Bloomberg News

Harrisburg Ex-Mayor Left Pennsylvania City Near Bankrupt

May 14, 2012

Harrisburg's former Mayor Stephen Reed in a March 15, 2004 file photo taken in front of the city's National Civil War Museum. Reed's penchant for borrowing saddled Harrisburg, where 30 percent of residents live in poverty, with $459.2 million in debt. Photographer: Carolyn Kaster/The Associated Press

Harrisburg's former Mayor Stephen Reed in a March 15, 2004 file photo taken in front of the city's National Civil War Museum. Reed's penchant for borrowing saddled Harrisburg, where 30 percent of residents live in poverty, with $459.2 million in debt. Photographer: Carolyn Kaster/The Associated Press

Stephen Reed, Harrisburg’s mayor for 28 years, pushed Pennsylvania’s capital into insolvency as the more than $500 million in bond deals he oversaw to finance community development drained city coffers.

An incinerator overhaul, with related debt now topping $300 million, capped the Democrat’s mayoral career. While not the largest, it was the riskiest of his credit-fueled projects, which may lead the city of 49,500 to enter bankruptcy as early as July, after a law barring that step expires.

“He leveraged things and wasn’t concerned about paying any debt off, just getting more and more money,” Dan Miller, the city controller, said of Reed.

Known for enjoying a light beer over ice in his off hours, Reed, 62, often worked into the night in his City Hall office, cigarettes and Diet Coke at hand. His penchant for borrowing saddled Harrisburg, where 30 percent of residents live in poverty, with $459.2 million in debt.

Reed’s indulgence in credit also generated millions of dollars in bank fees, sometimes for deals that auditors said didn’t make sense. It even extended to his own home, on which deed records show he took at least 18 loans over about 35 years.

Reed also used guarantee fees on incinerator debt to boost Harrisburg’s general fund. Now assets may be sold, including the trash-to-energy plant to help restore the city’s finances.

Put Off Solutions

“The tragedy of Reed is that he did have 28 years, he did have a generation, to do positive things,” Miller said in an interview. “Instead he kicked the can down the road.”

Reed declined to comment about his tenure in an e-mailed response to six separate inquiries, including by telephone and visits to his home and office. He left office in 2010.

The litany of borrowing he oversaw ran from $391.3 million in 1986 for a hydroelectric dam, which regulators blocked, to $7 million for the Harrisburg Senators Double-A baseball team, which the city sold in 2007. An incinerator audit, released in January, questioned interest-rate swaps with a Royal Bank of Canada unit, including one costing about $8 million.

Calling the audit “fundamentally flawed,” Elisa Barsotti, a Royal Bank spokeswoman, said the swaps cut the interest costs tied to the trash-to-energy plant. “We stand by our work.”

Reed, who hasn’t been accused of any crime related to municipal finances, also pledged the city’s backing for debt taken on by the Harrisburg Authority, which controls the incinerator. Reed appointed members of the authority’s board. The facility doesn't generate enough revenue to meet its obligations.

Collecting Pension

The former mayor, who collects an annual pension of about $56,000, according to the city controller’s office, now shares office space with and has worked as a consultant for Frederick Clark, a one-time authority chairman.

“No one did anything wrong,” Clark said by telephone.

The city got fees from the agency for debt guarantees, and records show some of the money went into municipal accounts set up under Reed’s control. He used the cash to help finance municipal development projects that reflected his interest in history, such as collecting a wooden Indian, wanted posters and vintage weapons for an Old West museum that never got built. A showplace dedicated to the Civil War opened in 2001.

Borrowing for one of his earliest plans, the Susquehanna River dam, opened the door to bankers seeking lucrative financing fees, said John Brinjac, a former Reed campaign manager and chief executive officer of Harrisburg-based Brinjac Engineering Inc. The company has worked for the city.

Swarming Bankers

“You had a lot of investment-banking guys, financial managers, bond counsel people swarming over the city,” he said.

Reed oversaw repeated borrowing to pay off previous debt while he held office. In 1997, Harrisburg sold securities to help fund the Civil War museum and to refinance bonds issued two years earlier.

Harrisburg’s predicament, placing it alongside Stockton, California, on the brink of seeking court protection, underscores the risk of piling up debt. More than $3 billion in sewer bonds led Jefferson County, Alabama, to become the nation’s biggest municipal bankruptcy last year.

Property records show Reed used his Harrisburg home, with peeling green paint and a rusty knocker on the door, to generate cash. State ethics forms indicate that in some years, he listed balances of at least $6,500 each on nine credit cards, a number that fell to seven by 2010, suggesting $45,500 or more in debt.

Curbs Sought

More than once, residents and City Council members went to court to curb Reed’s power. In 1997, Dauphin County Judge Joseph Kleinfelter ruled that he shouldn’t have spent $2.9 million obtained from the 1990 municipal-water system sale. Yet the judge declined to impose a fine, saying he had no doubt that “the mayor had the best interests of the city in mind” even if Reed had taken a “Machiavellian” view of his role.

A state ethics panel in 1993 failed to uncover evidence linking more than $50,000 in political contributions to Reed’s official actions in hiring donors to work on the dam project. The commission also found no proof that the private Mayor’s Club fund, which collected $30,000 from 1982 through 1986, violated the law. Reed spent the donations on antiques, artwork and expenses during trips to Texas, New York and Israel, according to the ethics probe.

From 2004 through 2010, 13 percent, or $90,000, of the mayor’s campaign expenditures were reimbursements to him, according to data compiled by Bloomberg News from financial reports. Yet the forms didn’t say what the payments covered.

Raises Questions

“If a candidate just turns in a bill for $10,000 for reimbursement with no definition, we don’t really know whether that was used for influencing the outcome of an election,” said Barry Kauffman, executive director of watchdog group Common Cause Pennsylvania.

Reed also spent more than $19,000 from his campaign fund on “shipping” from 2005 through 2009, without specifying in disclosure forms what was sent.

The web of borrowing under Reed left Harrisburg with a debt of more than eight times its general-fund budget, according to a recovery plan from David Unkovic, the first state receiver to take over a Pennsylvania city. After calling for probes of the incinerator financing, he resigned in March, citing “political and ethical crosswinds.”

Unkovic has refused requests for comment on his departure. William B. Lynch, a retired U.S. Air Force general, has been named to replace him.

Old-Fashioned Methods

As mayor, Reed usually arrived at his office by midday and worked into the evening, said David Black, president and chief executive officer of the Harrisburg Regional Chamber & CDREC, or Capital Region Economic Development Corp. The memorabilia- stuffed chamber overlooked Restaurant Row, a nightlife district Reed avoided, preferring take-out meals and a light beer over ice at a now-closed bar, according to supporter Annette Antoun.

Reed’s confident, resolute air made business leaders feel welcome, Black said. The mayor’s old-fashioned methods added to his reputation for hard work. He replied to e-mailed appointment requests with typewritten notes sent through an aide. Often smoking, Reed would greet visitors by saying he was swamped, Black said.

As mayor, Reed cultivated an image of a CEO in command. Appearing at major floods and fire calls, he sometimes directed firefighters where to point hoses, said Reizdan Moore, a former council president. Candidates backed by Reed ousted Moore and three others after they fought his baseball project.

Ousted in Primary

A 1967 graduate of Bishop McDevitt High School in the city, Reed drew on a stock of community goodwill, which grew as blighted downtown buildings became busy bars and restaurants. He won a state representative’s seat in 1974, and then a post on the commission governing Dauphin County, which encompasses Harrisburg. He lost the 2009 mayoral primary election.

After becoming mayor, Reed embarked on development projects at a time when the city was losing wealthier residents to the suburbs, pressuring tax revenue. About half the property in Harrisburg is government-owned and exempt from levies.

“It looked ugly,” said Joseph Harenza, a Reading, Pennsylvania, lawyer whose firm, Stevens & Lee, worked on city bond issues in the 1980s. “There was not a lot of community spirit, and it was just a tough place.”

While Reed pushed his projects, Harrisburg’s median household income slid to about $31,500 in his last years in office from an inflation-adjusted $53,800 in 1979, U.S. Census Bureau data show. The amount declined to 61 percent of the national figure in the latest survey, from 68 percent in 1989.

“When you win, you stand up there, there are accolades,” said Clark, the former Harrisburg Authority chairman. “When you don’t do so well, there’s criticism.”

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

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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