Alvarez and Marsal City of Harrisburg Report Debt Restructuring Report 09152013.pdf

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


IV. SOURCES AND USES OF MONIES FROM SALE OF INCINERATOR ....................................................... 19


Flow of Funds Analysis and Use of Sale Proceeds ......................................................................... 22

Analysis of Various Agreement(s) Term Conditions and Debt Financing Proposal ....................... 23


V. SOURCES AND USES OF MONIES FROM SALE OF PARKING FACILITIES .............................................. 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


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.


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


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


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 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




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.


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


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.


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

Alvarez and Marsal City of Harrisburg Report Debt Restructuring Report 09152013.pdf

Documents

Transcript of Alvarez and Marsal City of Harrisburg Report Debt Restructuring Report 09152013.pdf