Harrisburg, Pennsylvania, has teetered on the edge of fiscal ruin for over a year. Officials have blamed the budget problems mostly on an incinerator-plant project that became a costly boondoggle. But when Harrisburg rocked the municipal-finance world in early September by warning that it could skip a payment on its general-obligation bondswhich werent tied to the incinerator debtit sent a different message about the increasingly unwise ways that municipalities use borrowing these days (see The Muni-Bond Debt Bomb, Summer 2010).
Harrisburgs debt crisis stems from a long borrowing spree by its recently retired mayor, Stephen Reed, who governed the city for 28 years. Long before the incinerator debacle, Reed borrowed liberally to invest in projects that the private sector wouldnt finance on its own: building parking garages downtown; constructing and later renovating a baseball stadium; and then buying the minor-league baseball team, the Harrisburg Senators, that played there after it threatened to bolt town. As the local newspaper, the Patriot-News, put it when Reed retired, he never met a bond deal he didnt like.
What enabled the long borrowing binge was the perception that some of Reeds early ventures were successes. The national press touted the citys baseball purchase as a model of how communities could save their sports teams. Similarly, after Harrisburg spent $39 million in mostly borrowed money to create the National Civil War Museum, city officials hailed the effort as a successful gamble when it opened in February 2001.
But such projects typically bring much less economic benefit than promised, and the mounting debt can wreck a citys balance sheets. In buying the Senators, Harrisburg officials admitted that only about a dozen local firms benefited significantly from the team. That shouldnt surprise: most sports franchises, research shows, generate paltry long-term economic gains for the simple reason that they mostly create low-paying service jobs, and not many of those at that. As for museums and other tourist attractions paid for with government dollars, they often struggle to lure vacationers. The Civil War museum never lived up to expectations and has been losing money.
Over the last decade, Reed began to spend borrowed cash in ever-riskier ways. In 2003, the Patriot-News discovered that he had used public debt to buy nearly $5 million in American historical artifacts, including a $125,000 pistol once owned by Doc Holliday, in anticipation of opening a Wild West museum in Harrisburg. Neither the museum nor the purchases had city council approval. And then Reed put together the incinerator project, seeking to upgrade a local plant with speculative new technology. Design flaws and delays plagued the project, burdening the city with nearly $288 million in debt and $70 million in bond payments this year alone.
Harrisburgs residents should have received a wake-up call about the dubious nature of Reeds economic development schemes when the citys budget crashed in 2005, during a national expansion that saw many other municipalities awash in surplus tax revenues. Even before the city felt the full effect of the incinerator projects debt, Harrisburg had laid off workers and cut back services to deal with budget shortfalls.
In September, Pennsylvania governor Ed Rendell announced that the state would help the city meet its general-obligation bond payments, fearing that a default would make it impossible for other state municipalities to borrow. But Harrisburg remains deeply indebted. The citys predicament ought to be a warning to other cities that use borrowing to finance projects of questionable economic value. Often, the rationale that politicians give voters for such projects is merely the existence of a gleaming new facility in a competing town. But the true measure of costly developments should be whether they generate economic improvement and fiscal stability over the long termand judged by that criterion, they often fail, as they have in Harrisburg.