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Municipal folly bankrupts a state capital

On October 12, Harrisburg, the capital of Pennsylvania, filed for bankruptcy. The move took most of America by surprise headlines on CNN and the Drudge Report played the story as breaking news. It was not. Harrisburg's failure has been so long in the offing that last June the state legislature passed a law forbidding the city from declaring bankruptcy until July 2012. (The city will challenge this law in court.) People in Pennsylvania have been waiting for Harrisburg to go broke for a long time.

Harrisburg's financial ruin has long been assured, but not for any of the usual reasons. There are no runaway pensions eating up the budget or dirty officials embezzling funds. The city's tax base has not hollowed out like Detroit's. Instead, Harrisburg was doomed by a single project: a waste-to-energy incinerator that has left a city with an annual budget of $55 million some $280 million in debt. That's a debt load of $6,000 for each of the 49,500 men, women, and children in town, an amount so staggering it was impossible for the city to sustain it. (The saga has been chronicled by John Luciew of the local Patriot Times for several years in a tour de force of reportage.)

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Harrisburg's runaway incinerator is a compendium of failure?--?a combination of fashion-based policy, bad decisions by a local government, and schizophrenic federal mandates.

The story begins in 1967, when Harrisburg contracted with a local engineering firm to conduct a study of its waste-disposal needs. This was a period in American life when garbage disposal was just beginning to take shape as an engineering field. Prior to the mid-'60s, more than half the towns in America had no long-term plan to deal with solid waste; they simply found the cheapest available land and dumped their refuse or buried it in landfills. The proper planning and management of dumps and landfills had yet to be refined, and many of these sites were considered hazards. It was common throughout the period to hear garbage horror stories, like the great fire at the Kenilworth dump in Washington, D.C., or the toxic-waste scare at Love Canal in New York.

Then the federal government stepped in. Incinerators had been around since before the turn of the century: The Army built the first American incinerator in 1885. And while they had been popular in big cities during the 1930s, they fell out of favor over the next 30 years. As the federal government began grappling with waste management, it decided to give the incinerator industry a little boost to help revive it. To that end, the 1970 Clean Air Act put an end to open-burning at landfills, making landfills more costly to operate and incinerators an attractive alternative. It was not terribly surprising that Harrisburg's consultants recommended the town build its own incinerator.

An incinerator works about the way you'd imagine: Trash goes into a furnace, mechanical grates churn it, and intense heat reduces it to ash, which is ejected out the side while gaseous emissions are pumped out of a stack. Harrisburg's incinerator was built for $12 million and boasted a total theoretical burn capacity of 500 tons per day. It opened for business on October 10, 1972.

From the start, the plant didn't work very well. There were frequent explosions and unintended fires. Ash kept gumming up the mechanism, and whenever the metal grates jammed, the entire system had to be shut down. It's unclear how much money the operation cost the city during those early years, but it was a major announcement when the town's mayor declared, in 1981, that he had gotten the incinerator out of the red. Later evidence suggests that the mayor was exaggerating: The plant continued running at a loss until 1985. Either way, the expenses piled up: In addition to the initial cost, and the revenue hole, and higher-than-expected maintenance, the debt had to be refinanced. A few years later, the city had to float a $25 million bond just to clean out the incinerator's landfill. Locals dubbed the plant's 80-foot-tall pile of ash "Mt. Ashmore." 

But in the midst of all the bad news, there was a glimmer of hope. As part of the '70s oil shocks, parts of the American energy establishment cottoned on to the idea of turning "trash to steam" to generate electricity. In 1978, for instance, the Public Utility Regulatory Policies Act was passed requiring the Federal Energy Regulatory Commission to guarantee a market (meaning subsidized loans) for electricity produced by small power plants (meaning trash-to-steam facilities). The idea was simple: Use the heat from incinerators to send steam from boilers through turbines, which generate electricity. The Europeans had been using variations of trash to steam for years, and if the Europeans liked it, it had to be a good idea. The first American waste-to-energy plant (engineers in the field hate the term "trash to steam") opened in Massachusetts in 1975; and the fad spread nationwide.

Harrisburg jumped on the bandwagon in 1984, when it built a 5,000-foot pipeline to vent steam to power a nearby Bethlehem Steel plant. In 1985 the town added a turbine, for on-site electricity generation. But the added revenues did little for the bottom line. In 1993 the city unloaded the plant, selling it to a quasi-public utility, the Harrisburg Authority. The incinerator was "sold" for $40.7 million, which wasn't as good a deal as it looked. The Harrisburg Authority was closely tied to the city, and most of the money from the sale was in IOUs.

Shunting the incinerator to the Harrisburg Authority was mainly a way to insulate the town's mayor and council from the decision to raise garbage collection fees. The city was still on the hook for the costs of the plant. For instance, when the incinerator needed $10 million worth of repairs in 1996, the Harrisburg Authority technically borrowed the money?--?but the city backed the loan and guaranteed whatever payments the company couldn't make.

In the late '90s pollution from the plant began to get worse, too. Dioxin levels ran eight times higher than they had been just a few years earlier and the incinerator was clearly on the wrong side of the 1990 amendments to the federal Clean Air Act. Harrisburg bargained with the EPA for a decade before the feds finally came in and shut the incinerator down in December 2000.

Rep. Ronald Buxton, D-Harrisburg, center, talks with Rep. Bill DeWeese moments after a bill aimed at giving Pennsylvania Gov. Tom Corbett the power to force Harrisburg, Pa., into a state-sanctioned plan to deal with its staggering debt, Oct. 19, 2011 Associated Press

The shutdown was a crisis for the city. They still owed enough money on the facility that they needed the revenues it provided (even though it still ran at a net loss). And the city continued to believe that, if the kinks could just be worked out and the boilers kept running at peak capacity?--?for much of the time, the plant limped along at 25 percent capacity?--?then it could eventually be made profitable. And sitting out there was the debt load. Abandoning the plant would mean eating the entire nut, with nothing to show for it.

The EPA gave the city two options: shut the incinerator down permanently, or put in place a plan to meet federal air-quality standards by 2003. The city deliberated for three weeks. Then they decided to double down.

Over the next three years, the city requested bids for modernizing the plant. The proposals from the big players in the industry were in the $100 million range. (The highest bid came in at $178 million.) But one contractor stood out. Barlow Projects had a revolutionary design for waste-to-energy boilers. They were willing to do the job for $57 million.

The Barlow price was a trap. It was so low that it should have sent the city running. But by 2003 the total accumulated debt on the incinerator was $104 million. So the fact that the price was absurdly low made it, for a city already on the ropes, almost impossible to pass up.

Retrofitting the plant meant shutting it down for three years. In order to pay for the job, cover lost revenues, and maintain service on their existing debt, the city had to take out $125 million in new loans. The plan called for rebuilding the existing two boilers and adding a third, upping the plant's capacity to 800 tons per day. In addition, Barlow's proprietary technology promised that the boilers would have no moving parts (forced air would churn the trash), so they would not constantly be on the fritz, as they were in the old plant. The plan projected that revenues from the new facility would be $23.2 million in the first year and would rise robustly from there. By 2034, it would be generating $44 million a year and the entire debt would be worked off.

The cascade of failure which followed resembled the sinking of the Titanic.

The problems began immediately. The new contractor, Barlow, revised its cost upward to $77 million before it even began work. Also, it turned out that the firm was too small an operation to get bonded for a project of such magnitude. Instead, the city sought to protect itself by withholding large chunks of payment until goals were met, attaching stiff penalties for failure.

Barlow's lack of experience proved problematic. Right off the bat, one subcontractor, a steelworks in charge of forging the boilers, ran six months behind schedule. This destroyed the entire timeline?--?a big problem since the town's $125 million loan only covered its debt-service payments through what was supposed to be a hard completion date. 

And that's when things got really bad. In the legal world, entities without money are thought of as "judgment proof." That is, even if you could win a lawsuit against a bad actor, it wouldn't really matter, since they couldn't pay you. Barlow was "penalty proof."

Barlow Projects was so undercapitalized that by 2005 it wasn't able to continue work on the project without the funds the city was withholding. Barlow was behind schedule and hadn't met its goals, but it was also on the verge of going out of business. So the city couldn't penalize it. In fact, Harrisburg had no choice but to continue fronting money to the foundering company?--?because if the city pushed Barlow under, the project would be in even deeper trouble. So long as there was a chance Barlow might finish the job, the city would do whatever it could to keep the company afloat. Harrisburg was shoveling good money after bad; but by this point, it had no better option.

As Barlow began to sink, the city disbursed the money it had been holding in escrow. When Barlow went over deadline and was supposed to be paying $22,000 for every day each boiler was late, the city forgave the penalty. But in the end, the city couldn't drag Barlow across the finish line. The company went bankrupt, the third boiler was never finished, and the city finally sued Barlow for $70 million. This lawsuit, however, was mostly therapeutic: To the extent the company still exists as a legal entity, it will never be able to compensate Harrisburg for the damages it caused.

By the time Barlow gave up the ghost, Harrisburg's incinerator was a shambles. A story in Governing magazine reported that "streams of water flowed through the facility, amidst piles of ash; . . . the all-important third boiler had been 'completely scavenged' to maintain the two existing boiler units." Another firm, Covanta Energy, was hired in December 2006 to try to salvage the job. When he first saw the plant, Covanta vice president Jim Klecko reported, "I don't want to say I was scared, but I had reservations about physically going through the facility." Without the third boiler, the city was losing another $1 million a month. The total debt from the incinerator stood at $288 million.

From the minute the Barlow project failed, it became clear that the city would eventually take refuge in bankruptcy. The debt load was simply too great for a town of such modest size?--?there was no way to dig out. That's why Harrisburg declined to make any payments on its debt in 2010. Like a homeowner underwater on his mortgage, the town realized that there wasn't much point treading water on the note because eventually it would have to hand over the keys and walk away.

To that end, the city declined not only to service its debt but to take measures that might at least have put a dent in its obligations. It raised property taxes, but only slightly. It cut a handful of city workers. But when the mayor?--?whose career was effectively over?--?put forth a proposal to lease city-owned garages near the capital for $100 million, the council rejected it. The council understood that $100 million wouldn't get the city out of danger and they were better off retaining what assets they had.

Eventually, the mess will be sorted out by the courts. Harrisburg is suing Barlow for breach of contract and asking another court to nullify the state's attempt to keep it out of bankruptcy. Bondholders have filed six suits against the city, seeking to get at least some portion of the total debt or at least a chunk of the $65 million which is already overdue. Late last week, the state legislature voted to take the city into receivership.

As for the incinerator, Covanta, which came in on the salvage mission, has taken over the plant and has it up and running again--and burning Harrisburg's trash. The company claims that the incinerator is now running at 92 percent capacity.

Bio: Jonathan V. Last is a senior writer at The Weekly Standard. The opinions expressed in this commentary are solely those of the author.

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