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Harrisburg Mayor On City's Financial Collapse: 'The Chickens Came Home To Roost'

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By Hilary Russ

July 25 (Reuters) - The mayor of Pennsylvania's distressed capital city Harrisburg on Wednesday released a long-delayed audit that sheds light on the collapse of the city's finances and points the finger at the previous mayor.

The fiscal 2009 audit reveals that the city ended the year with a $227 million deficit, when it had closed out 2008 with a surplus of $46 million.

"It was the year in which the proverbial 'chickens came home to roost'," wrote Mayor Linda Thompson in the introduction to the audit. She took office in 2010 after her predecessor, Stephen Reed, who held the position since 1982, lost a bid for reelection.

Cities across the United States are under fiscal pressure because of shrinking revenue and rising costs and some have recently gone bankrupt. Others, including Harrisburg, are suffering because they're on the hook for capital projects that backfired.

During Reed's time in office, the city decided to guarantee debt that would pay for repairs to its waste-to-energy trash incinerator. But even then, the facility wasn't generating enough revenue to cover its existing debt, according to a separate forensic investigation released in January.

That made the new borrowing and bond guarantee for the incinerator a double-down bet that has mired the city in what is now about $320 million of debt.

Harrisburg now has a state-appointed receiver, who is working to sell the incinerator and other key assets.

According to the audit released on Wednesday, 2009 was the critical year in which the $264 million incinerator debt guarantee was booked to the city's financial statements.

It was also the year that Reed entered into "costly and questionable" labor contracts with public employees, and the year the city wrote off $844,000 in loans "in a vacuum of missing documentation in the wake of exiting city bureaucrats," Thompson said in the audit.

The year was marked by "a massive exodus" in the city's financial department and budget deficits "hidden in carried-over unpaid receivables," she wrote.

Thompson referred in the audit to the "incompetency" surrounding the incinerator debt deals and said Reed's time in office was filled with "years of misinformation."

In a statement to Reuters, Reed said that Thompson isn't telling the whole story.

Steps to wipe out "most, if not all" of the incinerator debt were "well underway" five years ago when the city council -- led at the time by Thompson herself -- blocked the city from doing so, Reed said.

"The simple fact has been and remains that the incinerator debt could have been and can be wiped," he said.

Reed has been a target for critics who say he's to blame for the city's current financial crisis, and many were waiting for the 2009 audit as further proof of his role.

Others, however, have pointed to additional culprits and have said that for many of his years in office, Reed helped the city grow and prosper.

At the close of fiscal 2009, which ended Dec. 31 for Harrisburg, the city had outstanding net bonded debt of $351 million. That breaks down to nearly $7,200 per capita for Harrisburg's approximately 50,000 residents, an increase of $5,200 debt per capita from 2008, the audit said.

Though it's required to release certified financial reports annually, Harrisburg's budget was so tight that it didn't have the personnel to complete the audit until now, according to the audit.

The city's previous receiver, who resigned four months after he began, asked federal and state investigators for a criminal probe into the incinerator deals.

The deals and the delayed city audits also led to an investigation by federal securities regulators, Thompson said.

U.S. officials have not commented on any ongoing probes.

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