press conference in the afternoon, he explained he did so “not because I think it is a good enough deal for the residents of Harrisburg, but because I feel the consequences could be worse.”
Reached by phone Friday, City Councilman Ben Allatt, the budget and finance committee chair, said he sympathized with the mayor’s remarks, describing the ultimate arrangement as “the lesser of two evils.”
Allatt pointed to some of the expected benefits of the state lease, including the parking and restaurant revenues that should be realized from the addition of around 900 workers to the downtown scene.
He also expressed frustration over feeling that many negotiations have been “forced on the city” in the course of the state’s intervention, saying Papenfuse “is always right to push back” on contracts that may not be the best deal for the city.
“Are we really getting the best deal? At the end of the day, it’s hard to say,” Allatt said. But, he added of the coordinator’s team, “I don’t think they were negotiating in bad faith for the city. I think there was no easy scenario.”
