From the desk of Darnell Williams -
ECKERT SEAMANS CHERIN & MELLOTT, LLC
M E M O R A N D U M
TO: Councilwoman Linda Thompson
FROM: Carol P. Cocheres
DATE: July 27, 2007
RE: Mayor’s Initial Response to Conditions to Bills 23-2007 and 24-2007
CC: Mayor Stephen R. Reed
On Wednesday evening, July 25, 2007 Mayor Stephen Reed and I discussed your memorandum dated July 11, 2007, but given to me on the morning of July 25. This memorandum sets forth various conditions, additions and modifications relating to Bills 23-2007 and 24-2007. The following sets forth each condition of your memorandum and, then, a summary of the Mayor’s initial response given to me during our telephone call on Wednesday evening.
CONDITION #1: The City and County shall be co-guarantors; using the 80/20 split formula.
RESPONSE: The Mayor agrees with the concept of the City and County being co-guarantors using the 80/20 split formula, but recognizes that this split of the guaranty is subject to County’s approval and agreement.
CONDITION #2: The per ton increase will be applied to the County and City as of 1/01/08; the County’s increase shall be equal to the increase of City residents, such that each individual in the County shall bear the same increase, i.e., under the proposed increase a City resident shall pay an additional $180/year whereas a County resident shall pay an additional $5-$10/year. Instead, all residents shall bear the same increase.
RESPONSE: The Mayor has no problem with this condition, but he has no legal authority to force the County to agree to the arrangement and thinks that the County will not agree.
CONDITION #3: Fred Clark, John Kellar and Leonard House shall resign immediately from the THA Board. The Mayor shall consent to the appointment of James Elison, Eric Pappenfuse and Erica Bryce, all of whom shall immediately be seated on the THA Board.
RESPONSE: The composition of the Board of Directors of The Harrisburg Authority is subject to litigation. Several issues are at stake: who makes the appointment of Board members, the checks and balances of the system and whether there is any violation of the City’s strong mayor form of government under the state law.
The Mayor also noted that with the two existing incumbents on the Board, there is the assumption that these Board members do everything that he asks. This is a misconception and wrong assumption. Even if he would ask for resignations, that does not mean the resignations would take place. The present Board members have not been especially responsive to him over the last 18 months.
CONDITION #4: All parties involved in the current incinerator agreement/debacle shall be terminated from City or Authority employment or as consultants. These include, but are not limited to: Andy Giorgione, Dan Lispi, John Lukens, Tom Mealy, and Bruce Barnes.
RESPONSE: Everyone else is being blamed except for James Barlow and the Barlow companies that caused the problem. He said that it is grossly unfair to ask others to give up careers because of Barlow’s mistakes. Mayor indicated that Mark Stewart of Wolf Block was engaged by the Authority to bring litigation against the Barlow entities. He understands James Barlow is starting a new company in an attempt to escape liability and did not use complimentary language in describing James Barlow.
As to the individuals named in condition 4, he pointed out that Dan Lispi is working for Covanta and has not worked for the Authority since December, 2006. Tom Mealy is no longer working for the City and the Authority, although he is still being paid from the City payroll for accrued sick and personal leave. Mr. Mealy helped the City by taking unused leave over time rather than one lump sum at the end of 2006.
CONDITION #5: Covanta’s insurance shall be increased to $10,000,000; there shall be no early termination fee.
RESPONSE: Covanta issue. (It is my understanding from conversations with Covanta representatives that Covanta has agreed to these conditions.)
CONDITION #6: THA shall put out an RFP for bids for the purchase of the incinerator as repaired on or before July 1, 2009.
RESPONSE: The Mayor agrees with RFP concept but notes that Covanta has the right to match the offer or Right of First Refusal under the Management and Professional Services Agreement. Still, the Mayor agrees and expects that something will be able to be done about a sale of the incinerator prior to July 1, 2009.
CONDITION #7: A special reserve fund shall be established in the amount of $1 million to be used for financial assistance for Harrisburg residents for property tax and water bill assistance. No grant shall exceed $200 for City utilities assistance and $300 for property tax assistance. This money can come from the “working capital loan.” Details can be worked before the close of the 2007 calendar year.
RESPONSE: The Mayor agrees with the idea of the Special Reserve Fund. The funding source would have to be explored and worked out as the uses of the Special Reserve do not coincide with purposes of the Resource Recovery Facility and the proposed Working Capital Loan.
CONDITION #8: MWBE local participation on the retrofit project shall be 30%.
RESPONSE: The Mayor agrees with the goal of 30% for MWBE local participation. This goal is consistent with the current numbers achieved during the retrofit. The M goal achieved 25% and the W goal achieved 5% so far.
CONDITION #9: If the County will not be a co-guarantor, then they will not be receiving the $5 from the $10/per ton increase.
RESPONSE: The County would have to agree to this condition. This is an administrative fee that the County set to be applicable to all parties/haulers including the Authority and the City.
CONDITION #10: There will be no restructuring or any assumption of any part or form of the CIT Agreement; the CIT Agreement shall be subordinate to RRF Bonds.
RESPONSE: If the CIT Agreement is not addressed, sharp increases in deficits will occur in 2007 and 2008. The Mayor is surprised to see what is gained by leaving in place the most expensive component of the outstanding obligations. CIT obligation is onerous and needs to be taken out to save millions. The Mayor thinks not addressing the CIT problem is wrong.
CONDITION #11: If County will not be a co-guarantor, THA shall not be responsible for any of the County’s consultant, legal fees, etc. The County shall be fully responsible for its own fees and costs.
RESPONSE: The Mayor has no problem with eliminating payments except that the County will not agree to assuming its fees and costs. Under existing agreement, the County is to be reimbursed.
CONDITION #12: Any and all monies recovered in the Barlow litigation shall be placed in a special fund for and shall be used to pay any debt service obligations on any outstanding debt of the retrofit for which the City is a guarantor.
RESPONSE: Agrees on use of monies if any monies are recovered in the Barlow litigation.
CONDITION #13: THA shall provide City Council with access to any of all documents and information regarding the Barlow lawsuit and THA’s financial condition. THA shall promptly answer any Council questions and provide requested documents within 48 hours.
RESPONSE: The Mayor has no problem with condition, but is concerned about litigation strategy of the Barlow litigation being disclosed to public and tipping off Barlow. The Authority also has to address this Condition.
CONDITION #14: The City shall guarantee the Covanta loan up to a maximum amount of $25,500,000. The City shall guarantee the Operating Capital Loan up to a maximum of $11,000,000. Of that sum, $3.5 million shall be paid to Covanta for unpaid invoices, $5.9 million shall be placed in a separate interest-bearing account and shall be used SOLELY for debt service payments. Furthermore, no monies shall be paid from that account for debt service without the affirmative vote of the THA Board at a public meeting PRIOR to the account withdrawal/debit payment for debt service. Absolutely none of these loan proceeds shall be used to pay any portion of the CIT debt.
RESPONSE: The Mayor strongly disagrees with Condition 14, especially the reduction of the Working Capital Loan. Such reduction results in a built in problem because there will be a deficit immediately. The Working Capital Loan was to address or solve all the deficit problems for at least 2007 and 2008, and reducing the size of the Loan will not resolve such deficits. He also asked about who will make the reduced Working Capital Loan when problems will still be unaddressed. In addition, with the reduction of the Working Capital Loan, the City will not be reimbursed for the advances made on behalf of the Resource Recovery Facility.
CONDITION #15: THA will report all assets to the City Council and work with the City administration and City Council to develop a plan to liquidate those assets in order to help pay-off the Covanta Loan and Working Capital Loan, within 90 days.
RESPONSE: The Authority has to address this Condition 15. However, the water system and sewerage system are subject to outstanding indentures and documents, and there are numerous requirements and payments that would have to be met and paid, respectively, if these assets are liquidated.
CONDITION #16: If and when the incinerator is sold the tipping fee increase that is passed on to the City residents, shall include a “roll back” clause that is structured in the agreement with any purchaser. Therefore all residents will begin paying the same rate fee prior to the increase, at least 30 days after the sale.
RESPONSE: This Condition 16 would kill any future sale or purchase of the Incinerator.
CONDITION #17: An independent forensic audit which gives the facts and truth as well as provide an analysis of what went wrong, so that the same mistake does not reoccur. In addition an annual forensic audit should be submitted to Council by the auditor, not the Authority to ensure that we get a complete document. This is especially necessary until we have in place systems to ensure we are getting ourselves out of debt. The approval of the guarantee will be conditioned on an independent forensic audit.
RESPONSE: The Mayor thinks that there will be some form of forensic audit done in preparation for the Barlow litigation. One concern about the submission of such information to Council is the disclosure of litigation strategy which Barlow will try to obtain.
CONDITION #18: All information submitted to Council on actions taken by THA must be legally certified by THA Board leadership. This is especially true should THA have to continue with the current Board. In addition, “all” spending of THA, who authorized, and for what purpose must be clearly delineated in a monthly report. Again, all reports should have legal certification and signed by THA leadership.
RESPONSE: The Authority has to address this Condition 18 also. But the Mayor thinks that some of the steps mentioned are already being done. Minutes of Authority Board meetings are already sent to Council. All Authority expenditures are also listed in public documents and approved by the Authority at a public meeting.
CONDITION #19: All actions taken by THA that impinges on the financial status of Harrisburg city residents must be brought before Council and the Mayor (both) and in writing prior to action. This doesn’t mean we must approve, but we must be notified prior to the action and have the opportunity to support or note our disapproval/concern for such an action. In addition, public disclosure must be made to the Harrisburg community, 30 days time for public input/comment on the issue, via a public meeting that is scheduled at a time and location accessible to the public. This includes any contractual agreements between the City and THA. Example, fee increases.
RESPONSE: The Authority has to address this Condition 19. The Mayor conceptually does not have a problem with this Condition.
CONDITION #20: Mayor Reed avail himself with Commissioner Jeff Haste and myself to meet with Secretary Yablonsky to get a process moving to discuss the services of DCED’s financial team that is willing to assist us with the consideration of options available in addressing this situation with the City’s RRF.
RESPONSE: The Mayor spoke to Secretary Yablonsky on Wednesday afternoon (July 25, 2007). The Secretary indicated that the type of review described in Condition 20 would take several months which may not be prudent in the present situation. Secretary Yablonsky told the Mayor that he’s aware of the action steps the Authority and City administration are proposing with respect to the Incinerator, and that he and DCED would probably recommend those steps. Secretary Yablonsky further stated that state financial aid is not there and available.
CONDITION #21: Covanta should be required to hold a performance bond. No amendments shall be made to any agreement with any contractor including the Covanta agreement without City Council’s knowledge.
RESPONSE: The Mayor does not know if Covanta would agree to a performance bond. He has no problem with notifying Council on any agreement with any contractors. The Authority has to address this Condition 21 also.
