How do you blame a city for lying to taxpayers and bond buyers about its sad financial shape - without also blaming its mayor, or its finance officers, or any of the paid lawyers, bankers, and advisers who helped tell the lies?
That's what the Securities and Exchange Commission did last week when it busted Pennsylvania's capital city, Harrisburg, for lying about its financial condition from 2008 to 2012, after it borrowed too much and started going broke.
The SEC settled the case. No fines, no guilty confession. The city did promise to make its financial reporting more accurate.
That's all? A January 2012 audit showed that local officials and well-paid advisers approved plans to hire unprepared, uninsured contractors, who failed to fix the local trash incinerator, then backed refinancings that delayed, diverted, and magnified the debt, in apparent violation of state laws.
"Bad financial information doesn't just fall off a tree. It's put out there by individuals," complained Anthony Sabino, a Long Island lawyer who teaches law at St. John's University Law School, to the Bond Buyer newspaper.
But instead of naming names, the SEC in Washington preferred to "more broadly address" city officials' responsibilities with a detailed warning that accompanied the Harrisburg action, says Elaine Greenberg, the Philadelphia-based lawyer who oversees the SEC's three-year-old municipal-finance task force.
What about the misconduct turned up in the audit? The Harrisburg bonds were financed back in 1997 to 2007. Since the U.S. Supreme Court's unanimous Gabelli v. SEC decision in February, the agency says it's tough to pursue securities frauds more than five years old; instead it is going after more recent lies, told in an apparent effort to cover up older losses.
Greenberg and her deputy, Mark Zehner, point out that the SEC doesn't regulate local governments. But what if the state and local authorities were part of the same corrupt machine, relentlessly squeezing taxpayers, while local law enforcement looks away?
Dauphin County District Attorney Ed Marsico, who says he's been studying up on Harrisburg's troubles since state Senate hearings into the matter last fall, told the Harrisburg Patriot-News that he might find ways around the statute of limitations. And that he's trying to get Peter Smith, the federal prosecutor in central Pennsylvania, or state Attorney General Kathleen Kane to talk about finally filing charges.
Meanwhile, the bipartisan group of state senators who held those hearings is redrafting bills that would make it more clearly a crime for Pennsylvania towns to lie about their finances, and ban other practices once dear to the capital, like local-agency bond guarantees and interest-rate swaps. Members of Gov. Corbett's administration helped write the bills, Elizabeth Rementer, spokeswoman for Sen. Rob Teplitz (D., Dauphin), told me.
Through it all, Harrisburg slides toward bankruptcy amid a bruising mayoral primary election.
In his newsletter, Municipal Market Advisors' muni bond watcher Matthew Fabian tells readers that state officials' plans to sell the city's incinerator to the Lancaster County Solid Waste Management Authority, and lease parking garages to Standard Parking Corp., won't raise enough cash to pay the city's debts.
Who should make up the difference? The advisers, insurers, and counselors who approved the bonds? The investors who trusted them?
No, Pennsylvania taxpayers will almost certainly eat the capital's debt, writes Fabian. Expecting the bondholders or the bond establishment to pay would be "a major blow for confidence in the ability and willingness of other Pennsylvania cities to honor their debts."