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Senate of Pennsylvania
Session of 2015 - 2016 Regular Session

MEMORANDUM

Posted: December 18, 2014 10:19 AM
From: Senator John H. Eichelberger, Jr. and Sen. John P. Blake, Sen. Mike Folmer, Sen. Rob Teplitz
To: All Senate members
Subject: Bipartisan Municipal Debt Reform Bill#1 -Local Government Debt Act
 
Last session, the Senate Local Government Committee held hearings to examine the financial situation surrounding the Harrisburg Authority and the fiscal distress of the City of Harrisburg. Those hearings revealed several issues of statewide importance with regard to the process through which municipalities incur debt. A bi-partisan package of bills to addr3ess those issues was introduced. We plan to reintroduce the legislation which was had drafted as a result of those hearings.
The bill, introduced as Senate Bill 901 last session, would make reforms to the Local Government Unit Debt Act (LGUDA). Much of the information presented at the hearings centered on the provisions of the LGUDA (53 Pa.C.S. §§ 8001-8049). That Act provides for review of project financings by the Department of Community and Economic Development (DCED), defines the different types of debt a municipality may enter into, and sets limits on the amount of debt a municipality can incur without voter approval.
The hearings revealed much about the latent flaws that exist in that process. First, the review conducted by DCED generally occurs after the major decisions about borrowing have already been consummated, no matter the complexity of the transaction. As noted in the testimony, the review is done by one lawyer in DCED’s Office of Chief Counsel, and is largely restricted to whether or not a municipality has filed the appropriate documentation with the Department and whether or not the borrowing is within the statutory debt limits. It is essentially a check-off to see if all of the required documents have been filed, rather than a review of the fiscal impacts of the project. At times, questions do arise as to whether documents meet the requirements and definitions contained in LGUDA, but the Department lacks the regulatory ability to delve into deeper issues. The hearings also called into question many of those definitions and requirements, as well as the Act’s enforceability.

Major examples of this include proper allowable borrowing for the cost of a project and the debt limits imposed on local government units. LGUDA provides that prior borrowing which is “self-liquidating” ( i.e. the project generates sufficient revenues to pay its debt service), does not count against a local government’s debt limit when it seeks to incur new debt. LGUDA allows borrowing only for permissible “costs of a project.” Those costs are defined to include construction costs and one year of working capital/operations costs to get the project up and running. In the Harrisburg instance, borrowing was incurred on multiple occasions to keep the operations of the project incinerator afloat, as well as to reimburse debt service payments made by the city/county under prior debt guarantees and to fill city budget gaps. Clearly, the debt was not self liquidating and the borrowed funds were inappropriately used, but the LGUDA debt limitations were never enforced.

Problems with the use of guarantees were also identified. At the hearings, it became apparent that the guarantees of Harrisburg Authority debt, issued by both the city and the county, were relied upon more than the merits of the project—which was clearly failing. Despite the ongoing history of the project, this enabled the repeated financings. Additionally, fees were charged by both the city and county for the guarantees provided. Those fees were added to the debt, despite not being a bona fide cost of the project, and increased the financial liability to the taxpayers by millions of dollars.

Finally, in addition to a lack of adequate regulatory oversight, the Harrisburg situation involved negligence and malfeasance on the part of contractors, government officials, and their advisers. Financial and legal advisers, who made hundreds of thousands of dollars from these transactions, repeatedly let down their real clients—the taxpayers. The advisers did nothing to protect the City, but rather fatefully assisted the manipulation around the LGUDA protections.
While not all of these problems can be cured by legislation alone, this bill would:
  • Establish an actual review process of complicated transactions by DCED before debt is incurred;
  • Eliminate the ability to charge a fee for issuing a guarantee;
  • Limit the ability of municipalities to provide unlimited guarantees of other entities’ debts;
  • Amend the “self-liquidating” and “working capital” definitions to prohibit reimbursements for payments made under a guarantee or other non-project-related costs;
  • Provide for fiduciary duties of those who represent local governments, as well as penalties for false filings.



Introduced as SB340