Washington, DC -- (ReleaseWire) -- 09/29/2015 --BENNETT: Chris Papst a multiple Emmy Award winning investigative reporter whose work has initiated changes in law and sparked criminal investigations. His new book is titled Capital Murder: An investigative reporter's hunt for answers in a collapsing city. In late 2011, Harrisburg, Pennsylvania, became the first and only capital city in American history to file for bankruptcy. Chris's book reveals Harrisburg's fatal mistakes and shares personal stories of those who suffered most via its failed government. He explains how the media and the citizens and their apathy allowed the city to be secretly killed by its beloved mayor of 28 years. Coupled with that, he is uncovering the truth behind Wall Street's role in the city collapse, and explains how this failure of state and local leadership could affect every American. Worst of all, it may not be over yet. Every municipality in America should understand what happened to Harrisburg because we need to learn from their fate.
PAPST: Thank you very much I appreciate it and thanks for having me on.
BENNETT: Your book deals with the downfall of Harrisburg, Pennsylvania, a city that became known as the first capital city to declare bankruptcy. I know there is never one single thing that causes a collapse like this. What were the major contributing factors?
PAPST: Well, we can name a couple but the main one was obviously debt, as the city went bankrupt because it has simply over-leveraged itself, it took out way too much money. The mayor was allowed to take out this money. Wall Street was more than happy to loan the city this money even though it started getting into ridiculous figures as compared to what the budget of the city is. So for example, the city had a trash-to-steam incinerator. Just that project accrued nearly $400 million in debt and the city only had about a $50 million dollars general fund budget. So you are talking about massive numbers of times the city's budget, like eight times the city's budget, tied up in debt to start one project and you couple that with its mayor of 28 years. And the reason he was able to do this and approve this much debt is because he earned the trust of the people. He was elected seven straight times, and over that period he stacked city council with all the people that he wanted because you couldn't get on the city council without this wonderful mayor supporting you. And the same thing with the treasurer and the same thing with the controller: those are all elected positions, and he had so much power that whoever he supported is who the people voted for. And he used that trust to take massive risks with taxpayers' money and after twenty eight years those risks created a house of cards and collapsed and the city filed for bankruptcy.
BENNETT: Has this impacted Harrisburg's borrowing? Is the city still able to issue bonds that the anyone wants to buy?
PAPST: Not really. Any type of bond the city wants to issue has to have insurance behind it—secondary bound insurance like the county for example, or possibly even the state that is willing to insure that money--because Harrisburg doesn't have a credit rating, even at the very lowest level. But the bigger picture here is not just about Harrisburg. The bigger picture is how Harrisburg's bankruptcy not only affected the state, but also affects the entire country because the municipal bonds market is small.
PAPST: And when you have municipalities that are filling for bankruptcy that is affecting all the other municipalities because it is such a small segment of our society that deals with most of all the municipal bonds. And now because of Harrisburg's bankruptcy, you have the attorney general of Pennsylvania that has already said that she is criminally looking at Wall Street and the bankers and the attorneys and the consultants for their involvement in loaning too much money because her argument is they had to have known Harrisburg could not pay all the money back that Wall Street was lending. And then the governor has recently hired a law firm just two days ago, to go after Wall Street civilly to get the money back for Harrisburg that he believes Wall Street took from the city in an untoward way. So this has significant implications all across America because if Wall Street is going to be held accountable now from the governor and the attorney general of Pennsylvania for bankrupting a city, that affects every municipality in America and it could save other municipalities in America and stop Wall Street from loaning money that those cities can't pay back.
BENNETT: Do you think the issues that plagued Harrisburg are endemic to most major American cities?
PAPST: Absolutely. Harrisburg is doing what most every other city in America is doing and it's over leveraging itself. The mayor of Harrisburg, this mayor of 28 years, he was building municipal stadiums; he was building high-rises; he was bringing minor league baseball teams to town. Now in doing that, he earned the trust and the respect of his electorate because people in Harrisburg now have the Double-A Affiliate to the Washington Nationals to Harrisburg Senators. They go to those games and they enjoy beautiful stadium. They see these new edifices that are built in the city. He built museums; Harrisburg university was created under his administration; the Whitaker Center for the Performing Arts—all these things where getting built under his watch and he did it by just taking out massive amounts of money and then taking out more money to pay off the previous bonds that he already took out. It was 28 years of these types of financial tricks and he didn't make them up. There are plenty of cities that are doing this, and a lot of times the politicians that are doing it are saying, 'Oh it is a scare tactic, we are not going to collapse; this isn't really going to happen.' Well, in Harrisburg we have a case study now. We have a realistic case study of a city that did financially collapse. And in the pages of Capital Murder I explained how the people of the city suffered, how the quality of life deteriorated in that city because the government could no longer operate: it couldn't pay police officers, it couldn't pay firefighters, it couldn't fix sink holes, pot holes, street lights; it couldn't do anything. Entire city blocks had their utilities shut off because the city couldn't fix the utility problems because it didn't have the money. This was a massive problem, and if it happens to more American cities, we are in trouble.
BENNETT: That's what happened in Harrisburg, Pennsylvania. Did it affect the rest of Pennsylvania?
PAPST: It didn't, because of what eventually happened and that was the state government, the governor just took the city over. When Harrisburg filed for bankruptcy, the fear was what we already talked about in the municipal bond market that as they filed for bankruptcy it is going to affect the entire state and the lending in that state because Wall Street is going to look at it as, 'Well if the state is not willing to protect our money tied up in Harrisburg, why should we think it is going to be protecting any other Pennsylvanian city?' So the governor just took the city over; he stripped the mayor and he stripped the city council of their ability to govern the city which was a constitutional crisis because the people of Harrisburg voted for their mayor and city council. So the governor comes in, strips them of their authority. He appoints what he called a receiver to install a recovery plan over the city so that it could try to avoid the bankruptcy. And in the process it has, but when they installed this recovery plan, the governor sold all of Harrisburg's assets and tried to pay down the debt the best way he could. He negotiated a little bit with Wall Street trying to get some concessions.
PAPST: And they avoided bankruptcy in the short term, but now the city doesn't own anything. The city sold almost everything it has, and in two or three years it is really going to be the test, and we are going to find out if this recovery plan worked. But if it doesn't, Harrisburg will have no other option except to re-file for bankruptcy, but this time the process will be worse, because it doesn't have any assets left to leverage.
BENNETT: A lot of financial advisors out there, such as myself, warned that municipal bonds could be the next bubble set to pop. Most lenders never scratch beneath the surface and learn the kind of things you have brought to light. Based on what you have learned in Harrisburg, how much faith do you put into the bond ratings that are out there?
PAPST: Harrisburg's bound ratings were really low, but the way that Harrisburg ended up getting around that was that they created authorities within the city, and the authorities are "independent authorities". An authority like the Harrisburg Water Authority or the Incinerator Authority. So the politician create these authorities that are not actually parts of the city, but in Harrisburg's case and in many other cases around the city, around the country, the mayor appoints who sits on the authority board. And then these authorities get their own bond ratings and they start loaning their own money and taking out their own debt. Again, this is supposed to be separate of the city but it's not. It's kind of a scam. It is the city. It is people who work for the city. It is the mayor or the city council appointed people that sit on these boards. But what happened in Harrisburg is that the bond rating got so low that they couldn't really borrow money, so they started using these authorities to borrow the money for them. When you look at it from that perspective and see that Wall Street seems to be OK with this because they have just continued in Harrisburg's case to lend the money to these authorities, I don't know how much faith you can really have. And the other aspect of this that's incredibly important is that we mentioned roughly $400 million in the incinerator that Harrisburg had. Well, from 2003 to 2007, the bonds that Harrisburg took out for that incinerator paid out $16 million dollars just in fees to the bankers, to the consultants, to the attorneys. That is money that is paid out to get the job done and to get the money loaned. And if the bond doesn't go through, that $16 million dollars doesn't get paid out. And the main question here is what is the incentive of Wall Street or of these attorneys and bankers not to find a way to loan this money because if it doesn't get loaned, they don't get a chunk of that $16 million. And in Capital Murder I partitioned out that $16 million and I named every company that got a cut of that because all of those companies contributed to these bonds being issued to the city that bankrupted, when it was easy to see that the city never could have paid that money back.
BENNETT: Back in 2011, it was Harrisburg. Today it is Puerto Rico, and their finances have been a disaster for a while. But the scale of their potential municipal bond default makes the crisis surprising to a lot people in Puerto Rico. Even those investors in bonds were constantly told by the governor that the government would pay its bond holders on time. Are you finding similarities with Harrisburg and Puerto Rico?
PAPST: It's the same, the same exact rhetoric, same exact language, nearly the same exact thing. But it is not just Harrisburg, and it is not just Puerto Rico: Stanton, California; Jefferson County, Alabama. There are a lot of cities, counties. And Los Angeles is having a really difficult time. Chicago looks like they are getting pretty rough too. And if this keeps happening to more of our cities, we are in bad shape. And in Capital Murder, I lay out the timeline because I watched the entire thing happen. This is what life was like in the city and this is what was being said one year before the bankruptcy. This is what had changed in six months after, six months before the bankruptcy. And then leading up to the bankruptcy, it was obvious what was going to happen and there was nothing else the city could do except become the first capital city ever to file for bankruptcy. And a capital city is supposed to be recession-proof. This is where all the tax dollars from the state are coming. This is where tens of thousands of government workers go every day and they are buying parking spots and food and paying taxes. It's not supposed to happen in a capital city. So since it did happen in a capital city, I think it gives us more of a reason to use Harrisburg as a case study because a lot of other cities don't have that built-in economic engine.
BENNETT: Why aren't there more reporters like you? People who are really willing to dig into the sinister shenanigans politicians engage in and escaping unnoticed? Weren't you afraid of "upsetting people"?
PAPST: Oh, I upset a lot of people. There's a lot of people that won't talk to me and as I was doing these investigations the mayor of Harrisburg, this mayor of 28 years - I only had three encounters with him in my 4 years in Harrisburg chasing him around. And that's the other part of the book Capital Murder. I was trying to figure out how somebody who is leading a city for 28 years could drive it into bankruptcy and nobody knew. And he keeps getting elected, he was a Democrat, but he kept getting elected, getting the Republican and the Democratic nomination. And even if anybody chose to run against him, often times he just run unopposed. It was an incredible thing to me to see that this man in 2006 was named the greatest mayor in America by the world mayor's organization, the third greatest mayor in the world. That was 2006, and five years later the city is bankrupted.
BENNETT: Thank you, Chris.
PAPST: Thank you.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
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