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City of Harrisburg, PA
Review and Analysis of Harrisburg Financial Recovery Plan:
Strong Plan (26 August 2013)
REPORTED PREPARED ON SEPTEMBER 16, 2013
This document has been developed for the City Council of Harrisburg, Pennsylvania. The contents of the document are the property of the City, and may include forward looking statements that are subject to market, economic, and operational variation. The past operational performance is no indication of future results. Furthermore, the
underlying data are provided by external council and advisors, and we do not guarantee the accuracy of the information provided by external parties.
ALVAREZ & MARSAL PUBLIC SECTOR SERVICES, LLC Columbia Square 555 Thirteenth St NW, 5th Floor West Washington, DC 20004
William V. Roberti , Managing Director (203) 400‐1623 [email protected]
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Table of Contents
I. EXECUTIVE SUMMARY ......................................................................................................................... 3
Purpose of Report ............................................................................................................................ 3
Findings and Conclusions ................................................................................................................. 4
II. BALANCED BUDGET .............................................................................................................................. 9
Overview of Strong Plan’s Multi‐Year Forecasts .............................................................................. 9
Revenue Enhancement Assumptions ............................................................................................ 11
Spending Initiatives ........................................................................................................................ 12
Year to Date Financial Results and Cash‐Flow Forecast ................................................................ 15
Findings and Conclusions ............................................................................................................... 15
III. OTHER FUNDING PRIORITIES ............................................................................................................. 17
Background on Plan Components .................................................................................................. 17
Findings and Conclusions ............................................................................................................... 18
IV. SOURCES AND USES OF MONIES FROM SALE OF INCINERATOR ....................................................... 19
Background on Plan Components .................................................................................................. 19
Flow of Funds Analysis and Use of Sale Proceeds ......................................................................... 22
Analysis of Various Agreement(s) Term Conditions and Debt Financing Proposal ....................... 23
Findings and Conclusions ............................................................................................................... 23
V. SOURCES AND USES OF MONIES FROM SALE OF PARKING FACILITIES .............................................. 24
Background on Plan Components .................................................................................................. 24
Flow of Funds Analysis and Use of Sale Proceeds ......................................................................... 24
Non‐Recurring Flow of Funds (Parking Transaction) ..................................................................... 24
Recurring Flow of Funds (Parking Transaction) ............................................................................. 27
Analysis of Plan Assumptions and Projections Revenue Assumptions .......................................... 29
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Net Operating Income (NOI) Enhancement Assumptions ............................................................. 31
Parking Meter Fees and Enforcement Revenue Assumptions ...................................................... 32
Operating Expenses Assumptions .................................................................................................. 33
Capital Reserve Account Assumptions........................................................................................... 35
Analysis of Various Agreement(s) Term Conditions and Debt Financing Proposal ....................... 36
Findings and Conclusions ............................................................................................................... 38
VI. APPENDIX ........................................................................................................................................... 41
APPENDIX A. Documents Reviewed ............................................................................................... 41
APPENDIX B. Index of Major Creditors ................................................................................. 42
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I. EXECUTIVE SUMMARY
Purpose of Report Alvarez & Marsal (“A&M”) was hired by the City of Harrisburg, PA (“City”) to prepare an expert
report related to the August 26, 2013 Receiver’s Strong Plan (“the Plan”). This due diligence analysis
describes our findings based on the information obtained, and addresses the completeness and
reasonableness or, conversely, the deficiencies and inconsistencies perceived in the materials
below. Major components of the analysis include:
Review of the assumptions and projections used to develop the balanced budget for 2013‐
2016 contained within the Plan
Validate the accuracy and reasonableness of the assumptions and projections relating to the
balanced budget for 2013‐2016
Develop a flow of funds analysis that delineates the sources and uses of proceeds derived
from the sale of city assets
Review the debt financing proposals for the parking transaction along with underlying
assumption and the cash flow assumptions
In completion of this report, A&M reviewed various documents, models, proposed debt financing
schedules, term sheets, proposed agreements and other confidential materials related to the underlying
assumptions in the Strong Plan. Our professionals had repeated due diligence conferences with the
Receiver and his financial advisors.
A&M discloses that our existing business relationships with current creditors, financial partners and
bondholders involved in this Plan did not impede or influence in our analysis, due diligence and report
conclusions.
Appendix A provides a listing of the documents provided by the Receiver and the Special Counsel to the
City Council in review and analysis. A&M agreed to a confidentiality agreement related to the uses and
transfer of the documents. A&M worked with the Receiver and his Financial Advisory Team to
understand the budget, the plan assumptions, and the transaction terms.
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Findings and Conclusions
The Harrisburg Strong Plan is a complex financial blueprint with critical initiatives and funding proposals
to address the City’s financial and economic challenges. The revised recovery plan has a number of
solutions that necessitate accommodations of the City, its employees, and major financial and
operational partners.
At the same time, City Council must understand the short and long term benefits, financial attributes
and risks related to the Plan.
Many of the terms and final contractual and transaction financial details of the Plan are still being
developed. City Council needs to understand the major components and cash‐flows to forge a workable
resolution for Harrisburg's future.
While A&M has some remaining questions and potential recommendations to the City and Receiver
related to the major sale and lease transactions, A&M does not see any major hurdles, assumptions or
projections that should prohibit City Council from moving forward in the notice of approval of the plan
concepts.
A&M reviewed the “financial snapshot” multi‐year budget and the various transaction cash flow
projections and assumptions. We held a number of meetings and calls with members of the Receiver’s
Financial Advisory team to understand the major components of the Plan to test the validity and
reasonableness of the assumptions. This analysis is based on estimates, assumptions, and information
gathered from our research related to the Proposed Revised Recovery or Strong Plan. The sources of
information and bases for the assumptions are stated herein. We believe that the sources of
information are reasonable and valid.
Since our recommendations and conclusions are based on estimates and assumptions that are
inherently subject to uncertainty and variation depending on evolving events, we do not represent them
as results that will or will not be achieved. Some assumptions inevitably will not materialize while
unanticipated events and circumstances will occur; therefore the actual results achieved may vary
materially from the examples and conclusions herein. The terms of our engagement do not provide for
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reporting on events and transactions that occurred subsequent to our research completed on
September 15, 2013.
A&M finds that the Plan provides immediate financial rewards and risks that the Council and community
must be aware of to address the future long term sustainability of the City.
Plan Opportunities & Benefits
Eliminates existing debt service funding demands on the General Fund with the defeasance of
the Incinerator Recovery Facility $212.7 million debt
Provides for immediate cash relief to the 2013 Budget to allow for $8.3 million to close the
projected budget deficit and $5.0 million to meet cash‐flow and aging vendor payments
Provides for expanded revenues (Earned Income Tax, Parking Tax, and Other Parking Revenues)
to address operating needs over the next four years
Targets monies for key City challenges and priorities
• $6.0 million for OPEB funding
• $10 million for economic development to improve the local tax and employment base
• $10 million for needed City infrastructure and deferred maintenance needs city assets
Provides budget funding for increasing employee health care and related insurance needs
Provides monies to fill critical city positions and reduced extraordinary operating expenses (e.g.,
overtime due high vacancy rates)
Plan identifies other potential operating and revenue initiatives for the City Council to develop a
long term financial plan
Plan Risks & Challenges
The Plan is only the first step for the City to address financial sustainability. Future operating
initiatives are needed to address potential financial challenges in future years.
Proposed Plan is a work in progress. Final terms for the Asset Transfer Agreement are still in
development and will require ongoing review
Employee wages and benefits being reduced by $4.0 million including $1.8 million for IAFF which
is not confirmed
Need for continued $5.0 million appropriation for the General Assembly for public safety
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The sale of the Incinerator does not fully cover the liability leaving $208 million in debt
The transaction remains highly sensitive to interest rates, and further interest rate increases
could erode value
Parking System Revenues and Operating Expense targets may not be achieved leaving the last
payments in the waterfall at highest risk
The subordination of City payments puts the City more at risk
The structure of debt creates increasing costs in the out years, requiring future revenue growth
One of the major consequences for the City in not moving forward with the proposed transactions is
that the Harrisburg would be faced with the immediate need to file bankruptcy. The current state of the
City’s cash flows does not allow the City to continue as usual with the existing labor, debt and operating
costs and without new revenues or further spending reductions.
While the Revised Recovery Plan may have some unpopular and unique strategies, the City has limited
options to ensure cash solvency by year end. Chapter 9 bankruptcy would have a damaging impact on
the City for years to come.
The cost of bankruptcy is expensive and will cause the City to have to spendhigh amounts in legal and
advisory fees. Bankruptcy will impact to the City’s ability to borrow low interest rate monies in the
future. Underwriters, rating agencies, credit enhancers, and bondholders may be fearful debt
obligations will not be met in future years.
Secondly, a proposed bankruptcy will also have a negative impact to the community including the
potential loss of business and traveler tourism, new home sales, and loss of future economic
development. As a result many of the revenues created by the City from taxes collected on the
community, bankruptcy may cause a longer recovery period.
Most importantly, the Strong Plan is only one of many added financial strategies and initiatives that City
Council will need to complete to achieve financial sustainability. The City will need to continue to
examine operational and program efficiencies and revenue opportunities to address the long term
needs for the City of Harrisburg. The Receiver has identified a number of initiatives that the City should
pursue. At the same time, as the financial control and accountability of the City’s finances returns to the
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City Council, the entire governing body needs to ensure that they have a strategic direction and mission
for the community including a long term financial sustainability plan. With several of the Strong Plan
initiatives expiring over the next three to six years, it is important that the City Council be proactive in
the development of a long term plan to address the challenges of health care costs, employee staffing
and pay incentive, aging infrastructure and other program priorities to enhance the economic viability of
the City.
Based on our analysis, we have developed a number of overarching findings and conclusions:
In light of the current unbalanced budget and bleak financial cash‐flow forecasts immediate
short and long term financial measures are needed.
The Plan’s assumptions and forecasts seem reasonable and valid. While the projections and
assumptions are conservative, several of the revenue and expense projections are not in place
which is essential to balance the budget.
• Continuation of $5.0 million in funding from the General Assembly for public safety
operations. The Baseline Budgets include the public safety appropriation and it is
essential that this supplemental funding continues. If the state funding is not
appropriated, then additional spending reduction or revenue enhancements initiatives
will be required.
• $1.8 million in personnel spending reductions from IAFF contract settlement.
• Elimination of the Incinerator debt and restructuring of other existing debt service
requirements.
The transactions provide immediate cash flow needs to address critical outstanding bills,
backlog of payments, address the timing of revenues, and resolve working capital needs.
Future budgets should be based on the priorities of the City that are within the resource
constraints of the current forecasts. Forecasts need to include current and future impacts of
health/medical costs on current employees and current/future retirees.
The Parking Transaction monetizes (i.e., trade‐off of upfront cash infusion in lieu of future cash
flows) future cash flows of the various parking garages and lots
The Transaction is highly sensitive to interest rates. Future delays in the timely closing of the
transaction could cause reductions in the overall value of the transaction.
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The Parking Transaction includes a number of moving parts, legal requirements, and concessions
that have been made in order to consummate a deal. As a result, the transaction has become
complex and challenging to communicate to the various constituents.
Based on these findings, the City should be aware of the following items related to risks and structure of
the transaction:
• What level of risk is being transferred to the City in the transaction?
• How much of the current financing structure is dependent on future revenues?
• What concessions were required, and does the term sheet reflect all of these
concessions?
• How will the City’s expected payments be affected by the concessions?
• What happens if the surplus revenues are not achieved?
• What happens if the operating income is negative?
• Will the excess funds draw from the Capital Reserve account?
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II. BALANCED BUDGET
Overview of Strong Plan’s Multi‐Year Forecasts
The City’s General Fund Budget was presented in the Plan is balanced. The Plan includes various revenue
enhancements and expense reductions to balance both the current and future year budgets.
While the FY 2013 to FY 2016 General Fund Budgets are balanced, meaning that if the revenue
projections are met and spending is contained with the expense assumptions, the City will have
sufficient revenues to meet all of its required operating expenses over the next four years.
The Plan did not provide multi‐year
detail budget line items for major
spending purposes (e.g., personnel,
supplies, services, capital, and
other) or detail for the major sources of revenues. We did note however that the Plan did include
conservation revenue and cost inflationary adjustments.
The Plan provides a balanced General Fund budget for the next four years including providing resources
for several key priorities. The below table summarizes the major key components of the balanced
General Fund “Financial Snapshot”.
Harrisburg Strong Plan ‐ Financial SnapshotAdjusted Projected Projected ProjectedFY 2013 FY 2014 FY 2015 FY 2016
Beginning Budget Balance ‐$ ‐$ 400,000$ 400,000$
Estimated Baseline Revenue 50,000,000$ 50,526,000$ 50,130,520$ 50,354,710$ Plan New Revenue Sources 19,100,000$ 9,800,000$ 10,342,000$ 10,885,260$ Total General Fund Revenues 69,100,000$ 60,326,000$ 60,472,520$ 61,239,970$
Estimated Baseline Spending 51,330,000$ 52,326,000$ 53,372,520$ 54,439,970$ Plan Cost Reductions/Payments 17,770,000$ 7,600,000$ 7,100,000$ 6,800,000$ Total General Fund Expenditures 69,100,000$ 59,926,000$ 60,472,520$ 61,239,970$
Ending Budget Balance ‐$ 400,000$ 400,000$ 400,000$
Inflationary Growth AssumptionsProjected Projected ProjectedFY 2014 FY 2015 FY 2016
Revenues 0.0020% 0.0020% 0.0500%
Expenses 2.00% 2.00% 2.00%
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Components of the Strong Plan's Financial Impact to the General Fund Forecasts
FY 2013 FY 2014 FY 2015 FY 2016
BEGINNING FUND BALANCE ‐$ ‐$ 400,000$ 400,000$
REVENUES:
BASELINE REVENUES (Revised) 50,000,000$ 50,526,000$ 50,130,520$ 50,354,710$
NEW OR EXPANDED REVENUESExisting & New Priority Revenues (Meter Enforcement) ‐$ 1,400,000$ 1,442,000$ 1,485,260$
Priority Parking Distributions ‐$ 500,000$ 1,000,000$ 1,500,000$ Earned Income Tax 5,900,000$ 7,900,000$ 7,900,000$ 7,900,000$
Monies for Payables & Working Capital 5,000,000$ ‐$ ‐$ ‐$
Monies to Balance Budget 8,200,000$ ‐$ ‐$ ‐$ TOTAL NEW OR EXPANDED REVENUES 19,100,000$ 9,800,000$ 10,342,000$ 10,885,260$
TOTAL TOTAL GENERAL FUND REVENUES 69,100,000$ 60,326,000$ 60,872,520$ 61,639,970$
EXPENSES:
BASELINE EXPENDITURES (REVISED) (1) 51,330,000$ 52,326,000$ 53,372,520$ 54,439,970$ (Net of Existing Debt Service)
REDUCED OR REVISED SPENDING INITIATIVESPersonnel Costs ‐ Labor Concessions(3) (700,000)$ (4,000,000)$ (4,500,000)$ (4,800,000)$ Personnel Costs ‐ Reduction in Force ‐$ (600,000)$ (600,000)$ (600,000)$ Revised Debt Service ‐ GO Debt (Ambac) (2) 5,970,000$ 7,700,000$ 7,700,000$ 7,700,000$ Revised Capital Equip. Leases 3,000,000$ 3,000,000$ 3,000,000$ 3,000,000$ Payment to Suburban Communities 4,500,000$ 1,500,000$ 1,500,000$ 1,500,000$ Aged Payables/Backlog 5,000,000$
TOTAL REDUCED/REVISED SPENDING 17,770,000$ 7,600,000$ 7,100,000$ 6,800,000$
TOTAL GENERAL FUND EXPENDITURES 69,100,000$ 59,926,000$ 60,472,520$ 61,239,970$
ENDING FUND BALANCE ‐$ 400,000$ 400,000$ 400,000$
(1) Excludes a l l Debt Service Payments including Incinerator Debt Service i s $212.7 mil l ion
(2) GO Debt Restructuring resul ted in a savings of $1.7 mil l ion in FY 2013 and $17 mil l ion in future years
(3) Requires IAFF Approva l
(4) Avai lable funds for new capi ta l pay go or debt service after remaining obl igations aga inst $3.0 mil l ion
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Revenue Enhancement Assumptions
Parking Facility Tax ‐ Parking Priority Payments and Parking Meter Enforcement Revenues
Parking Tax ‐‐ Increase in Meter & Enforcement Revenues
The 2013 Baseline Budget includes $1.1 million from current parking meter
enforcement. The Plan estimates an additional $400,000 per year of fixed parking meter
enforcement payments to be made to the City under the Parking Transactions proposal.
In order to achieve this estimate the new parking authority must adequately staff the
parking enforcement to achieve this estimate.
Priority Parking Distributions
The Plan projects that the City will receive the Priority Parking Payments from the
parking operations. The Parking Transaction cash flow earmarks lease payment for the
lease of the Parking Facilities. The Plan projects the priority parking distribution of
$500,000 in FY 2014 with a 3
percent growth factor for six
years.
The lease payment will be paid
to the City for the entire lease term of the parking facilities. In addition and through
2018 the Plan enhances payments to the General with enhanced lease payments
totaling:
Earned Income Tax (EIT)
Monies from the approved additional 1 percent EIT may be used to address current and future
year operating needs. The Financial Snapshot reflects the incremental increase of $5.9 million of
projected from the 2013 increase. Revenues from the standard 0.5 percent EIT are included in
the Baseline Budget projection. In order to have sufficient funds to operate on a balanced basis
for Fiscal Years 2014 to 2016 the Plan recommends that the City Council approval legislation for
the extension of the EIT through FY 2016.
Priority Parking Payments
FY 2013 $ 0.00 million FY 2017 $ 1.50 millionFY 2014 $ 0.500 million FY 2018 $ 2.00 millionFY 2015 $ 1.000 millionFY 2016 $ 1.500 million TOTAL $ 6.500 million
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Monies for Payables and Working Capital
The Parking Transaction reflects the transfer of one‐time monies ($ 5.0 million) to address the
“backlog” city bills and payables. The one‐time funds will help provide for financial relief from
the timing of revenue and provide for adequate “working capital”. The Government Finance
Officers Association (GFOA) recommends that unrestricted funds should have working reserves
of up to two months of needed working capital.
Monies to Balance Budget
The current budget is not balanced. One‐time funds are needed to ensure that the General Fund
is not in a deficit position at year end. The one‐time monies are needed to not only balance the
budget to address several budget shortfalls in the current year budget.
The Receiver identified the need to an additional $1.9 million for healthcare and other insurance
costs; $1.2 million in overstatements in revenues from the HPA transfers; and $200,000 in
reduced parking enforcement revenues due to current staffing levels.
Spending Initiatives
Elimination of Incinerator Debt Service
The Plan eliminates existing debt and funding demands on the General Fund with the
defeasance of the Incinerator Recovery Facility $212.7 million debt. See the Incinerator Section
of this report for discussion on the proposed uses of monies from the Sale of the Resource
Recovery Facility (Incinerator) of the HPA. The elimination of the $15.0 million in annual debt
service provides immediate and ongoing financial relief to address current financial cash‐flow
issues.
Labor Wage and Benefit Economic Contract Provisions
The Plan reflects the implementation of labor agreement changes for the City’s various
collective bargaining units including the Fraternal Order of Police (FOP); American Federation of
State and Municipal Employees (AFSME); and the International Association of Firefighters (IAFF).
Both the FOP and AFSME Employees have approved collective bargaining agreements through
end of FY 2016. Below is a summary of the wage reduction projections provided by the Receiver.
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A&M was only provided summary level cost savings estimates. The contract modifications
reflect changes in economic compensation in wages and
health care. FOP and AFSME employees (excluding
Parking) have agreed to contract provisions for period of
2013 to 2016. Receiver continues active negotiations with
IAFF with similar wage and benefit economic benefit
changes.
The contract amendments reflect changes to health/medical care coverage reducing the City’s
current and future health/medical costs including post‐employment cost. Major components of
the FOP and AFSME Health/Medical Plan changes include:
Health Insurance Contract Changes
Changes in plan design, coinsurance, copays and deductibles
Changes in prescription copays and restrictions
FOP Employee contributions – percent of base salary of 6 year patrol officer, based on
tier of coverage
AFSME Employee contributions – percent of base salary, based on tier of coverage
If City’s costs increase more than 6 percent annually after 2015, then parties are
required to negotiate and go to mandatory expedited interest arbitration
Can change to PEBTF
A&M was unable to validate or test the projections related to the proposed cost savings.
However the tenants of the wage and benefit reductions seem reasonable and valid.
Summary of Strong Plan Personnel Spending Reductions from Labor Agreements
Cost Reductions by Labor Group FYY 2013 FY 2014 FY 2015 FY 2016 Totals
AFSCME ‐ General Fund 160,000$ 460,000$ 460,000$ 460,000$ 1,540,000$
FOP 440,000$ 1,880,000$ 1,920,000$ 2,240,000$ 6,790,000$
IAFF ‐ Proposed 140,000$ 1,670,000$ 1,830,000$ 2,100,000$ 5,740,000$
Total Reductions to Personnel Costs 740,000$ 4,010,000$ 4,210,000$ 4,800,000$ 14,070,000$
Cost Reductions by Uses of Monies FY 2013 FY 2014 FY 2015 FY 2016 Totals
Salaries & Wages 76% 59% 60% 59% 59%
Benefits & Other Personnel Costs 24% 41% 40% 41% 41%
Approved Salary/Wage Adjustments
AFSCME* & FOP Agreements
FY 2012 3% IncreaseFY 2013 0% IncreaseFY 2014 0% IncreaseFY 2015 1% IncreaseFY 2016 1% Increase* Does not include AFSCME parking employees
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Reductions in Force Based on Changes in THA's Operations of the Water and Sewer Systems
With the proposed organization changes of the water and sewer operations the Plan eliminates
related positions and funding for existing positions that will be become the staffing cost of the
THA. The Plan projects $600,000 annually in reduced General Fund costs for water and sewer
support staff meter enforcement working for Standard Parking.
General Obligation Restructuring
The Plan restructures the City's other General Fund debt and capital lease obligations, as well as,
the current GO debt structure with Ambac, resulting in lower payments with an extended bond
maturity for additional years. Since March 2012, the City defaulted on its GO obligations and
projected to be unable to pay the September 2013 repayment obligation. The total defaulted
payments exceed $17 million.
Ambac’s settlement with City reflects a payment of $5,970,000 by December 15, 2013. The
monies to make the payment are to be derived from proceeds of the Parking Transaction. This
amount is $1.7 million less than original FY 2013 payment amounts.
Existing capital leases with Sun Trust Leasing will are also proposed to be restructured providing
annual financial savings to the General Fund. These leases include previous purchases for
vehicles, computer equipment and other equipment.
The City is in arrears in its payments to SunTrust in the amount of approximately $1.3 million.
The Receiver is engaging in settlement discussions with SunTrust with a potential a lump‐sum
payment by early 2017.
Suburban Sewer Billing Claimants
The Suburban Claimants have claimed
over billings of sewer system rate charges
of approximately $25 million. The
proposed settlement agreement will
Suburban Sewer Billing Claimants
FY 2013 $ 4.500 million FY 2017 $ 2.225 millionFY 2014 $ 1.500 million FY 2018 $ 2.225 millionFY 2015 $ 1.500 million FY 2019 $ 2.225 millionFY 2016 $ 1.500 million TOTAL $ 15.675 million
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repay the various customers. Monies to make the above payments are to be placed in a lockbox
escrow account to be managed by a third party.
Year to Date Financial Results and Cash‐Flow Forecast
A&M reviewed the current year budget results. The City currently has 91 vacant positions of which
approximately 80 FTE are estimated to be General Fund positions. While the current budget will realize
the benefit from the position vacancies, some departments have experienced increased overtime costs
due to required staffing requirements. At the same time, staffing shortfall (e.g., Parking Enforcement)
has resulted in lower than estimated parking fines.
The current Approved Budget is still unbalanced. The Receiver’s Financial Team did indicate that there
were initial problems with revenues and expenditures projections/assumptions that may not occur. The
corrections have been made to the Adjusted 2013 Budget. The year to date results are somewhat
misleading however, due to the current general obligation debt not being paid and with a remaining
significant year end deficit.
A&M also examined the Receiver’s Cash‐Flow Forecasts. The forecasts did reflect that if a revised
revenue and expense plan was not enacted the City would be out of cash before the end of the year. The
City does not have sufficient working capital or fund reserves to address current aging payables, provide
for adequate cash flow or address the proposed shortfall.
Findings and Conclusions
In light of the current unbalanced budget and bleak financial cash‐flow forecasts immediate
short and long term financial measures are needed.
The Plan’s assumptions and forecasts seem reasonable and valid. While the projections and
assumptions are conservative, several of the revenue and expense projections are not in place
which is essential to balance the budget.
o Continuation of $5.0 million in funding from the General Assembly for public safety
operations. The 2013 budget and 2014 to 2016 budgets include the public safety
appropriation and it is essential that this supplemental funding continues. If the
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annual or multi‐year appropriation is not approved, then additional spending
reduction or revenue enhancements will be required.
o Agreement on the $1.8 million in personnel spending reductions from IAFF contract
settlement.
o Elimination and restructuring of existing debt service requirements.
Immediate cash flow needs to address critical outstanding bills and backlog of payments,
address the timing of revenues and working capital needs.
Future budgets should be based on the priorities of the City that are within the resource
constraints of the current forecasts. Forecasts need to include current and future impacts of
health/medical costs on current employees and current/future retirees.
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III. OTHER FUNDING PRIORITIES
Background on Plan Components
The Plan earmarks monies from the Parking
Transaction for designated program priorities
for the City. These designated program
transfers include:
Economic Recovery Development
The Plan outlines a collaborative approach to develop an economic recovery strategy that
engages the City and community leaders. $10.0 million is earmarked from the Parking
Transaction to help “expand the City's revenues through new sources of tax revenues paid by
successful new or expanded businesses or by individuals investing in housing and improvements
within the City”.
Capital Infrastructure
The Plan earmarks $10 million from the Parking Transaction to address aging capital needs to
address needed repair, upgrades, and building renovations over the next several years geared to
improving the City's life quality and spring load further investment in the City.
Other Post‐Employment Benefits (OPEB) Trust Fund
A&M was unable to validate the current unfunded liability of the City’s post‐employment
benefits to retirees. However, the Receiver’s team indicated that the liability was over $120
million. The recent and proposed labor agreement modifications imposed changes to the City’s
funding levels for current employees which will have an impact in future years. The Plan targets
$6.0 million in onetime funds over the next several years to begin to address the City’s future
liabilities.
The Plan outlines the creation and funding of a trust fund to begin to address unfunded its
employee’s post‐retirement health care costs for active and retired city workers.
Strong Plan Recovery Prioritites Earmarked
Funds
Economic Recovery Development 10,000,000$
Capital Infrastructure 10,000,000$
Other Post Employment Benefits 6,000,000$
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Major contractual changes in the approved FOP and AFSME agreements for retiree benefits include
the following major plan changes which could affect the future unfunded liability:
No post‐retirement health benefits for employees hired after ratification
Current employees (FOP)
• Same health plan as active employees, same copayments, etc.
• Retiree contributes percent of pension based on tier of coverage
• Not eligible if other coverage at same or lower cost available
• Only through Medicare eligibility, and then receive reimbursement of supplemental insurance
Current employees (AFSME) (employee coverage only)
• Same health plan as active employees, same copayments, etc. • Window for employees who are eligible to retire under Rule of 85 and are
Age 55 as of December 31, 2013 • Other retirees contribute same amount paid for single coverage on date of
retirement • Not eligible if other coverage at same or lower cost available • Only through Medicare eligibility, and then receive reimbursement of
supplemental insurance
Findings and Conclusions
The earmarking of funds to address economic recovery and capital infrastructure needs is a valid
and reasonable assumption. There oversight groups should develop priority and rating system to
ensure the monies have the highest and best use with the greatest return on investment to the
City.
The City needs to complete annual actuary review of the current and future funding
requirements for its OPEB needs. The proposed changes in the funding levels for employee
health/medical care may result in future reduced needs. However, until future analysis and
actuary review is completed the Trust Fund concept is a valid and reasonable assumption.
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IV. SOURCES AND USES OF MONIES FROM SALE OF INCINERATOR
Background on Plan Components
Major Key components and terms of the Resource Recovery Facility (Incinerator) Transaction
include:
Sale to Lancaster County Solid Waste Management Authority Sale of 800‐ton per day, three
units, mass burn, waste‐to‐energy facility.
The County and LCSWMA will enter into a 20‐year cooperation agreement under which
LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure
certain minimum revenues of the resource recovery facility.
A Redevelopment Assistance Capital Program ("RACP") grant of $8.0 Million to benefit the
Incinerator was authorized by the 2011 Capital Budget Act for improvement of the steam
lines at the facility. The RACP grant will be available to pay for capital improvements to the
Incinerator and will be transferred from THA to LCSWMA.
LCSWMA will be able to access approximately $8.0 Million maintained under the THA trust
indenture related to the THA Incinerator bonds as a match to the grant. The combination of
these amounts will result in at least $16 Million of improvements that are expected to be
made during the next several years as well as a $16 Million increase in the purchase price
for the Incinerator.
Power Purchase Agreement between LCSWMA and the Borough of Columbia includes a
term of 20 years; range of prices per kWh is $.04022 in the first year to $.07169 in the 20th
year; capacity charges are based upon agreed upon projections.
The Power Purchase Agreement provides for certain "claw back" provisions if the kWh price
under the contract exceeds the then market rate.
The final purchase price for the Incinerator may fluctuate (range of $126 to $130 million)
because the purchase price is based in part on the cost of borrowing. If tax‐exempt interest
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rates rise, proceeds will be reduced. If tax‐exempt interest rates decline, proceeds will be
increased.
The County and LCSWMA will enter into a 20‐year cooperation agreement under which
LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure
certain minimum revenues of the resource recovery facility.
The Incinerator currently has a number of outstanding claims against the facility including:
Proposed Uses of Incinerator Sale Proceeds
Capital USA, Inc. ("CIT")
CIT holds a federal judgment arising out of funding by its affiliate to THA of $25 million in 2005
related to facility retrofitting costs. The judgment amount is over $19 million, and CIT claims
that it is entitled to additional amounts in the nature of licensing fees. On a present value basis
CIT estimates the claim to exceed $37 million. The Receiver (acting on behalf of the City and
THA), Dauphin County and CIT, have each agreed a settlement payment of $21.5 million from
proceeds of the Incinerator sale.
Covanta Energy Services, Inc.
Covanta and/or its affiliate Covanta Harrisburg, Inc. (“Covanta”) was hired in 2007 to first design
and implement a plan to complete the Incinerator and to thereafter operate and maintain the
Use of Proceeds from Sale in Incinerator Facility
(Mill ions) Payout fromCurrent Sale of Facility
Incinerator Creditors Claim Proceeds Claim Loss *
CIT 37.00$ 21.50$ (15.50)$ Covanta 26.00$ 9.50$ (16.50)$ JEM 0.80$ 0.80$ ‐$ AGM & Dauphin County * 298.50$ 89.60$ (208.90)$ Swap Termination Fee 4.60$ 4.60$ ‐$
TOTAL 366.90$ 126.00$ (240.90)$
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Incinerator. They also assisted in the completion of the 2007 retrofit after construction cost
overruns and defects occasioned by the prior operator had delayed the reopening of the
facility.
When Covanta agreed to complete and then operate the facility, it also provided THA with
certain funding for the project's completion. At present, Covanta claims that it is owed a total of
as much as $26 million for the sums it advanced to complete the retrofit.
The Receiver (acting on behalf of THA and the City) and Covanta have reached agreement to
settle all of Covanta's claims for $9.5 million. Covanta operates LCSWMA's facility in Lancaster,
Pennsylvania, is proposed expected to operate the Harrisburg Incinerator under a contract with
LCSWMA.
.
JEM Group, LLC ("JEM")
JEM performed various contractual services related to the Incinerator's retrofit. JEM claims that
they are still owed more than $800,000. The subcontractors to JEM are asserting claims against
JEM with respect to their work under JEM.
The Receiver is engaged in negotiations with the Contractors to resolve the claims of the
Contractors and anticipates reaching agreement prior to confirmation of the Strong Plan.
Payments to be Received by Dauphin County and Assured Guaranty*
Upon the sale of the Incinerator Facility, Dauphin County and Assured Guaranty claims payment
totaling approximately $298.5 million. Due to the remaining sale proceeds being less than the
claimed amount monies from the Parking Transaction will be used to assist in the payment of
the Dauphin County/AGM claim. AGM and Dauphin County are estimated to receive a total of
approximately $210 million in initial proceeds from both the Parking transaction and the sale of
the Incinerator.
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Claim Associated with a Certain Swap Transaction
A swap transaction was put in place to "swap" THA's contractual obligation associated with the
2003 retrofit incinerator bonds. There will be a $4.6 million termination fee related to the swap.
This remains in negotiations.
Flow of Funds Analysis and Use of Sale Proceeds
The incinerator sale includes proceeds of $126 million for the sale of the incinerator. These proceeds
would be paid out to the creditors for the settlement amounts listed above. The reduction in creditor
claims is the sum of the pay down of $126 million plus the agreed upon losses by CIT and Covanta of
$15.5 million and $16.5 million, respectively. After the reduction of $158 million in creditor claims,
Harrisburg is left with a residual liability of $208.9 million required to make AGM and Dauphin County
whole.
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Analysis of Various Agreement(s) Term Conditions and Debt Financing Proposal
The County and LCSWMA will enter into a 20‐year cooperation agreement under which
LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure
certain minimum revenues of the resource recovery facility.
Sale includes the transfer of a Redevelopment Assistance Capital Program ("RACP") grant of
$8.0 Million to benefit the Incinerator and LCSWMA having access to approximately $8.0
Million maintained under the THA trust indenture as a match to the grant.
Power Purchase Agreement between LCSWMA and the Borough of Columbia includes a
term of 20 years; the range of prices per kWh is expected to grow from $.04022 in the first
year to $.07169 in the 20th year; capacity charges are based upon agreed upon projections.
The Power Purchase Agreement provides for certain "claw back" provisions if the kWh price
under the contract exceeds the then market rate.
Due to the limited scope and time constraints A&M did not complete a detailed review or
analysis of the tipping fee and related revenue projections in the Waste Management
proposal.
Findings and Conclusions
The Incinerator Transaction monetizes the existing City/THA asset which is in need of
current and future improvements. The competitive sale process does not capture sufficient
funds to retire the $212 million in existing debt and address current facility claims.
The Transaction is highly sensitive to interest rates, and as a result, the delay in time to close
the transaction substantially reduced the overall value of the transaction. Further erosion
due to interest rates could further reduce the value and potentially derail the transaction.
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V. SOURCES AND USES OF MONIES FROM SALE OF PARKING FACILITIES
Background on Plan Components
Under the receivership plan, an asset transfer of the Harrisburg Parking Authority’s (HPA’s) parking
system (i.e., the “Parking Transaction”) is being proposed to generate upfront “year 1” proceeds by
monetizing the ten parking garages plus the associated parking lots owned by the City. These proceeds
are required in order to close the gap created by the substantial losses that will be realized during the
sale of the incinerator. The transaction includes metered spaces, as well as, the following garages and
parking lots: Locust Street Garage, Market Square Garage, River Street Garage, Fifth Street Garage,
Chestnut Street Garage, Harrisburg University Garage, Seventh Street Garage and Lot, Mulberry /
Dewberry Lot, City Island Garage and Lot, South Garage and Lot, Walnut Garage, 10th Street Lot, and
Mulberry Street Lot.
Flow of Funds Analysis and Use of Sale Proceeds
The parking transaction has a number of complex components that together make up the overall
transaction. These components can be divided into two overarching categories: the non‐recurring (i.e.,
“one‐time”) flow of funds and the recurring (i.e., “ongoing”) flow of funds.
Non‐Recurring Flow of Funds (Parking Transaction)
The initial non‐recurring flow of funds will flow to five different uses after transaction costs:
(1) Repayment or defeasance of existing debt proceeds for the benefit of the City
(2) Initial Deposit into the Parking Capital Reserve Fund
(3) Payment to settle the Harrisburg University parking structure
(4) Payments to the City
(5) Payments to existing Creditors.
The illustration below depicts the flow of funds into these five payment sources.
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The source of funds for the Transaction is from the bond issuance of $283.2 million for the Harrisburg
First Parking. This will generate between $258 million to $271.5 million after transaction costs of
approximately $11.5 to $15 million.
(1) Repayment or defeasance of existing debt proceeds for the benefit of the City
Proceeds from the Transaction will be used to first retire the outstanding parking debt by
carving out $99.1 million to satisfy the existing debt. The defeasance retires the existing debt
through cash and the purchase of government securities, which will be sufficient to meet all
payments of principal and interest on the outstanding bonds as they become due. These funds
will be combined with the existing Debt Service Reserve Funds (DSRF) for the existing securities
to provide the $110.7 million necessary to complete the defeasance schedule and provide
sufficient reserves for the transaction.
(2) Initial Deposit into the Parking Capital Reserve Fund
The parking transaction creates the initial fund to supply the capital investment necessary to
modernize the parking system, and to establish the fund to pay for ongoing capital
improvements. The initial deposit is set for $10 million, with a maximum fund balance of $15
million.
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(3) Payment to settle the Harrisburg University parking structure
The third area of payment is for the Harrisburg University parking garage settlement. After the
University defaulted on the underlying bond, HPA began making the debt service payments as
guarantor of the debt. The Harrisburg University garage was the underlying collateral for the
debt, and the $3.6 million payment is to compensate the university and to absorb the existing
university parking structure into overall parking transaction. In 2010, the HPA contracted with
Wilbur Smith Associates (WSA) to perform a business valuation of the HPA Parking System. At
the time of the WSA valuation, the thirty year lease on the Harrisburg University system was
determined to be worth $11.6 million. Assuming that the business value of the University
parking system increased since 2010, the consideration provided to the City in terms of the
upfront payments of debt service and the $3.6 million settlement appear to be a good value to
the City and the overall parking transaction. Without this transaction, the overall parking
transaction value may not have had enough value to create a satisfactory settlement with the
creditors.
(4) Payments to the City
The fourth area of payment involves the flow of funds available to the City in the amount of
$39.2 million. This amount is slightly lower than the original parking proceeds due to the City
based on a negotiated concession of $2 million from the City and of $1.7 million in forgiven debt
service provided by AMBAC. The forgiven debt service, when coupled with other benefits from
AMBAC, necessitated the removal of $1.7 million from the upfront payments to the City. Of the
$39.2 million, an initial set aside of $3.3 million will be made as an additional concession for the
Liquid Fuels tax revenue. The initial set aside is an upfront payment by the City that would be
replenished should the Liquid Fuels tax revenue amendment get appended to the transportation
bill and approved in the upcoming legislative session.
(5) Payments to existing Creditors.
The fifth area of payment is to the creditors, who will receive the remaining funds from the
issuance of debt of $120 ‐ 125 million in order to partially fill the $208.9 million hole left by the
losses taken on the incinerator transaction. From the total proceeds on the debt, an additional
transaction cushion of $5 million has been set aside to accommodate for small fluctuations in
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interest rates or other unforeseen events ahead of the transaction’s closing date. Including the
$5 million in payments, the flow of payments described above results in a negative $1.8 million
deficit. The deficit could be made up through the further reduction in transaction costs, or offset
from the $5 million cushion.
Recurring Flow of Funds (Parking Transaction)
The recurring flow of funds for the parking transaction follows a seniority of funds cascading down from
the pledged revenues. The pledged revenues include garage revenues, lease of 4,500 – 5,200 spaces
from the Commonwealth, metered revenue, enforcement, and other licensing fees, rents, advertising
and miscellaneous revenue. The pledged revenues do not include the annual parking tax revenues
collected by the City. The system‐wide revenues provide the funding mechanism to support the
waterfall of payments, beginning with a senior payment to the City in the amount of $1.5 million in year
1 and growing at 3 percent for the first six years of the contract, and turning into a fixed payment of
$1.7 for the remainder of the term. After the Year Six, the $1.5 million payment shifts from a senior
priority payment to a junior payment subordinate to debt service.
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The next cost elements to come out are operating expenses. These include approximately $5.0 million in
system‐wide operation and maintenance costs, an additional $2.0 million in management fees, and $0.1
million in contingency funding. Debt Service of $9.1 million in Year 1 is the next cost element to be
covered in the flow of funds. Ordinarily, a Debt Service Reserve Fund would be the next cost element to
be funded; however, an in kind contribution has been provided by AGM, via a surety bond, to replace or
reduce the debt service fund. The surety bond has the effect of increasing the bond rating, thereby,
reducing the interest rate. After debt service, the year 1 net operating income results in a surplus of $1
million, which will be distributed 25 percent to the City and 75 percent to the Capital Reserve account.
After debt service, an additional payment of $0.5 million to the City, via a ground lease payment, is
included. This amount is set to grow by 3 percent a year for the first six years with no growth for the
remainder of the transaction term.
After the waterfall of payments has been distributed, any surplus revenues that remain will be
distributed 25 percent to the City and 75 percent to the Capital Reserve fund for the first six years of
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operation. After the Year Six, 100 percent of the surplus revenues will be deposited into the Capital
Reserve account until the account reaches $15 million in available funds. After the Capital Reserve fund
is topped off at $15 million, the excess revenues will be distributed 25 percent to the City and 75
percent to AGM/Dauphin County until the outstanding creditor debt of $86 million has been repaid. It is
important to note that the repayment of creditor debt does not include interest payments, which would
materially increase the size of the overall payments to the creditors and represents a significant
concession from the creditors given the final payment is not expected to be made until after 2045.
Analysis of Plan Assumptions and Projections Revenue Assumptions
Revenue Assumptions
The revenue projections for the parking transactions depict an increase in annual system revenues from
$14.5 million in 2009 to $20.1 million in 2014. The 2014 revenue estimates include four revenue
components: garage and surface lot revenues, street meters, parking tax, and enforcement and other
revenue sources.
Revenues FY 2004 FY 2009 FY 2014
Garages and Surface Lots(1) $9,794,500 $11,848,600 $13,856,390
Street Meters 1,206,800 1,186,500 1,816,656
Parking Tax 1,201,500 1,475,800 2,771,278
Enforcement & Other 0 0 $1,694,144
Total Revenues $12,202,800 $14,510,900 $20,138,468
Note (1) Garages and Surface Lot estimates are shown net of Parking Tax
The revenues from enforcement were not part of the 2009 estimates and should be removed before
doing comparisons at the system level. Looking at the trend from each of the other components
provides valuable checks on the starting point for the revenue estimates. Inspection of the garage and
surface lot revenue show that the increase from 2009 to 2014 remains in line with the revenue increase
from the prior five years (i.e., 2004 to 2009). Specifically, the revenues increased by $2.0 million or 20.7
percent between 2004 and 2009, and the revenues are projected to increase by $2.4 million or 20.5
percent between 2009 and 2014. Based on this trend analysis, the Year 1 revenues from the garages and
surface lots appear to be set at a reasonable starting point.
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By comparison, the street meters and parking tax increased by much larger increments from 2009 to
2014. The street meters increased by $0.6 million or 53.1 percent between 2009 and 2014 in
comparison to a decline of 1.7 percent between 2004 and 2009. The parking tax increased by $1.3
million, or 87.8 percent, between 2009 and 2014 in comparison to an increase of by $0.3 million, or 22.8
percent, between 2004 and 2009. Given the structural changes in both the street meter and parking
taxes, these estimates still appear to be reasonable.
A&M examined the growth rate of these garage and surface lot revenue projections. The current
estimates include base growth rates, during the first five years, of 7.1 percent to 10.0 percent for the
Commonwealth parking contract, growth rates of 2.9 percent to 16.7 percent for the other revenue
sources, and include growth rates of ‐8.9 percent to +3.0 percent for the base operating expenses.
As a result of the increasing expenses and reduced expenses, the base net operating income increases at
23.9 percent, 17.3 percent, 7.9 percent, 6.3 percent, and 4.5 percent in the first five years of operation.
As a result of these growth rates, the base operating income for the parking system is projected to
increase from $8.7 million to $14.5 million at the end of year 5. The relative gross margins are expected
to expand from 50.8 percent to 63.3 percent over the same time period.
Year
CW Contract
Net of Taxes
Other Revenues
Net of Taxes OPEX
2 7.7% 16.7% 3.0%3 7.1% 4.8% -8.9%4 10.0% 4.1% 3.0%5 9.1% 2.9% 3.0%6 3.0% 3.3% 0.9%7 3.0% 3.3% 3.0%8 3.0% 3.3% 3.0%9 3.0% 3.3% 3.0%
10 3.0% 3.3% 3.0%
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Net Operating Income (NOI) Enhancement Assumptions
After estimating the base net operating results, the Harrisburg First team developed a series of NOI
enhancements to further expand the overall Net Operating Income, and thereby increasing the debt
capacity made possible through the parking transaction. The NOI enhancements included:
• An increase in the meter rates from $2 to $2.50 per hour
• An increase in the monthly rates charged to the Commonwealth of $10 per year over the first
five years
• A $0.5 million reduction in annual management fees
• Removal of HPA consulting fees
• Reduction of the timeline to reduce HPA labor
• Stopping the City escalation for the $1.5 million
• Subordinating the City’s $1.5 million payment after six years
• Bringing on new parkers to the parking system through DGS
Finally, one of the considered NOI enhancements is not included and remains under consideration:
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• The Harrisburg First team is also considering replacing the midtown meters to bring the same
technological efficiencies to those meters as that are being realized throughout the rest of the
parking system.
As a result of these NOI enhancements, the operating income is expected to increase by an additional
$1.3 million to $2.8 million in the first five years. Once the City’s payments stop escalating and the $1.5
million payment is subordinated, the total debt service made possible by the transaction is increased
and the total debt service payments are able to be expanded allowing for the size of the transaction to
be increased. These steps were necessary to make up for the reduction in interest rates. With these
additional enhancements, the NOI is increased by $4.7 million in year 6 taking the gross operating
margins from 64.2 percent to 83.3 percent. Without the subordination of debt, the debt service
coverage ratios would have limited the size of the transaction to the point that return of proceeds would
have to be cut further, likely causing the City to have to accept reduced upfront payments.
Parking Meter Fees and Enforcement Revenue Assumptions
The parking meter fees are set to increase by an additional 36 percent in 2015 on top of the five year
growth of 53.1 percent relative to the 2009 baseline. After year 3, the parking transaction revenues
were estimated to grow by 3 percent. The reason that these estimates are reasonable is that meter
rates are projected to increase by 100% from $1.50 to $3 within the CBD and by 50% from $1 to $1.50
for other areas. Additionally, a permit parking system is expected to be put in place for residents in
order to move parkers from the neighborhoods into the paid parking spots. This action should move
parkers from the “free” spots around the City to the paid meter or paid garage lots. These parkers are
currently outside of the parking system and represent a new source of revenues.
As it currently stands, the inexpensive meter rates coupled with the low level of enforcement
incentivizes parkers to stay on the streets to risk the ticket. In February 2003, WSA conducted a Parking
Rate Study and concluded that meter violations are relatively high (almost 39 percent for the survey
period) and enforcement relatively low (only 9.5 percent of the violations received a parking ticket). The
planned increase in enforcement activities over the next two years should send the message that the
days of inexpensive parking with lax parking oversight are gone, and that paid parking will be the norm
moving forward. The enforcement revenues are estimated to increase by approximately 14 percent in
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2014 and an additional 39 percent in 2015. Thereafter, the enforcement revenues were estimated to
grow by 3 percent.
The reasons that these estimates in the first two years are conservative are twofold. First, the meter
violation and late payment penalties are expected to roughly double from $14 to $30 for a meter
violation and from $11 to $20 for a late payment penalty. Secondly, the new parking management
intend to implement a significant enforcement push in the first two years to reinforce the message that
the parking system of meters and enforcement has changed.
While the enforcement revenues are likely to be the most conservative estimates in the parking system
forecast for years 1 and 2, the future year assumption that enforcement revenues will remain at the
level achieved could be high if citizens follow the learned behavior and move to the parking garages. If
the spike in enforcement is followed by learned behavior to move to the garages, the straight line
growth after a significant 2 year increase could be an aggressive assumption. Given the poor baseline
parking violation data, these estimates are hard to predict. We expect that the initially conservative
estimates are likely to balance out the aggressive future year growth assumptions, as the enforcement
revenues settle into a new steady state level. Since the revenue projections involve significant
assumptions that could materially alter the forecasts, the City will need to make a determination on the
level of confidence in the revenue projections.
Operating Expenses Assumptions
Under the HPA, total operating expenses included garage, surface lot, and street meter operation and
maintenance costs. The model under the parking transaction will trade off in house management for an
outside asset management and parking management service. When comparing the historic growth rates
with the prior five year comparison, the operating costs are growing at a similar, but slower, overall pace
compared to the prior five year period. From 2004 to 2009, the total operating expenses increased by
$1.0 million or 20.2 percent. By comparison, the total operating expenses from 2009 to 2014 increased
by $1.0 million or 15.7 percent.
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Operating Expenses FY 2004 FY 2009 FY 2014
System O&M Costs $5,041,900 $6,060,500 $5,017,259
Management Fees $0 $0 $1,241,059
Total Operating Costs $5,041,900 $6,060,500 $6,258,318
While the 5‐10 year trend in operating expenses from 2004 to 2014 appears to be in line as a starting
point, there is a substantial reduction of 42.5 percent in legacy HPA labor staff labor after year 1. This
reduction, coupled with increases in the remaining categories, creates an overall system reduction of 8.9
percent in year 2. Thereafter, the parking system costs are projected to grow at 3 percent per year. The
primary concern is that the 42.5 percent reduction in staff could be aggressive given the City’s plans for
stepped up enforcement during this time and the high degree of cost reduction. The justification for the
reduction is that standard parking intends to leverage the existing technologies and staff to manage the
program. Our concerns with this assumption are twofold: that the cuts in labor could be too deep, and
as a result, the City’s ability to generate the planned additional enforcement revenues could be
jeopardized.
The Harrisburg First parking system will be managed with a two pronged asset manager and parking
manager using AEW and Standard Parking respectively. This is a unique solution to the management,
and is currently in the process of being implemented by AEW and Standard Parking in Cincinnati. After
the HPA team has been replaced, there will still be a need for overall “business” (versus asset)
management, however, the incentive structure, and risk transfer should match the compensation that is
being received by AEW.
Furthermore, the combined use of a parking and asset manager appears to carry high costs. Similar
business management solutions use a percentage of revenue structure to align the business interests of
the manager with the other stakeholders. Using this as a benchmark, the combined team would carry
costs of 11.5 percent of total revenues (9.7 percent and 1.8 percent for the asset and parking manager
respectively). This compares to revenue managers on previous airport deals that have received 5‐6
percent of system revenues.
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As a result of the analysis of the high fees being charged by the asset manager, the receiver entered into
negotiations with AEW to bring down costs to 5‐6% of total revenues. Furthermore, we recommended
that the performance management fees be subordinated to the City payments, and the receiver is in
active negotiations to ensure that the City be paid before performance award fees. The subordination
will enable higher debt service utilization, and will align the managers with the City. Finally, A&M’s
recommendation alternative payment structures be considered including payments based on
percentage of parking system revenues, were taken to align the interests of the asset manager with the
interests of the City.
Capital Reserve Account Assumptions
The Capital Reserve account provides a fund that can be used to maintain the parking structures, but the
governance of this account remains a concern. The level of the Capital Reserve account appears to have
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been driven more by negotiations than by forecast spend. The reserve account should have a reasonable
balance, but not be too high, else both the City and the creditors could be tying their hands for the sake
of a bloated reserve account. By bringing down the maximum size of the Capital Reserve account from
$35 million to $15 million, the transaction size increased, the City and creditors will be paid sooner from
surplus revenues, and a more rapid buy down of debt will occur, benefiting all parties.
The Capital Reserve account must also have the proper governance to avoid the possibility of shifting
operating costs into capital buckets in order to achieve performance awards, thereby, hiding the true
cost of operation. The governance structure should include consideration for what happens if the
surplus revenues are not achieved, how much flexibility the management team will have to use the
funds, how the City will limit the funds use for “operating‐like” expenses, and establish the procedures if
the operating income is negative. As an example, if the system has negative surplus revenues, will the
excess funds draw from the Capital Reserve account?
Analysis of Various Agreement(s) Term Conditions and Debt Financing Proposal
The current parking transaction remains steeped in negotiations with creditors and the underlying
management company. As a result, the underlying components of the parking system model remain in
flux, and are changing with each negotiation. For this reason, many of the underlying documents are not
aligned. This has been further complicated by the substantial reduction in the value of the transaction
that was caused by the significant upward movement in interest rates.
Since May 2013, interest rates have increased significantly with the 10 year Treasury bond rate
increasing from 1.63 percent on May 1st to 2.91 percent on September 11th (a 78.5 percent increase in
rates). The spike in rates caused the price of bonds to fall precipitously, with the Municipal Bond Buyer
index falling from 131.9 on May 1st to 107.8 on September 11th. The 18.2 percent fall in the bond index
provides a reasonable proxy for the impact on the overall parking system transaction, which on a $281.2
million deal, would have suffered from a $51.4 million loss in total transaction value. This loss of value
eroded any transaction cushion, and created the need to return to the negotiating table with the
creditors.
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As a result and the substantial loss associated with the recent spike in interest rates, the City has had to
agree to concessions that were not planned for at the outset of the deal. These concessions change
rapidly, causing the term sheet to be misaligned with the current deal. As an example, as part of the
negotiations on behalf of the City, there have been three types of proceeds that are being carved out for
the benefit of the City: upfront proceeds from the sale, ongoing senior operating and lease payments
($1.5M + $0.5M), and a split of surplus funding between the creditors and City after setting aside $15
million in Capital Reserves.
The fluid nature and need for concessions, creates challenges with maintaining proper oversight of the
environment. As an example, there were several concessions related to the City payments that needed
to be made in order to hold the transaction together. The City was asked to remove the escalation factor
after year 6 from the senior payment, and the City payment was subordinated in the priority of payment
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to allow for the level of debt necessary. Due to the recent nature of these changes, the updated terms
are reflected in the Harrisburg First forecast cash flows, but are not reflected in the term sheet.
While the limitation of growth on the “senior” payment and the parking ground lease after 6 years will
limit future City earnings streams and have an increasing impact in the future, this will be offset slightly
by the surplus revenue payments after the Capital Reserve account has been topped up. Furthermore,
without some level of concession from the City, the overall deal would not be possible, given the
substantial reduction in bond prices that have occurred over the past four months.
Given the tenuous and rapidly changing nature of the negotiations, any one stakeholder without an
agreed to settlement (e.g., the IAFF labor contract) is able to unravel the entire deal based on not
coming to the bargaining table. For this reason it is important to push into the bargaining to show the
good faith negotiations, and carefully check the terms and conditions of the deal as they are being
finalized.
Findings and Conclusions
Based on our analysis we have developed a number of overarching findings and conclusions related to
the parking transaction.
General Findings
• The Parking Transaction monetizes future cash flows of various parking garages and lots in order
to relieve the City of a substantial burden generated as a result of the incinerator debt.
• Transaction is highly sensitive to interest rates, and the delay in time to close the transaction
substantially reduced the overall value. Further erosion due to interest rates could further
reduce the value and potentially derail the transaction.
• The parking transaction includes a number of moving parts, several legal requirements, and
concessions that have been made on both sides in order to consummate a deal. As a result, the
transaction has become increasingly complex and challenging to communicate.
Parking System Revenues
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• The 5 to 10 year trend of revenues for garage and lot fees appears to be a reasonable starting
point for 2014. The initial growth rates beyond 2014 are a little higher, primarily driven by
increases in garage operating and capital costs.
• The enforcement and meter revenues grow in excess of 30 percent for the initial two years,
before stabilizing at 3 percent growth thereafter.
• The level of uncertainty in the revenue projections is a risk for the City and the Creditors. The
enforcement and meter increases are based on limited underlying data resulting in a higher
variability in the forecast. The estimates seem conservative, but the confidence in the
underlying data is not strong enough for an accurate prediction.
Parking System Operating Expenses
• Trend in operating expenses appears to be in line as a starting point but the one‐time reduction
in labor costs in 2015/2016 could be aggressive, and/or impact generation of enforcement
revenues.
• The incentive structure and risk transfer of the AEW transaction should match the compensation
being received by AEW. Since this is being negotiated as we speak, the validation was
challenging.
• The AEW transaction has been simplified based on a percent of revenues versus an annual fixed
fee
• Governance of Capital Reserve account remains a concern.
• Level of Capital Reserve account driven more by negotiations than forecast spend. Account
should have a reasonable but not too high balance. More rapid buy down of debt will benefit
both parties.
Terms and Conditions
• Components of the transaction are changing on a daily basis, creating challenges with
maintaining the proper oversight of the environment.
• The City will receive three different types of funding:
o Up front proceeds from the sale
o Ongoing senior operating and lease payments ($1.5M + $0.5M)
o Split of surplus funding between the creditors and City after setting aside $15M in
Capital Reserves.
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• As a result and the substantial loss associated with the recent spike in interest rates, the City has
had to agree to concessions that were not planned for at the outset of the deal.
• The fluid nature and need for concessions, creates challenges with maintaining proper oversight
of the environment. As an example, there were several concessions related to the City payments
that needed to be made in order to hold the transaction together.
o The $1.5 million City payment stopped escalating after Year 6.
o The City payment was pushed behind debt payments (i.e., subordinated) in the priority
of payment to allow for the level of debt necessary.
o These changes are reflected in the Harrisburg First forecast cash flows, but are not
reflected in the term sheet.
• The limitation of growth on the “senior” payment and the parking ground lease after 6 years will
limit future City earnings streams, with increasingly larger impacts in future years. This will be
offset slightly by the surplus revenue payments after the Capital Reserve account has been
topped up.
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VI. APPENDIX
APPENDIX A. Documents Reviewed
• Asset Purchase Agreement between The Harrisburg Authority and Lancaster County Solid Waste Management Authority (8/23/2013)
• City of Harrisburg Cost of Issuance for Parking and Resource Recovery Facility • City of Harrisburg Liquid Fuel Tax Summary • City of Harrisburg’s Overall Flow of Funds Summary • City of Harrisburg’s Projected Parking Transactions 2014‐2050 (9/3/2013) • City of Harrisburg’s Strong Plan (8/26/2013) • Desman Associates’ Financial Review of the Long‐Term Concession and Lease of the Harrisburg
Public Parking System (8/28/2013) • Harrisburg First’s Cash Flows Report for City of Harrisburg (August 2013) • Harrisburg First’s DGS Parking Agreement for the City of Harrisburg (2/12/2013) • Harrisburg First’s Financial Model for City of Harrisburg: Commonwealth Structure (5/24/2013) • Harrisburg First’s Report on Commonwealth Bonds for 20 years, County/AGM bonds (at Amount
Meeting Coverage Requirements), 100/70 Allocation, Turbo from Back (8/23/2013) • Harrisburg First’s Report on Commonwealth Bonds for 20 years, County/AGM bonds (at Amount
Meeting Coverage Requirements), 100/70 Allocation, Turbo from Back (9/6/2013) • Harrisburg First’s Sources and Uses of Funds Report for Parking Monetization (7/1/2013) • Harrisburg First’s Summary of Proposed Terms of Asset Transfer of Harrisburg Parking
Authority’s Parking System (8/16/2013) • Harrisburg Parking Authority Parking System Rates Graphed for Report to Receiver (August
2012) • Harrisburg Parking Authority Transactions to City of Harrisburg Plus Projections (1999‐2011) • Public Resources Advisory Group’s Report on Harrisburg Parking Authority’s Cash Defeasance of
Outstanding Debt (8/21/2013) • Summary of Realized and Projected Net Revenues, Parking Rates, Operating Expenses, Net
Income, Debt Service, and Capital Expenditures Responses from Interested Parties 2012‐2041 (WilburSmith Business Valuation, Boenning & Scattergood, Harrisburg Forward, Harrisburg First, Harrisburg Parking Partners, Keystone Parking Group, National Development Council, NW Financial Group, Morgan Stanley Infrastructure Partners, and Ontario Teachers’ Pension Plan)
• WilburSmith Associates’ Business Valuation of the Harrisburg Parking Authority Parking System (3/7/2011)
• City of Harrisburg FY 2013 Budget • Year to Date Actuals – Period Ending July 31, 2013 • Receiver Budget Projections and Monthly Cash Flow Statements • Collection Bargaining Agreements and Summary of Major Contract Changes • Waste Agreement between Harrisburg and LCSWMA
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APPENDIX B. Index of Major Creditors