Another one bites the dust? Part 2, How deep a hole?
[Continued from yesterday's Part 1.]
By: David A. Smith
Yesterday we scratched the surface of
Uh, Madame Mayor?
The crisis is arising because Mayor Thompson is taking a stand:
“Any mayor that signs a bill that doesn’t budget for its debt obligations certainly is in violation of debt act ordinances and also its own city ordinances,” Thompson said following the vote.
Vetoing non-spending: Mayor Thompson
The budget battle between the council and the new mayor has left many
“I wouldn’t say this is a big issue people talk about,” said Wendy Yanich, 43, a retail shop employee. “You don’t know what’s true or false.”
Allowing Ms. Yanich her rational ignorance, let’s illuminate what’s true and what’s false, shall we?
Here are the big figures:
The budget comparison: all such excerpted from the city’s 135-page FY 10 budget (pdf)
Let’s start with the eye-popping number – the increase in debt service from $11.9m to $80.5m – ‘only’ a $68.6m jump.
That’s some increase!
[By the way, that number I can't square with the projected debt service anywhere, so it probably included principal payments or reserve funding. In any case, as this is a blog post and not a forensic or fraud audit, I'll gullibly accept it as an accurate figure of the capital shortfall necessary to bring
The city council cavalierly proposed to fund this somehow – presumably by raising cash assets somewhere, or by taxing the residents. Remarkably, Harrisburg’s current expenses – that is, those that contribute to visible citizen benefits like police, firefighters, public works, parks and recreation, and even dedicated public servants (‘general government’) – represent only 33% of the total proposed budget (the one the Mayor vetoed).
Here it is in numbers …
The ‘general fund’ consumes only one third of the expenditures
Instead, debt service is a whopping 41% of the total – and that excludes the 23% of the budget that goes directly for utility services.
To plug the hole with controllable revenues,
The city is bankrupt in all but name.
How did
An expansive vision of a transformed city: Stephen Reed
As related by Wikipedia, Mayor Reed went on an ambitious program of expanding his city’s governmental services. Without for the moment trying to judge the wisdom of these moves, just count the number of times Mayor Reed made long-term expenditure commitments – new capital projects or assumed social mandates.
Reed is credited with conceiving and developing Harrisburg’s City Island park, the National Civil War Museum, the Harrisburg University of Science and Technology, and the high school that accompanied it.
Spending money to build buildings adds a long cost. So does creating new civic attractions (like the
A good idea that almost certainly doesn’t pay for itself
In 2000, the
Adding another cost.
Most recently, in 2006 Reed was credited and recognized by the Federal Emergency Management Agency for reducing the city’s flood risks.
Adding another cost.
Not a good trend
Reed’s successes are balanced by setbacks:
Population loss
Mounting debt
Continued poverty remain challenges as
Is
A town is a business that sells quality of life and competes with other towns to attract real estate tax payers. It spends its revenue on infrastructure that enhances quality of life and enables it to attract more workers and real estate tax payers. Some towns are so attractive, relative to their rural competition, that they attract millions of newcomers without even trying, and these towns become megacities by growing vast economically rational but unplanned spontaneous communities called slums, where the housing demand has overrun the infrastructure capacity – and the problem of fixing slums’ overrun capacity is, I believe, the greatest demographic challenge of the 21st century, the century of cities.
Because towns compete, some lose.
Those setbacks notwithstanding, in December 2006 the City Mayors organization recognized Reed’s achievements by awarding him the bronze third place in its annual World Mayor competition.
As we wrote in our study of MEEs, beware the visionary CEO who becomes overconfident.
Overconfidence of the visionary CEO. Visionary CEOs that had created a business from scratch had successfully taken risks others feared to take. Some became vulnerable to believing that their judgment was always more right than the skeptics and naysayers. This belief eventually dulled their former perceptiveness to risk.
Overconfidence in the visionary CEO. Boards recruited by a visionary CEO placed too much credence in flat CEO assertions. The board members lacked devil’s-advocacy rigor – even willingness to be ‘rude’ – that should reside in the investment committee, credit policy committee, or audit committee.
Throughout his 28-year tenure, Mayor Reed was supremely confident:
Trust me, this is going to work
Opponents and critics are most outspoken about the methods Mayor Reed used to fund the purchases without public oversight: “Every time the independent Harrisburg Authority floats bonds for the
Mayor Reed won reelection in 2005, unopposed, after winning the Democratic Primary against Jason Smith, a
As late as January 2009, he was called “Mayor-for-life.”
Has a nice ring, doesn’t it?
Hubris is always followed by nemesis.
Look on my works, ye mighty, and despair
In the May 2009 Democratic Primary, Mayor Reed lost his re-election bid to Harrisburg City Council president Linda Thompson.
Having both served on the city council during Mr. Reed’s mayoralty, Ms. Thompson and Mr. Miller know what they’re in for:
I swear to admit we’re broke, totally broke, and nothing but broke
[City Comptroller Dan] Miller, who was elected independently of the mayor, argues that Chapter 9 would allow the city to shed at least some debt, the same way that bankrupt firms renegotiate terms with creditors.
I’ve got all the figures
[Continued tomorrow in Part 3.]
Comment from Dan Gaulin
Date: April 5, 2010, 9:27 am
David,
Very interesting series on Harrisburg and municipal finance. I just read the latest Matt Taibbi piece in the Rolling Stone -http://www.rollingstone.com/politics/story/32906678/looting_main_street , and colorful rhetoric aside, I get the sense that he is not that far off the truth, but I’d be interested in your take as you understand these transactions better than I. Also, I wonder if some of the difficulty in getting Harrisburg’s numbers to jibe are a result of some of these penalties and fees that Taibbi describes. And this is not just an Alabama or Pennsylvania thing – I am not sure of this but didn’t our own Turnpike Authority get involved with some complicated financial products that didn’t work out to well? In the end, I suspect that as long as we have a political system (voters and officials) that have difficulty facing the real costs of infrastructure (or public services for that matter) and a financial system that is creative enough to push off the day of reckoning (for a dear price), then we’ll continue to see more Harrisburgs and Birminghams.
Dan