Up in Smoke
Harrisburg’s waste to energy to bankruptcy saga
Oct 31, 2011, Vol. 17, No. 07 • By JONATHAN V. LAST
Barlow’s lack of experience proved problematic. Right off the bat, one subcontractor, a steelworks in charge of forging the boilers, ran six months behind schedule. This destroyed the entire timeline—a big problem since the town’s $125 million loan only covered its debt-service payments through what was supposed to be a hard completion date.
And that’s when things got really bad. In the legal world, entities without money are thought of as “judgment proof.” That is, even if you could win a lawsuit against a bad actor, it wouldn’t really matter, since they couldn’t pay you. Barlow was “penalty proof.”
Barlow Projects was so undercapitalized that by 2005 it wasn’t able to continue work on the project without the funds the city was withholding. Barlow was behind schedule and hadn’t met its goals, but it was also on the verge of going out of business. So the city couldn’t penalize it. In fact, Harrisburg had no choice but to continue fronting money to the foundering company—because if the city pushed Barlow under, the project would be in even deeper trouble. So long as there was a chance Barlow might finish the job, the city would do whatever it could to keep the company afloat. Harrisburg was shoveling good money after bad; but by this point, it had no better option.
As Barlow began to sink, the city disbursed the money it had been holding in escrow. When Barlow went over deadline and was supposed to be paying $22,000 for every day each boiler was late, the city forgave the penalty. But in the end, the city couldn’t drag Barlow across the finish line. The company went bankrupt, the third boiler was never finished, and the city finally sued Barlow for $70 million. This lawsuit, however, was mostly therapeutic: To the extent the company still exists as a legal entity, it will never be able to compensate Harrisburg for the damages it caused.
By the time Barlow gave up the ghost, Harrisburg’s incinerator was a shambles. A story in Governing magazine reported that “streams of water flowed through the facility, amidst piles of ash; . . . the all-important third boiler had been ‘completely scavenged’ to maintain the two existing boiler units.” Another firm, Covanta Energy, was hired in December 2006 to try to salvage the job. When he first saw the plant, Covanta vice president Jim Klecko reported, “I don’t want to say I was scared, but I had reservations about physically going through the facility.” Without the third boiler, the city was losing another $1 million a month. The total debt from the incinerator stood at $288 million.
From the minute the Barlow project failed, it became clear that the city would eventually take refuge in bankruptcy. The debt load was simply too great for a town of such modest size—there was no way to dig out. That’s why Harrisburg declined to make any payments on its debt in 2010. Like a homeowner underwater on his mortgage, the town realized that there wasn’t much point treading water on the note because eventually it would have to hand over the keys and walk away.
To that end, the city declined not only to service its debt but to take measures that might at least have put a dent in its obligations. It raised property taxes, but only slightly. It cut a handful of city workers. But when the mayor—whose career was effectively over—put forth a proposal to lease city-owned garages near the capital for $100 million, the council rejected it. The council understood that $100 million wouldn’t get the city out of danger and they were better off retaining what assets they had.
Eventually, the mess will be sorted out by the courts. Harrisburg is suing Barlow for breach of contract and asking another court to nullify the state’s attempt to keep it out of bankruptcy. Bondholders have filed six suits against the city, seeking to get at least some portion of the total debt or at least a chunk of the $65 million which is already overdue. Late last week, the state legislature voted to take the city into receivership.
As for the incinerator, Covanta, which came in on the salvage mission, has taken over the plant and has it up and running again—and burning Harrisburg’s trash. The company claims that the incinerator is now running at 92 percent capacity.
Jonathan V. Last is a senior writer at The Weekly Standard.
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