Bloomberg News

Harrisburg Receiver Resigns After Calling for Probes

March 30, 2012

Harrisburg (9661MF:US)’s receiver, David Unkovic, resigned today, dealing the latest setback to the insolvent Pennsylvania capital that has skipped payments on debt and had a bankruptcy bid rejected.

Unkovic, 57, gave no reason for resigning, effective immediately, in a letter to the Commonwealth Court, said Kevin Harley, a spokesman for Governor Tom Corbett. The state’s first receiver took over Dec. 2 to devise a recovery plan. The city defaulted on some general-obligation bonds March 15.

“His resignation is both unexpected and unfortunate,” Harley said by telephone.

A former bond lawyer, Unkovic on March 28 sent formal requests for state and federal investigations into “possible illegal activities” in financing an overhaul of a trash-to- energy incinerator that pushed the capital into insolvency. He cited an audit released in January by the Harrisburg Authority, which controls the plant.

Unkovic had proposed selling city assets to cover debt of more than $300 million, five times Harrisburg’s general-fund budget. Much of that was incurred to help pay for incinerator work. Last week, a county judge ruled that control of the facility should be handed to another receiver.

Ruling Prompted Call

Unkovic didn’t respond to calls for comment on his resignation today. In an interview yesterday, he said that a March 22 ruling by Judge Todd A. Hoover prompted him to seek state and federal examinations of the financing.

“I was very concerned about the effect of this order by Judge Hoover to put back the incinerator to parties who caused the massive debt,” Unkovic said in the interview in his office. The additional receiver probably won’t interfere with Unkovic’s plans to sell or lease the plant, Hoover said in his ruling.

Because of the power of the state’s receivership law, Unkovic’s resignation shouldn’t impede the plan he put in place, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

“The bus is going to keep moving,” Schankel said by telephone. “They’re changing drivers and how they navigate.”

Harrisburg Mayor Linda Thompson said she will continue to follow Unkovic’s plan, which was approved by the Commonwealth Court on March 9.

Seeking Solvency

“We remain focused on the goal of eliminating the structural deficit and returning this city to fiscal solvency,” Thompson said in a statement. About 30 percent of Harrisburg’s almost 50,000 residents live in poverty.

Unlike previous fiscal recovery plans, Unkovic didn’t mandate the sale of assets. After receiving bids for the city’s parking system, the incinerator and operations of the water and sewer system, he said he would negotiate with creditors on any debt that wouldn’t be covered by the transactions.

Unkovic’s resignation underscores the difficulty in dealing with the city’s financial situation short of declaring bankruptcy, city Controller Dan Miller said in an interview.

“Bankruptcy is imminent,” Miller said by telephone. “No one can make this work.”

The city is barred by state law from seeking bankruptcy protection until July. A federal judge cited that fact in rejecting an attempt to file for Chapter 9 proceedings by the City Council last year.

No Performance Bond

In 2003, the city on the Susquehanna River helped pay for an overhaul to remedy environmental violations by the municipal incinerator. The financing contained no performance bond to protect against shoddy or untimely work, which Unkovic has said was unusual.

Now operating near capacity, the plant doesn’t generate enough revenue to pay its costs including the debt, which grew after the first contractor, Barlow Projects Inc., was dismissed. Covanta Holding Corp. (CVA:US) was hired to complete the work and run the facility.

Harrisburg started skipping payments on incinerator debt in 2009. The city owes $310 million, including penalties to Assured Guaranty Municipal Corp. (AGO:US) and Dauphin County, which backed some of the debt after the city failed to meet its obligations.

The audit cited by Unkovic said municipal officials and advisers “knew or should have known that, at a minimum, there was substantial risk” the plant wouldn’t produce enough revenue to cover costs. He asked U.S. Attorney Peter J. Smith in Harrisburg and Pennsylvania Attorney General Linda Kelly to investigate the incinerator bond deals.

Heidi Havens, a spokeswoman for Smith, and Nils Frederiksen, a spokesman for Kelly, declined to comment March 28 on the request for examinations of the plant’s financing.

Rejected Approach

“There’s been challenges from a number of people that I didn’t rubber stamp the Act 47 plan from the summer,” Unkovic said in an interview yesterday, referring to the proposal by consultants hired under the state’s distressed cities program. The council has rejected that approach.

“Mr. Unkovic had been serving the city well,” Councilman Brad Koplinski said by e-mail. “He listened to every voice on the subject and was fair and honest. He was asking the right questions and coming to the right conclusions.”

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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