* Hearing in wake of troubled Harrisburg incinerator project
* Penalties, tougher review could be on tap
* Ex-mayor, who signed off on debt deals, offers suggestions
By Mark Shade
HARRISBURG, Pa., Oct 4 (Reuters) - Pennsylvania legislators, grappling with capital city Harrisburg's $340 million of debt, set out on Thursday to tighten the state law that governs how cities and towns win approval for complex, taxpayer-funded projects.
In a day-long hearing, members of Pennsylvania's Senate Local Government Committee questioned former local officials publicly for the first time about how Harrisburg could have racked up so much debt tied to renovations of its ill-fated trash incinerator.
"[We need] legislative fixes that can guarantee that this fiscal debacle does not get revisited on any taxpayer across the commonwealth," said state Sen. John Blake, the Democratic chair of the committee. "I think this is a more pervasive issue throughout the entire commonwealth that affects the fiscal health of all of our communities."
Committee Chairman John Eichelberger, a Republican from central Pennsylvania, said changes could include incorporating a tougher review process with penalties for those who misrepresent their projects.
When Harrisburg filed for bankruptcy in October 2011, it became a cautionary tale about how a single troubled project could bring a struggling city to the financial collapse.
A handful of other U.S. municipalities - in particular, Alabama's Jefferson County, which filed the country's largest Chapter 9 bankruptcy last November - were also undone largely by debt from underperforming public projects financed with revenue bonds.
Harrisburg's bankruptcy case was thrown out because state legislators passed a law banning the city from filing. That ban was extended until Nov. 30. If lawmakers don't extend the ban again, William Lynch, the city's state-appointed receiver, could put the city into bankruptcy again.
Lynch's attorney, Mark Kaufman, declined to tell the audience at the Bloomberg State & Municipal Finance Conference in New York on Wednesday whether Lynch would put the city into bankruptcy if the ban expires. Kaufman added that municipalities ought to avoid Chapter 9 if possible.
CITY BORROWED MILLIONS TO PAY FOR OPERATIONS - AUDITOR
Harrisburg's finances ran into trouble when it first issued, and later guaranteed, debt to repair and retrofit its trash-to-steam incinerator from the early 1990s to 2007.
The city sold the flailing incinerator to the newly formed Harrisburg Authority in 1993. The authority began borrowing millions of dollars for operating capital. It would then borrow millions more to refinance that debt, forensic auditor Steven Goldfield testified at the hearing.
Goldfield said Pennsylvania law bars long-term borrowing for government operations, but that's what Harrisburg was doing with its incinerator.
"It's akin to paying your rent with a credit card and never paying the balance off, and continuing to do it," Goldfield told state senators. "At some point you're paying exorbitant interest rates, you haven't addressed the problem, and the debt load is beyond your capability."
Stephen Reed, who was Harrisburg's mayor for 28 years, including while the incinerator financing was hashed out, also testified. He has rarely spoken about the deals since leaving office.
Reading from a statement, he recommended that the state be required to dig deeper into the guarantees that municipalities make when seeking approval for large-scale projects.
Reed said the city made its guarantees when it first started retrofitting its incinerator because officials believed the changes would be sufficient to get the facility operating in a profitable way.
No independent review found that the project might end up being far more expensive than projected, said Reed, who has been the target of some scorn for the financially troubled project.
"The decision makers in this matter ... are not engineers and would not have specialized knowledge to assess a cost estimate on a project of this sophistication and technology," he added.
The committee is planning to hold another hearing at the end of the month.