CityofHarrisburg,PA

ReviewandAnalysisofHarrisburg FinancialRecoveryPlan: StrongPlan(26August2013)

REPORTEDPREPAREDONSEPTEMBER16,2013
ALVAREZ&MARSALPUBLICSECTORSERVICES,LLC
ColumbiaSquare 555ThirteenthStNW,5thFloorWest Washington,DC20004

WilliamV.Roberti,ManagingDirector
(203)4001623 broberti@alvarezandmarsal.com

ThisdocumenthasbeendevelopedfortheCityCouncilofHarrisburg,Pennsylvania.Thecontentsofthedocument arethepropertyoftheCity,andmayincludeforwardlookingstatementsthataresubjecttomarket,economic, andoperationalvariation.Thepastoperationalperformanceisnoindicationoffutureresults.Furthermore,the underlyingdataareprovidedbyexternalcouncilandadvisors,andwedonotguaranteetheaccuracyofthe informationprovidedbyexternalparties.


TableofContents I. EXECUTIVESUMMARY......................................................................................................................... 3 PurposeofReport............................................................................................................................ 3 FindingsandConclusions................................................................................................................. 4 II. BALANCEDBUDGET.............................................................................................................................. 9 OverviewofStrongPlansMultiYearForecasts .............................................................................. 9 RevenueEnhancementAssumptions............................................................................................ 11 SpendingInitiatives........................................................................................................................ 12 YeartoDateFinancialResultsandCashFlowForecast................................................................15 FindingsandConclusions............................................................................................................... 15 III. OTHERFUNDINGPRIORITIES............................................................................................................. 17 BackgroundonPlanComponents.................................................................................................. 17 FindingsandConclusions............................................................................................................... 18 IV. SOURCESANDUSESOFMONIESFROMSALEOFINCINERATOR.......................................................19 BackgroundonPlanComponents.................................................................................................. 19 FlowofFundsAnalysisandUseofSaleProceeds......................................................................... 22 AnalysisofVariousAgreement(s)TermConditionsandDebtFinancingProposal.......................23 FindingsandConclusions............................................................................................................... 23 V. SOURCESANDUSESOFMONIESFROMSALEOFPARKINGFACILITIES ..............................................24 BackgroundonPlanComponents.................................................................................................. 24 FlowofFundsAnalysisandUseofSaleProceeds......................................................................... 24 NonRecurringFlowofFunds(ParkingTransaction)..................................................................... 24 RecurringFlowofFunds(ParkingTransaction)............................................................................. 27 AnalysisofPlanAssumptionsandProjectionsRevenueAssumptions..........................................29 1|P a g e

NetOperatingIncome(NOI)EnhancementAssumptions.............................................................31 ParkingMeterFeesandEnforcementRevenueAssumptions......................................................32 OperatingExpensesAssumptions .................................................................................................. 33 CapitalReserveAccountAssumptions........................................................................................... 35 AnalysisofVariousAgreement(s)TermConditionsandDebtFinancingProposal.......................36 FindingsandConclusions............................................................................................................... 38 VI. APPENDIX...........................................................................................................................................41 APPENDIXA.DocumentsReviewed............................................................................................... 41 APPENDIXB. IndexofMajorCreditors................................................................................. 42

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I.

EXECUTIVESUMMARY PurposeofReport Alvarez & Marsal (A&M) was hired by the City of Harrisburg, PA (City) to prepare an expert reportrelatedtotheAugust26,2013ReceiversStrongPlan(thePlan).Thisduediligenceanalysis describes our findings based on the information obtained, and addresses the completeness and reasonableness or, conversely, the deficiencies and inconsistencies perceived in the materials below.Majorcomponentsoftheanalysisinclude: Review of the assumptions and projections used to develop the balanced budget for 2013 2016containedwithinthePlan Validatetheaccuracyandreasonablenessoftheassumptionsandprojectionsrelatingtothe balancedbudgetfor20132016 Develop a flow of funds analysis that delineates the sources and uses of proceeds derived fromthesaleofcityassets Review the debt financing proposals for the parking transaction along with underlying assumptionandthecashflowassumptions

In completion of this report, A&M reviewed various documents, models, proposed debt financing schedules,termsheets,proposedagreementsandotherconfidentialmaterialsrelatedtotheunderlying assumptions in the Strong Plan. Our professionals had repeated due diligence conferences with the Receiverandhisfinancialadvisors. A&M discloses that our existing business relationships with current creditors, financial partners and bondholders involved in this Plan did not impede or influence in our analysis, due diligence and report conclusions. Appendix A provides a listing of the documents provided by the Receiver and the Special Counsel to the City Council in review and analysis. A&M agreed to a confidentiality agreement related to the uses and transfer of the documents. A&M worked with the Receiver and his Financial Advisory Team to understandthebudget,theplanassumptions,andthetransactionterms. 3|P a g e

FindingsandConclusions The Harrisburg Strong Plan is a complex financial blueprint with critical initiatives and funding proposals to address the Citys financial and economic challenges. The revised recovery plan has a number of solutions that necessitate accommodations of the City, its employees, and major financial and operationalpartners. At the same time, City Council must understand the short and long term benefits, financial attributes andrisksrelatedtothePlan. Many of the terms and final contractual and transaction financial details of the Plan are still being developed.CityCouncilneedstounderstandthemajorcomponentsandcashflowstoforgeaworkable resolutionforHarrisburg'sfuture. While A&M has some remaining questions and potential recommendations to the City and Receiver related to the major sale and lease transactions, A&M does not see any major hurdles, assumptions or projectionsthatshouldprohibitCityCouncilfrommovingforwardinthenoticeofapprovaloftheplan concepts. A&M reviewed the financial snapshot multiyear budget and the various transaction cash flow projections and assumptions. We held a number of meetings and calls with members of the Receivers Financial Advisory team to understand the major components of the Plan to test the validity and reasonableness of the assumptions. This analysis is based on estimates, assumptions, and information gathered from our research related to the Proposed Revised Recovery or Strong Plan. The sources of information and bases for the assumptions are stated herein. We believe that the sources of informationarereasonableandvalid. Since our recommendations and conclusions are based on estimates and assumptions that are inherentlysubjecttouncertaintyandvariationdependingonevolvingevents,wedonotrepresentthem as results that will or will not be achieved. Some assumptions inevitably will not materialize while unanticipated events and circumstances will occur; therefore the actual results achieved may vary materially from the examples and conclusions herein. The terms of our engagement do not provide for 4|P a g e

reporting on events and transactions that occurred subsequent to our research completed on September15,2013. A&MfindsthatthePlanprovidesimmediatefinancialrewardsandrisksthattheCouncilandcommunity mustbeawareoftoaddressthefuturelongtermsustainabilityoftheCity. PlanOpportunities&Benefits Eliminates existing debt service funding demands on the General Fund with the defeasance of theIncineratorRecoveryFacility$212.7milliondebt Provides for immediate cash relief to the 2013 Budget to allow for $8.3 million to close the projectedbudgetdeficitand$5.0milliontomeetcashflowandagingvendorpayments Provides for expanded revenues (Earned Income Tax, Parking Tax, and Other Parking Revenues) toaddressoperatingneedsoverthenextfouryears TargetsmoniesforkeyCitychallengesandpriorities $6.0millionforOPEBfunding $10millionforeconomicdevelopmenttoimprovethelocaltaxandemploymentbase $10millionforneededCityinfrastructureanddeferredmaintenanceneedscityassets

Providesbudgetfundingforincreasingemployeehealthcareandrelatedinsuranceneeds Providesmoniestofillcriticalcitypositionsandreduced extraordinaryoperatingexpenses (e.g., overtimeduehighvacancyrates) PlanidentifiesotherpotentialoperatingandrevenueinitiativesfortheCityCounciltodevelopa longtermfinancialplan PlanRisks&Challenges The Plan is only the first step for the City to address financial sustainability. Future operating initiativesareneededtoaddresspotentialfinancialchallengesinfutureyears. Proposed Plan is a work in progress. Final terms for the Asset Transfer Agreement are still in developmentandwillrequireongoingreview Employeewagesandbenefitsbeingreducedby$4.0millionincluding$1.8millionforIAFFwhich isnotconfirmed Needforcontinued$5.0millionappropriationfortheGeneralAssemblyforpublicsafety

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ThesaleoftheIncineratordoesnotfullycovertheliabilityleaving$208millionindebt The transaction remains highly sensitive to interest rates, and further interest rate increases coulderodevalue Parking System Revenues and Operating Expense targets may not be achieved leaving the last paymentsinthewaterfallathighestrisk ThesubordinationofCitypaymentsputstheCitymoreatrisk Thestructureofdebtcreatesincreasingcostsintheoutyears,requiringfuturerevenuegrowth One of the major consequences for the City in not moving forward with the proposed transactions is thattheHarrisburgwouldbefacedwiththeimmediateneedtofilebankruptcy.Thecurrentstateofthe CityscashflowsdoesnotallowtheCitytocontinueasusualwiththeexistinglabor,debtandoperating costsandwithoutnewrevenuesorfurtherspendingreductions. While the Revised Recovery Plan may have some unpopular and unique strategies, the City has limited options to ensure cash solvency by year end. Chapter 9 bankruptcy would have a damaging impact on theCityforyearstocome. The cost of bankruptcy is expensive and will cause the City to have to spendhigh amounts in legal and advisory fees. Bankruptcy will impact to the Citys ability to borrow low interest rate monies in the future. Underwriters, rating agencies, credit enhancers, and bondholders may be fearful debt obligationswillnotbemetinfutureyears. Secondly, a proposed bankruptcy will also have a negative impact to the community including the potential loss of business and traveler tourism, new home sales, and loss of future economic development. As a result many of the revenues created by the City from taxes collected on the community,bankruptcymaycausealongerrecoveryperiod. Mostimportantly,theStrongPlanisonlyoneofmanyaddedfinancialstrategiesandinitiativesthatCity Council will need to complete to achieve financial sustainability. The City will need to continue to examine operational and program efficiencies and revenue opportunities to address the long term needs for the City of Harrisburg. The Receiver has identified a number of initiatives that the City should pursue.Atthesametime,asthefinancialcontrolandaccountabilityoftheCitysfinancesreturnstothe 6|P a g e

City Council, the entire governing body needs to ensure that they have a strategic direction and mission for the community including a long term financial sustainability plan. With several of the Strong Plan initiatives expiring over the next three to six years, it is important that the City Council be proactive in the development of a long term plan to address the challenges of health care costs, employee staffing andpayincentive,aginginfrastructureandotherprogramprioritiestoenhancetheeconomicviabilityof theCity. Basedonouranalysis,wehavedevelopedanumberofoverarchingfindingsandconclusions: In light of the current unbalanced budget and bleak financial cashflow forecasts immediate shortandlongtermfinancialmeasuresareneeded. The Plans assumptions and forecasts seem reasonable and valid. While the projections and assumptions are conservative, several of the revenue and expense projections are not in place whichisessentialtobalancethebudget. Continuation of $5.0 million in funding from the General Assembly for public safety operations. The Baseline Budgets include the public safety appropriation and it is essential that this supplemental funding continues. If the state funding is not appropriated, then additional spending reduction or revenue enhancements initiatives willberequired. $1.8millioninpersonnelspendingreductionsfromIAFFcontractsettlement. Elimination of the Incinerator debt and restructuring of other existing debt service requirements. The transactions provide immediate cash flow needs to address critical outstanding bills, backlogofpayments,addressthetimingofrevenues,andresolveworkingcapitalneeds. Future budgets should be based on the priorities of the City that are within the resource constraints of the current forecasts. Forecasts need to include current and future impacts of health/medicalcostsoncurrentemployeesandcurrent/futureretirees. The Parking Transaction monetizes (i.e., tradeoff of upfront cash infusion in lieu of future cash flows)futurecashflowsofthevariousparkinggaragesandlots The Transaction is highly sensitive to interest rates. Future delays in the timely closing of the transactioncouldcausereductionsintheoverallvalueofthetransaction.

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TheParkingTransactionincludesanumberofmovingparts,legalrequirements,andconcessions that have been made in order to consummate a deal. As a result, the transaction has become complexandchallengingtocommunicatetothevariousconstituents. Basedonthesefindings,theCityshouldbeawareofthefollowingitemsrelatedtorisksandstructureof thetransaction: WhatlevelofriskisbeingtransferredtotheCityinthetransaction? Howmuchofthecurrentfinancingstructureisdependentonfuturerevenues? What concessions were required, and does the term sheet reflect all of these concessions? HowwilltheCitysexpectedpaymentsbeaffectedbytheconcessions? Whathappensifthesurplusrevenuesarenotachieved? Whathappensiftheoperatingincomeisnegative? WilltheexcessfundsdrawfromtheCapitalReserveaccount?

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 II. BALANCEDBUDGET OverviewofStrongPlansMultiYearForecasts TheCitysGeneralFundBudgetwaspresentedinthePlanisbalanced.ThePlanincludesvariousrevenue enhancementsandexpensereductionstobalanceboththecurrentandfutureyearbudgets.

HarrisburgStrongPlanFinancialSnapshot Adjusted FY2013 BeginningBudgetBalance Estimated Baseline Revenue PlanNewRevenue Sources TotalGeneralFundRevenues Estimated Baseline Spending PlanCostReductions/Payments TotalGeneralFundExpenditures EndingBudgetBalance $

Projected FY2014 $

Projected FY2015 $ 400,000

Projected FY2016 $400,000

$50,000,000 $50,526,000 $50,130,520 $50,354,710 $ 19,100,000 $9,800,000 $ 10,342,000 $10,885,260 $ 69,100,000 $ 60,326,000 $ 60,472,520 $61,239,970 $51,330,000 $52,326,000 $53,372,520 $54,439,970 $ 17,770,000 $7,600,000 $7,100,000 $ 6,800,000 $ 69,100,000 $ 59,926,000 $ 60,472,520 $61,239,970 $ $ 400,000 $ 400,000 $400,000

While the FY 2013 to FY 2016 General Fund Budgets are balanced, meaning that if the revenue projections are met and spending is contained with the expense assumptions, the City will have sufficientrevenuestomeetallofitsrequiredoperatingexpensesoverthenextfouryears. The Plan did not provide multiyear detail budget line items for major spending purposes (e.g., personnel,
Revenues InflationaryGrowthAssumptions Projected FY2014 0.0020% 2.00% Expenses Projected FY2015 0.0020% 2.00% Projected FY2016 0.0500% 2.00%

supplies, services, capital, and

other) or detail for the major sources of revenues. We did note however that the Plan did include conservationrevenueandcostinflationaryadjustments. The Plan provides a balanced General Fund budget for the next four years including providing resources for several key priorities. The below table summarizes the major key components of the balanced GeneralFundFinancialSnapshot. 9|P a g e

ComponentsoftheStrongPlan'sFinancialImpacttotheGeneralFundForecasts
FY2013 BEGINNING FUNDBALANCE REVENUES: BASELINEREVENUES(Revised) $ 50,000,000 $ 50,526,000 $ 50,130,520 $50,354,710 $ FY2014 $ FY2015 $ 400,000 FY2016 $400,000

NEW OREXPANDEDREVENUES Existing&NewPriorityRevenues (MeterEnforcement) $ PriorityParkingDistributions EarnedIncome Tax MoniesforPayables&Working Capital MoniestoBalance Budget TOTALNEWOREXPANDEDREVENUES TOTAL TOTALGENERALFUNDREVENUES EXPENSES: BASELINEEXPENDITURES(REVISED)(1) (NetofExistingDebtService)

$1,400,000 $1,442,000 $ 1,485,260 $ 1,000,000 $ 1,500,000 $ 7,900,000 $ 7,900,000

$ $ 500,000 $5,900,000 $ 7,900,000

$ 5,000,000 $

$ 8,200,000 $ $ $ $ 19,100,000 $9,800,000 $ 10,342,000 $10,885,260 $ 69,100,000 $ 60,326,000 $ 60,872,520 $61,639,970

$ 51,330,000 $ 52,326,000 $ 53,372,520 $54,439,970

REDUCEDORREVISEDSPENDINGINITIATIVES Personnel CostsLabor Concessions(3) $ (700,000) Personnel CostsReductionin Force $ RevisedDebtService GODebt (Ambac) (2) $ 5,970,000 RevisedCapital Equip.Leases $3,000,000 PaymenttoSuburban Communities $ 4,500,000 AgedPayables/Backlog $5,000,000 TOTALREDUCED/REVISEDSPENDING $ 17,770,000 TOTALGENERALFUNDEXPENDITURES ENDINGFUNDBALANCE

$ (4,000,000) $ (4,500,000) $ (4,800,000) $ (600,000) $ (600,000) $ (600,000) $ 7,700,000 $3,000,000 $ 1,500,000 $ 7,700,000 $ 7,700,000 $3,000,000 $ 3,000,000 $ 1,500,000 $ 1,500,000

$7,600,000 $7,100,000 $ 6,800,000

$ 69,100,000 $ 59,926,000 $ 60,472,520 $61,239,970 $ $ 400,000 $ 400,000 $400,000

(1) Excl udes a ll DebtServi ce Pa yments i ncl udi ng Inci nera torDebtServi ce is $212.7mi ll i on (2) GODebtRes tructuri ng res ul ted i n a s a vi ngs of $1.7mi l l i on i n FY2013a nd $17mi l l i on i n future yea rs (3) Requires IAFF Approva l (4) Ava i l abl e funds fornew ca pi ta l pa ygo ordebts ervi ce a fterremai ni ng obl i gati ons a ga i ns t$3.0mi l l i on

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RevenueEnhancementAssumptions ParkingFacilityTaxParkingPriorityPaymentsandParkingMeterEnforcementRevenues ParkingTaxIncreaseinMeter&EnforcementRevenues The 2013 Baseline Budget includes $1.1 million from current parking meter enforcement.ThePlanestimatesanadditional$400,000peryearoffixedparkingmeter enforcement payments tobemade totheCityundertheParking Transactionsproposal. In order to achieve this estimate the new parking authority must adequately staff the parkingenforcementtoachievethisestimate. PriorityParkingDistributions The Plan projects that the City will receive the Priority Parking Payments from the parking operations. The Parking Transaction cash flow earmarks lease payment for the lease of the Parking Facilities. The Plan projects the priority parking distribution of $500,000 in FY 2014 with a 3 percent growth factor for six years. The lease payment will be paid
FY2013 FY2014 FY2015 FY2016 PriorityParkingPayments $0.00million $0.500million $1.000million $1.500million FY2017 FY2018 TOTAL $1.50million $2.00million $6.500million

to the City for the entire lease term of the parking facilities. In addition and through 2018 the Plan enhances payments to the General with enhanced lease payments totaling: EarnedIncomeTax(EIT) Monies from the approved additional 1 percent EIT may be used to address current and future yearoperatingneeds.TheFinancialSnapshotreflectstheincrementalincreaseof$5.9millionof projected from the 2013 increase. Revenues from the standard 0.5 percent EIT are included in the Baseline Budget projection. In order to have sufficient funds to operate on a balanced basis for Fiscal Years 2014 to 2016 the Plan recommends that the City Council approval legislation for theextensionoftheEITthroughFY2016. 11|P a g e

MoniesforPayablesandWorkingCapital TheParkingTransactionreflectsthetransferofonetimemonies($5.0million)toaddressthe backlogcitybillsandpayables.Theonetimefundswillhelpprovideforfinancialrelieffrom thetimingofrevenueandprovideforadequateworkingcapital.TheGovernmentFinance OfficersAssociation(GFOA)recommendsthatunrestrictedfundsshouldhaveworkingreserves ofuptotwomonthsofneededworkingcapital. MoniestoBalanceBudget Thecurrentbudgetisnotbalanced.OnetimefundsareneededtoensurethattheGeneralFund is not in a deficit position at year end. The onetime monies are needed to not only balance the budgettoaddressseveralbudgetshortfallsinthecurrentyearbudget. TheReceiveridentifiedtheneedtoanadditional$1.9millionforhealthcareandotherinsurance costs; $1.2 million in overstatements in revenues from the HPA transfers; and $200,000 in reducedparkingenforcementrevenuesduetocurrentstaffinglevels. SpendingInitiatives EliminationofIncineratorDebtService The Plan eliminates existing debt and funding demands on the General Fund with the defeasance of the Incinerator Recovery Facility $212.7 million debt. See the Incinerator Section of this report for discussion on the proposed uses of monies from the Sale of the Resource Recovery Facility (Incinerator) of the HPA. The elimination of the $15.0 million in annual debt service provides immediate and ongoing financial relief to address current financial cashflow issues. LaborWageandBenefitEconomicContractProvisions The Plan reflects the implementation of labor agreement changes for the Citys various collective bargaining units including the Fraternal Order of Police (FOP); American Federation of StateandMunicipalEmployees(AFSME);andtheInternationalAssociationofFirefighters(IAFF). Both the FOP and AFSME Employees have approved collective bargaining agreements through endofFY2016.BelowisasummaryofthewagereductionprojectionsprovidedbytheReceiver.

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SummaryofStrongPlanPersonnelSpendingReductionsfromLaborAgreements CostReductionsbyLaborGroup AFSCMEGeneralFund FOP IAFFProposed TotalReductionstoPersonnelCosts CostReductionsbyUsesofMonies Salaries& Wages Benefits&OtherPersonnelCosts FYY2013 FY2014 FY2015 FY2016 Totals

$ 160,000 $ 460,000 $ 460,000 $ 460,000 $ 1,540,000 $ 440,000 $ 1,880,000 $ 1,920,000 $ 2,240,000 $ 6,790,000 $ 140,000 $ 1,670,000 $ 1,830,000 $ 2,100,000 $ 5,740,000 4,010,000 $ 4,210,000 $ 740,000 $ FY2013 76% 24% FY2014 59% 41% FY2015 60% 40% $ 4,800,000 $ 14,070,000 FY2016 59% 41% Totals 59% 41%

A&M was only provided summary level cost savings estimates. The contract modifications reflect changes in economic compensation in wages and ApprovedSalary/WageAdjustments health care. FOP and AFSME employees (excluding AFSCME*&FOPAgreements FY2012 3%Increase Parking) have agreed to contract provisions for period of FY2013 0%Increase FY 2014 0% Increase 2013to2016.Receivercontinuesactivenegotiationswith FY2015 1%Increase IAFF with similar wage and benefit economic benefit FY2016 1%Increase * Does not i ncl ude AFSCME pa rki ng empl oyees changes.

Thecontractamendmentsreflectchangestohealth/medicalcarecoveragereducingtheCitys currentandfuturehealth/medicalcostsincludingpostemploymentcost.Majorcomponentsof theFOPandAFSMEHealth/MedicalPlanchangesinclude: HealthInsuranceContractChanges Changesinplandesign,coinsurance,copaysanddeductibles Changesinprescriptioncopaysandrestrictions FOPEmployeecontributionspercentofbasesalaryof6yearpatrolofficer,basedon tierofcoverage AFSMEEmployeecontributionspercentofbasesalary,basedontierofcoverage IfCityscostsincreasemorethan6percentannuallyafter2015,thenpartiesare requiredtonegotiateandgotomandatoryexpeditedinterestarbitration CanchangetoPEBTF

A&M was unable to validate or test the projections related to the proposed cost savings. Howeverthetenantsofthewageandbenefitreductionsseemreasonableandvalid.

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 ReductionsinForceBasedonChangesinTHA'sOperationsoftheWaterandSewerSystems With the proposed organization changes of the water and sewer operations the Plan eliminates related positions and funding for existing positions that will be become the staffing cost of the THA. The Plan projects $600,000 annually in reduced General Fund costs for water and sewer supportstaffmeterenforcementworkingforStandardParking. GeneralObligationRestructuring ThePlanrestructurestheCity'sotherGeneralFunddebtandcapitalleaseobligations,aswellas, the current GO debt structure with Ambac, resulting in lower payments with an extended bond maturity for additional years. Since March 2012, the City defaulted on its GO obligations and projected to be unable to pay the September 2013 repayment obligation. The total defaulted paymentsexceed$17million. Ambacs settlement with City reflects a payment of $5,970,000 by December 15, 2013. The monies to make the payment are to be derived from proceeds of the Parking Transaction. This amountis$1.7millionlessthanoriginalFY2013paymentamounts. ExistingcapitalleaseswithSun TrustLeasingwillare alsoproposedtoberestructuredproviding annual financial savings to the General Fund. These leases include previous purchases for vehicles,computerequipmentandotherequipment. TheCityisinarrearsinitspaymentstoSunTrustintheamountofapproximately$1.3million. TheReceiverisengaginginsettlementdiscussionswithSunTrustwithapotentialalumpsum paymentbyearly2017. SuburbanSewerBillingClaimants The Suburban Claimants have claimed over billings of sewer system rate charges
SuburbanSewerBillingClaimants $4.500million $1.500million $1.500million $1.500million FY2017 FY2018 FY2019 TOTAL $2.225million $2.225million $2.225million $15.675million

FY2014 proposed settlement agreement will FY2015 FY2016

of approximately $25 million. The FY2013

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repaythevariouscustomers.Moniestomaketheabovepaymentsaretobeplacedinalockbox escrowaccounttobemanagedbyathirdparty. YeartoDateFinancialResultsandCashFlowForecast A&M reviewed the current year budget results. The City currently has 91 vacant positions of which approximately 80 FTE are estimated to be General Fund positions. While the current budget will realize the benefit from the position vacancies, some departments have experienced increased overtime costs due to required staffing requirements. At the same time, staffing shortfall (e.g., Parking Enforcement) hasresultedinlowerthanestimatedparkingfines. The current Approved Budget is still unbalanced. The Receivers Financial Team did indicate that there were initial problems with revenues and expenditures projections/assumptions that may not occur. The corrections have been made to the Adjusted 2013 Budget. The year to date results are somewhat misleading however, due to the current general obligation debt not being paid and with a remaining significantyearenddeficit. A&M also examined the Receivers CashFlow Forecasts. The forecasts did reflect that if a revised revenueandexpenseplanwasnotenactedtheCitywouldbeoutofcashbeforetheendoftheyear.The Citydoesnothavesufficientworkingcapitalorfundreservestoaddresscurrentagingpayables,provide foradequatecashfloworaddresstheproposedshortfall. FindingsandConclusions In light of the current unbalanced budget and bleak financial cashflow forecasts immediate shortandlongtermfinancialmeasuresareneeded. The Plans assumptions and forecasts seem reasonable and valid. While the projections and assumptions are conservative, several of the revenue and expense projections are not in place whichisessentialtobalancethebudget. o Continuation of $5.0 million in funding from the General Assembly for public safety operations. The 2013 budget and 2014 to 2016 budgets include the public safety appropriation and it is essential that this supplemental funding continues. If the

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annual or multiyear appropriation is not approved, then additional spending reductionorrevenueenhancementswillberequired. o Agreement on the $1.8 million in personnel spending reductions from IAFF contract settlement. o Immediate cash flow needs to address critical outstanding bills and backlog of payments, addressthetimingofrevenuesandworkingcapitalneeds. Future budgets should be based on the priorities of the City that are within the resource constraints of the current forecasts. Forecasts need to include current and future impacts of health/medicalcostsoncurrentemployeesandcurrent/futureretirees. Eliminationandrestructuringofexistingdebtservicerequirements.

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III. OTHERFUNDINGPRIORITIES
StrongPlanRecoveryPrioritites

BackgroundonPlanComponents The Plan earmarks monies from the Parking Transaction for designated program priorities for the City. These designated program transfersinclude: EconomicRecoveryDevelopment
EconomicRecoveryDevelopment CapitalInfrastructure OtherPostEmploymentBenefits

Earmarked Funds $10,000,000 $10,000,000 $ 6,000,000

The Plan outlines a collaborative approach to develop an economic recovery strategy that engages the City and community leaders. $10.0 million is earmarked from the Parking Transaction to help expand the City's revenues through new sources of tax revenues paid by successfulneworexpandedbusinessesorbyindividualsinvestinginhousingandimprovements withintheCity. CapitalInfrastructure The Plan earmarks $10 million from the Parking Transaction to address aging capital needs to addressneededrepair,upgrades,andbuildingrenovationsoverthenextseveralyearsgearedto improvingtheCity'slifequalityandspringloadfurtherinvestmentintheCity. OtherPostEmploymentBenefits(OPEB)TrustFund A&M was unable to validate the current unfunded liability of the Citys postemployment benefits to retirees. However, the Receivers team indicated that the liability was over $120 million. The recent and proposed labor agreement modifications imposed changes to the Citys funding levels for current employees which will have an impact in future years. The Plan targets $6.0 million in onetime funds over the next several years to begin to address the Citys future liabilities. The Plan outlines the creation and funding of a trust fund to begin to address unfunded its employeespostretirementhealthcarecostsforactiveandretiredcityworkers.

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Major contractual changes in the approved FOP and AFSME agreements for retiree benefits include thefollowingmajorplanchangeswhichcouldaffectthefutureunfundedliability: Nopostretirementhealthbenefitsforemployeeshiredafterratification Currentemployees(FOP) Samehealthplanasactiveemployees,samecopayments,etc. Retireecontributespercentofpensionbasedontierofcoverage Noteligibleifothercoverageatsameorlowercostavailable OnlythroughMedicareeligibility,andthenreceivereimbursementof supplementalinsurance Currentemployees(AFSME)(employeecoverageonly) Samehealthplanasactiveemployees,samecopayments,etc. WindowforemployeeswhoareeligibletoretireunderRuleof85andare Age55asofDecember31,2013 Other retirees contribute same amount paid for single coverage on date of retirement Noteligibleifothercoverageatsameorlowercostavailable Only through Medicare eligibility, and then receive reimbursement of supplementalinsurance FindingsandConclusions Theearmarkingoffundstoaddresseconomicrecoveryandcapitalinfrastructureneedsisavalid andreasonableassumption.Thereoversightgroupsshoulddeveloppriorityandratingsystemto ensure the monies have the highest and best use with the greatest return on investment to the City. The City needs to complete annual actuary review of the current and future funding requirements for its OPEB needs. The proposed changes in the funding levels for employee health/medical care may result in future reduced needs. However, until future analysis and actuaryreviewiscompletedtheTrustFundconceptisavalidandreasonableassumption.

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IV. SOURCESANDUSESOFMONIESFROMSALEOFINCINERATOR BackgroundonPlanComponents Major Key components and terms of the Resource Recovery Facility (Incinerator) Transaction include: Sale to Lancaster County Solid Waste Management Authority Sale of 800ton per day, three units,massburn,wastetoenergyfacility. The County and LCSWMA will enter into a 20year cooperation agreement under which LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure certainminimumrevenuesoftheresourcerecoveryfacility. A Redevelopment Assistance Capital Program ("RACP") grant of $8.0 Million to benefit the Incinerator was authorized by the 2011 Capital Budget Act for improvement of the steam lines at the facility. The RACP grant will be available to pay for capital improvements to the IncineratorandwillbetransferredfromTHAtoLCSWMA. LCSWMA will be able to access approximately $8.0 Million maintained under the THA trust indenture related to the THA Incinerator bonds as a match to the grant. The combination of these amounts will result in at least $16 Million of improvements that are expected to be made during the next several years as well as a $16 Million increase in the purchase price fortheIncinerator. Power Purchase Agreement between LCSWMA and the Borough of Columbia includes a term of 20 years; range of prices per kWh is $.04022 in the first year to $.07169 in the 20th year;capacitychargesarebaseduponagreeduponprojections. ThePowerPurchaseAgreementprovidesforcertain"clawback" provisionsifthekWhprice underthecontractexceedsthethenmarketrate. The final purchase price for the Incinerator may fluctuate (range of $126 to $130 million) because the purchase price is based in part on the cost of borrowing. If taxexempt interest

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rates rise, proceeds will be reduced. If taxexempt interest rates decline, proceeds will be increased. The County and LCSWMA will enter into a 20year cooperation agreement under which LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure certainminimumrevenuesoftheresourcerecoveryfacility.

TheIncineratorcurrentlyhasanumberofoutstandingclaimsagainstthefacilityincluding:

UseofProceedsfromSaleinIncineratorFacility
(Millions)

IncineratorCreditors CIT Covanta JEM AGM&DauphinCounty* SwapTerminationFee TOTAL

Current Claim $37.00 $26.00 $0.80 $298.50 $4.60 $366.90

Payout from SaleofFacility Proceeds $21.50 $9.50 $0.80 $89.60 $4.60 $126.00

ClaimLoss* $(15.50) $(16.50) $ $(208.90) $ $(240.90)

ProposedUsesofIncineratorSaleProceeds CapitalUSA,Inc.("CIT") CIT holds a federal judgment arising out of funding by its affiliate to THA of $25 million in 2005 related to facility retrofitting costs. The judgment amount is over $19 million, and CIT claims that it is entitled to additional amounts in the nature of licensing fees. On a present value basis CIT estimates the claim to exceed $37 million. The Receiver (acting on behalf of the City and THA), Dauphin County and CIT, have each agreed a settlement payment of $21.5 million from proceedsoftheIncineratorsale. CovantaEnergyServices,Inc. Covantaand/oritsaffiliateCovantaHarrisburg,Inc.(Covanta)washiredin2007tofirstdesign and implement a plan to complete the Incinerator and to thereafter operate and maintain the 20|P a g e

Incinerator. They also assisted in the completion of the 2007 retrofit after construction cost overruns and defects occasioned by the prior operator had delayed the reopening of the facility. When Covanta agreed to complete and then operate the facility, it also provided THA with certainfundingfortheproject'scompletion.Atpresent,Covantaclaimsthatitisowedatotalof asmuchas$26millionforthesumsitadvancedtocompletetheretrofit. The Receiver (acting on behalf of THA and the City) and Covanta have reached agreement to settle all of Covanta's claims for $9.5 million. Covanta operates LCSWMA's facility in Lancaster, Pennsylvania, is proposed expected to operate the Harrisburg Incinerator under a contract with LCSWMA. . JEMGroup,LLC("JEM") JEM performed various contractual services related to the Incinerator's retrofit. JEM claims that they are still owed more than $800,000. The subcontractors to JEM are asserting claims against JEMwithrespecttotheirworkunderJEM. The Receiver is engaged in negotiations with the Contractors to resolve the claims of the ContractorsandanticipatesreachingagreementpriortoconfirmationoftheStrongPlan. PaymentstobeReceivedbyDauphinCountyandAssuredGuaranty* Upon thesaleofthe IncineratorFacility,DauphinCountyandAssuredGuarantyclaimspayment totaling approximately $298.5 million. Due to the remaining sale proceeds being less than the claimed amount monies from the Parking Transaction will be used to assist in the payment of the Dauphin County/AGM claim. AGM and Dauphin County are estimated to receive a total of approximately $210 million in initial proceeds from both the Parking transaction and the sale of theIncinerator.

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ClaimAssociatedwithaCertainSwapTransaction A swap transaction was put in place to "swap" THA's contractual obligation associated with the 2003retrofitincineratorbonds.Therewillbea$4.6millionterminationfeerelatedtotheswap. Thisremainsinnegotiations. FlowofFundsAnalysisandUseofSaleProceeds The incinerator sale includes proceeds of $126 million for the sale of the incinerator. These proceeds would be paid out to the creditors for the settlement amounts listed above. The reduction in creditor claims is the sum of the pay down of $126 million plus the agreed upon losses by CIT and Covanta of $15.5 million and $16.5 million, respectively. After the reduction of $158 million in creditor claims, Harrisburg is left with a residual liability of $208.9 million required to make AGM and Dauphin County whole.

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AnalysisofVariousAgreement(s)TermConditionsandDebtFinancingProposal The County and LCSWMA will enter into a 20year cooperation agreement under which LCSWMA will agree to certain maximum per ton disposal fees and the County will ensure certainminimumrevenuesoftheresourcerecoveryfacility. Sale includes the transfer of a Redevelopment Assistance Capital Program ("RACP") grant of $8.0 Million to benefit the Incinerator and LCSWMA having access to approximately $8.0 MillionmaintainedundertheTHAtrustindentureasamatchtothegrant. Power Purchase Agreement between LCSWMA and the Borough of Columbia includes a term of 20 years; the range of prices per kWh is expected to grow from $.04022 in the first yearto$.07169inthe20thyear;capacitychargesarebaseduponagreeduponprojections. ThePowerPurchaseAgreementprovidesforcertain"clawback" provisionsifthekWhprice underthecontractexceedsthethenmarketrate. Due to the limited scope and time constraints A&M did not complete a detailed review or analysis of the tipping fee and related revenue projections in the Waste Management proposal. FindingsandConclusions The Incinerator Transaction monetizes the existing City/THA asset which is in need of current and future improvements. The competitive sale process does not capture sufficient fundstoretirethe$212millioninexistingdebtandaddresscurrentfacilityclaims. TheTransactionishighlysensitivetointerestrates,andasaresult,thedelayintimetoclose the transaction substantially reduced the overall value of the transaction. Further erosion duetointerestratescouldfurtherreducethevalueandpotentiallyderailthetransaction.

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V.

SOURCESANDUSESOFMONIESFROMSALEOFPARKINGFACILITIES BackgroundonPlanComponents Under the receivership plan, an asset transfer of the Harrisburg Parking Authoritys (HPAs) parking system (i.e., the Parking Transaction) is being proposed to generate upfront year 1 proceeds by monetizing the ten parking garages plus the associated parking lots owned by the City. These proceeds are required in order to close the gap created by the substantial losses that will be realized during the sale of the incinerator. The transaction includes metered spaces, as well as, the following garages and parking lots: Locust Street Garage, Market Square Garage, River Street Garage, Fifth Street Garage, Chestnut Street Garage, Harrisburg University Garage, Seventh Street Garage and Lot, Mulberry / Dewberry Lot, City Island Garage and Lot, South Garage and Lot, Walnut Garage, 10th Street Lot, and MulberryStreetLot. FlowofFundsAnalysisandUseofSaleProceeds The parking transaction has a number of complex components that together make up the overall transaction. These components can be divided into two overarching categories: the nonrecurring (i.e., onetime)flowoffundsandtherecurring(i.e.,ongoing)flowoffunds. NonRecurringFlowofFunds(ParkingTransaction) Theinitialnonrecurringflowoffundswillflowtofivedifferentusesaftertransactioncosts: (1) RepaymentordefeasanceofexistingdebtproceedsforthebenefitoftheCity (2) InitialDepositintotheParkingCapitalReserveFund (3) PaymenttosettletheHarrisburgUniversityparkingstructure (4) PaymentstotheCity (5) PaymentstoexistingCreditors. Theillustrationbelowdepictstheflowoffundsintothesefivepaymentsources.

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 The source of funds for the Transaction is from the bond issuance of $283.2 million for the Harrisburg First Parking. This will generate between $258 million to $271.5 million after transaction costs of approximately$11.5to$15million. (1) RepaymentordefeasanceofexistingdebtproceedsforthebenefitoftheCity Proceeds from the Transaction will be used to first retire the outstanding parking debt by carving out $99.1 million to satisfy the existing debt. The defeasance retires the existing debt through cash and the purchase of government securities, which will be sufficient to meet all payments of principal and interest on the outstanding bonds as they become due. These funds will be combined with the existing Debt Service Reserve Funds (DSRF) for the existing securities to provide the $110.7 million necessary to complete the defeasance schedule and provide sufficientreservesforthetransaction. (2) InitialDepositintotheParkingCapitalReserveFund The parking transaction creates the initial fund to supply the capital investment necessary to modernize the parking system, and to establish the fund to pay for ongoing capital improvements. The initial deposit is set for $10 million, with a maximum fund balance of $15 million. 25|P a g e

(3) PaymenttosettletheHarrisburgUniversityparkingstructure The third area of payment is for the Harrisburg University parking garage settlement. After the University defaulted on the underlying bond, HPA began making the debt service payments as guarantor of the debt. The Harrisburg University garage was the underlying collateral for the debt, and the $3.6 million payment is to compensate the university and to absorb the existing university parking structure into overall parking transaction. In 2010, the HPA contracted with Wilbur Smith Associates (WSA) to perform a business valuation of the HPA Parking System. At the time of the WSA valuation, the thirty year lease on the Harrisburg University system was determined to be worth $11.6 million. Assuming that the business value of the University parking system increased since 2010, the consideration provided to the City in terms of the upfront payments of debt service and the $3.6 million settlement appear to be a good value to the City and the overall parking transaction. Without this transaction, the overall parking transaction value may not have had enough value to create a satisfactory settlement with the creditors. (4) PaymentstotheCity The fourth area of payment involves the flow of funds available to the City in the amount of $39.2 million. This amount is slightly lower than the original parking proceeds due to the City basedonanegotiatedconcessionof$2millionfromtheCityandof$1.7millioninforgivendebt service provided by AMBAC. The forgiven debt service, when coupled with other benefits from AMBAC, necessitated the removal of $1.7 million from the upfront payments to the City. Of the $39.2million,aninitialset asideof$3.3 millionwillbemadeasanadditionalconcessionforthe Liquid Fuels tax revenue. The initial set aside is an upfront payment by the City that would be replenishedshouldtheLiquidFuelstaxrevenueamendmentgetappendedtothetransportation billandapprovedintheupcominglegislativesession. (5) PaymentstoexistingCreditors. The fifth area of payment is to the creditors, who will receive the remaining funds from the issuance of debt of $120 125 million in order to partially fill the $208.9 million hole left by the losses taken on the incinerator transaction. From the total proceeds on the debt, an additional transaction cushion of $5 million has been set aside to accommodate for small fluctuations in 26|P a g e

interest rates or other unforeseen events ahead of the transactions closing date. Including the $5 million in payments, the flow of payments described above results in a negative $1.8 million deficit.Thedeficitcouldbemadeupthroughthefurtherreductionintransactioncosts,oroffset fromthe$5millioncushion.

RecurringFlowofFunds(ParkingTransaction) Therecurringflowoffundsfortheparkingtransactionfollowsaseniorityoffundscascading downfrom the pledged revenues. The pledged revenues include garage revenues, lease of 4,500 5,200 spaces from the Commonwealth, metered revenue, enforcement, and other licensing fees, rents, advertising and miscellaneous revenue. The pledged revenues do not include the annual parking tax revenues collected by the City. The systemwide revenues provide the funding mechanism to support the waterfallofpayments,beginningwithaseniorpaymenttotheCityintheamountof$1.5millioninyear 1 and growing at 3 percent for the first six years of the contract, and turning into a fixed payment of $1.7 for the remainder of the term. After the Year Six, the $1.5 million payment shifts from a senior prioritypaymenttoajuniorpaymentsubordinatetodebtservice. 27|P a g e

 Thenextcostelementstocomeoutareoperatingexpenses.Theseincludeapproximately$5.0millionin systemwideoperationandmaintenancecosts,anadditional$2.0millioninmanagementfees,and$0.1 million in contingency funding. Debt Service of $9.1 million in Year 1 is the next cost element to be coveredintheflowoffunds.Ordinarily,aDebtServiceReserveFundwould bethenext costelementto befunded;however,aninkindcontributionhasbeenprovidedbyAGM,viaasuretybond,toreplaceor reduce the debt service fund. The surety bond has the effect of increasing the bond rating, thereby, reducing the interest rate. After debt service, the year 1 net operating income results in a surplus of $1 million,whichwillbedistributed25percenttotheCityand75percenttotheCapitalReserveaccount.

After debt service, an additional payment of $0.5 million to the City, via a ground lease payment, is included. This amount is set to grow by 3 percent a year for the first six years with no growth for the remainderofthetransactionterm. After the waterfall of payments has been distributed, any surplus revenues that remain will be distributed 25 percent to the City and 75 percent to the Capital Reserve fund for the first six years of

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operation. After the Year Six, 100 percent of the surplus revenues will be deposited into the Capital Reserve account until the account reaches $15 million in available funds. After the Capital Reserve fund is topped off at $15 million, the excess revenues will be distributed 25 percent to the City and 75 percenttoAGM/DauphinCountyuntiltheoutstandingcreditordebtof$86millionhasbeenrepaid.Itis importanttonotethattherepaymentofcreditordebtdoesnotincludeinterestpayments,whichwould materially increase the size of the overall payments to the creditors and represents a significant concessionfromthecreditorsgiventhefinalpaymentisnotexpectedtobemadeuntilafter2045. AnalysisofPlanAssumptionsandProjectionsRevenueAssumptions RevenueAssumptions Therevenue projectionsfortheparkingtransactionsdepictanincreaseinannualsystemrevenuesfrom $14.5 million in 2009 to $20.1 million in 2014. The 2014 revenue estimates include four revenue components: garage and surface lot revenues, street meters, parking tax, and enforcement and other revenuesources. Revenues GaragesandSurfaceLots(1) StreetMeters ParkingTax Enforcement&Other TotalRevenues FY2004 $9,794,500 1,206,800 1,201,500 0 FY2009 FY2014

$11,848,600 $13,856,390 1,186,500 1,475,800 0 1,816,656 2,771,278 $1,694,144

$12,202,800 $14,510,900 $20,138,468

Note(1)GaragesandSurfaceLotestimatesareshownnetofParkingTax The revenues from enforcement were not part of the 2009 estimates and should be removed before doing comparisons at the system level. Looking at the trend from each of the other components provides valuable checks on the starting point for the revenue estimates. Inspection of the garage and surfacelotrevenueshowthattheincreasefrom2009to2014remainsinline withtherevenueincrease from the prior five years (i.e., 2004 to 2009). Specifically, the revenues increased by $2.0 million or 20.7 percent between 2004 and 2009, and the revenues are projected to increase by $2.4 million or 20.5 percentbetween2009and2014.Basedonthistrendanalysis,theYear1revenuesfromthegaragesand surfacelotsappeartobesetatareasonablestartingpoint. 29|P a g e

By comparison, the street meters and parking tax increased by much larger increments from 2009 to 2014. The street meters increased by $0.6 million or 53.1 percent between 2009 and 2014 in comparison to a decline of 1.7 percent between 2004 and 2009. The parking tax increased by $1.3 million,or87.8percent,between2009and2014incomparisontoanincreaseofby$0.3million,or22.8 percent, between 2004 and 2009. Given the structural changes in both the street meter and parking taxes,theseestimatesstillappeartobereasonable. A&M examined the growth rate of these garage and surface lot revenue projections. The current estimates include base growth rates, during the first five years, of 7.1 percent to 10.0 percent for the Commonwealth parking contract, growth rates of 2.9 percent to 16.7 percent for the other revenue sources,andincludegrowthratesof8.9percentto+3.0percentforthebaseoperatingexpenses.
CW Other Contract Revenues Net of Net of Taxes Taxes 7.7% 16.7% 7.1% 4.8% 10.0% 4.1% 9.1% 2.9% 3.0% 3.3% 3.0% 3.3% 3.0% 3.3% 3.0% 3.3% 3.0% 3.3%

Year 2 3 4 5 6 7 8 9 10

OPEX 3.0% -8.9% 3.0% 3.0% 0.9% 3.0% 3.0% 3.0% 3.0%

Asaresultoftheincreasingexpensesandreducedexpenses,thebasenetoperatingincomeincreasesat 23.9 percent, 17.3 percent, 7.9 percent, 6.3 percent, and 4.5 percent in the first five years of operation. As a result of these growth rates, the base operating income for the parking system is projected to increase from $8.7 million to $14.5 million at the end of year 5. The relative gross margins are expected toexpandfrom50.8percentto63.3percentoverthesametimeperiod.

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 NetOperatingIncome(NOI)EnhancementAssumptions After estimating the base net operating results, the Harrisburg First team developed a series of NOI enhancements to further expand the overall Net Operating Income, and thereby increasing the debt capacitymadepossiblethroughtheparkingtransaction.TheNOIenhancementsincluded: Anincreaseinthemeterratesfrom$2to$2.50perhour An increase in the monthly rates charged to the Commonwealth of $10 per year over the first fiveyears A$0.5millionreductioninannualmanagementfees RemovalofHPAconsultingfees ReductionofthetimelinetoreduceHPAlabor StoppingtheCityescalationforthe$1.5million SubordinatingtheCitys$1.5millionpaymentaftersixyears BringingonnewparkerstotheparkingsystemthroughDGS

Finally,oneoftheconsideredNOIenhancementsisnotincludedandremainsunderconsideration:

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The Harrisburg First team is also considering replacing the midtown meters to bring the same technological efficiencies to those meters as that are being realized throughout the rest of the parkingsystem.

As a result of these NOI enhancements, the operating income is expected to increase by an additional $1.3 million to $2.8 million in the first five years. Once the Citys payments stop escalating and the $1.5 million payment is subordinated, the total debt service made possible by the transaction is increased and the total debt service payments are able to be expanded allowing for the size of the transaction to be increased. These steps were necessary to make up for the reduction in interest rates. With these additional enhancements, the NOI is increased by $4.7 million in year 6 taking the gross operating margins from 64.2 percent to 83.3 percent. Without the subordination of debt, the debt service coverageratioswouldhavelimitedthesizeofthetransactiontothepointthatreturnofproceedswould havetobecutfurther,likelycausingtheCitytohavetoacceptreducedupfrontpayments. ParkingMeterFeesandEnforcementRevenueAssumptions The parking meter fees are set to increase by an additional 36 percent in 2015 on top of the five year growth of 53.1 percent relative to the 2009 baseline. After year 3, the parking transaction revenues were estimated to grow by 3 percent. The reason that these estimates are reasonable is that meter rates are projected to increase by 100% from $1.50 to $3 within the CBD and by 50% from $1 to $1.50 for other areas. Additionally, a permit parking system is expected to be put in place for residents in order to move parkers from the neighborhoods into the paid parking spots. This action should move parkers from the free spots around the City to the paid meter or paid garage lots. These parkers are currentlyoutsideoftheparkingsystemandrepresentanewsourceofrevenues. As it currently stands, the inexpensive meter rates coupled with the low level of enforcement incentivizes parkers to stay on the streets to risk the ticket. In February 2003, WSA conducted a Parking Rate Study and concluded that meter violations are relatively high (almost 39 percent for the survey period)andenforcementrelativelylow(only9.5percentoftheviolationsreceivedaparkingticket).The planned increase in enforcement activities over the next two years should send the message that the days of inexpensive parking with lax parking oversight are gone, and that paid parking will be the norm moving forward. The enforcement revenues are estimated to increase by approximately 14 percent in

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2014 and an additional 39 percent in 2015. Thereafter, the enforcement revenues were estimated to growby3percent. The reasons that these estimates in the first two years are conservative are twofold. First, the meter violation and late payment penalties are expected to roughly double from $14 to $30 for a meter violation and from $11 to $20 for a late payment penalty. Secondly, the new parking management intend to implement a significant enforcement push in the first two years to reinforce the message that theparkingsystemofmetersandenforcementhaschanged. While the enforcement revenues are likely to be the most conservative estimates in the parking system forecast for years 1 and 2, the future year assumption that enforcement revenues will remain at the level achieved could be high if citizens follow the learned behavior and move to the parking garages. If the spike in enforcement is followed by learned behavior to move to the garages, the straight line growth after a significant 2 year increase could be an aggressive assumption. Given the poor baseline parking violation data, these estimates are hard to predict. We expect that the initially conservative estimates are likely to balance out the aggressive future year growth assumptions, as the enforcement revenues settle into a new steady state level. Since the revenue projections involve significant assumptions that couldmateriallyaltertheforecasts,theCitywill needto makeadeterminationon the levelofconfidenceintherevenueprojections. OperatingExpensesAssumptions Under the HPA, total operating expenses included garage, surface lot, and street meter operation and maintenance costs. The model under the parking transaction will trade off in house management for an outsideassetmanagementandparkingmanagementservice.Whencomparingthehistoricgrowthrates withthepriorfiveyearcomparison,theoperatingcostsaregrowingatasimilar,butslower,overallpace compared to the prior five year period. From 2004 to 2009, the total operating expenses increased by $1.0 million or 20.2 percent. By comparison, the total operating expenses from 2009 to 2014 increased by$1.0millionor15.7percent.

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OperatingExpenses SystemO&MCosts ManagementFees TotalOperatingCosts

FY2004

FY2009

FY2014

$5,041,900 $6,060,500 $5,017,259 $0 $0 $1,241,059

$5,041,900 $6,060,500 $6,258,318

While the 510 year trend in operating expenses from 2004 to 2014 appears to be in line as a starting point, there is a substantial reduction of 42.5 percent in legacy HPA labor staff labor after year 1. This reduction,coupledwithincreasesintheremainingcategories,createsanoverallsystemreductionof8.9 percent in year 2. Thereafter, the parking system costs are projected to grow at 3 percent per year. The primary concern is that the 42.5 percent reduction in staff could be aggressive given the Citys plans for steppedupenforcementduringthistimeandthehighdegreeofcostreduction.Thejustificationforthe reduction is that standard parking intends to leverage the existing technologies and staff to manage the program. Our concerns with this assumption are twofold: that the cuts in labor could be too deep, and as a result, the Citys ability to generate the planned additional enforcement revenues could be jeopardized. The Harrisburg First parking system will be managed with a two pronged asset manager and parking manager using AEW and Standard Parking respectively. This is a unique solution to the management, and is currently in the process of being implemented by AEW and Standard Parking in Cincinnati. After the HPA team has been replaced, there will still be a need for overall business (versus asset) management,however,theincentivestructure,andrisktransfershouldmatchthecompensationthatis beingreceivedbyAEW. Furthermore, the combined use of a parking and asset manager appears to carry high costs. Similar business management solutions use a percentage of revenue structure to align the business interests of the manager with the other stakeholders. Using this as a benchmark, the combined team would carry costs of 11.5 percent of total revenues (9.7 percent and 1.8 percent for the asset and parking manager respectively). This compares to revenue managers on previous airport deals that have received 56 percentofsystemrevenues.

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 Asaresultoftheanalysisofthehighfeesbeingchargedbytheassetmanager,thereceiverenteredinto negotiations with AEW to bring down costs to 56% of total revenues. Furthermore, we recommended that the performance management fees be subordinated to the City payments, and the receiver is in active negotiations to ensure that the City be paid before performance award fees. The subordination will enable higher debt service utilization, and will align the managers with the City. Finally, A&Ms recommendation alternative payment structures be considered including payments based on percentage of parking system revenues, were taken to align the interests of the asset manager with the interestsoftheCity. CapitalReserveAccountAssumptions TheCapitalReserveaccountprovidesafundthatcanbeusedtomaintaintheparkingstructures,butthe governanceofthisaccountremainsaconcern.TheleveloftheCapitalReserve accountappearstohave

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beendrivenmorebynegotiationsthanbyforecastspend.Thereserveaccountshouldhaveareasonable balance,butnotbetoohigh,elseboththeCityandthecreditorscouldbetyingtheirhandsforthesake of a bloated reserve account. By bringing down the maximum size of the Capital Reserve account from $35millionto$15million,thetransactionsizeincreased,theCityandcreditorswillbepaidsoonerfrom surplusrevenues,andamorerapidbuydownofdebtwilloccur,benefitingallparties. The Capital Reserve account must also have the proper governance to avoid the possibility of shifting operating costs into capital buckets in order to achieve performance awards, thereby, hiding the true cost of operation. The governance structure should include consideration for what happens if the surplus revenues are not achieved, how much flexibility the management team will have to use the funds,howtheCitywilllimitthefundsuseforoperatinglikeexpenses,andestablishtheproceduresif the operating income is negative. As an example, if the system has negative surplus revenues, will the excessfundsdrawfromtheCapitalReserveaccount? AnalysisofVariousAgreement(s)TermConditionsandDebtFinancingProposal The current parking transaction remains steeped in negotiations with creditors and the underlying management company. As a result, the underlying components of the parking system model remain in flux,andarechangingwitheachnegotiation.Forthisreason,manyoftheunderlyingdocumentsarenot aligned. This has been further complicated by the substantial reduction in the value of the transaction thatwascausedbythesignificantupwardmovementininterestrates. Since May 2013, interest rates have increased significantly with the 10 year Treasury bond rate increasing from 1.63 percent on May 1st to 2.91 percent on September 11th (a 78.5 percent increase in rates). The spike in rates caused the price of bonds to fall precipitously, with the Municipal Bond Buyer index falling from 131.9 on May 1st to 107.8 on September 11th. The 18.2 percent fall in the bond index providesareasonableproxyfortheimpactontheoverallparkingsystemtransaction,whichona$281.2 million deal, would have suffered from a $51.4 million loss in total transaction value. This loss of value eroded any transaction cushion, and created the need to return to the negotiating table with the creditors.

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 As a result and the substantial lossassociated with the recent spike in interest rates, the City has had to agree to concessions that were not planned for at the outset of the deal. These concessions change rapidly, causing the term sheet to be misaligned with the current deal. As an example, as part of the negotiationsonbehalfoftheCity,therehavebeenthreetypesofproceedsthatarebeingcarvedoutfor the benefit of the City: upfront proceeds from the sale, ongoing senior operating and lease payments ($1.5M + $0.5M), and a split of surplus funding between the creditors and City after setting aside $15 millioninCapitalReserves. The fluid nature and need for concessions, creates challenges with maintaining proper oversight of the environment. As an example, there were several concessions related to the City payments that needed tobemadeinordertoholdthetransactiontogether.TheCitywasaskedtoremovetheescalationfactor afteryear6fromtheseniorpayment,andtheCitypaymentwassubordinatedinthepriorityofpayment

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to allow for the level of debt necessary. Due to the recent nature of these changes, the updated terms arereflectedintheHarrisburgFirstforecastcashflows,butarenotreflectedinthetermsheet. While the limitation of growth on the senior payment and the parking ground lease after 6 years will limit future City earnings streams and have an increasing impact in the future, this will be offset slightly by the surplus revenue payments after the Capital Reserve account has been topped up. Furthermore, without some level of concession from the City, the overall deal would not be possible, given the substantialreductioninbondpricesthathaveoccurredoverthepastfourmonths. Given the tenuous and rapidly changing nature of the negotiations, any one stakeholder without an agreed to settlement (e.g., the IAFF labor contract) is able to unravel the entire deal based on not coming to the bargaining table. For this reason it is important to push into the bargaining to show the good faith negotiations, and carefully check the terms and conditions of the deal as they are being finalized. FindingsandConclusions Based on our analysis we have developed a number of overarching findings and conclusions related to theparkingtransaction. GeneralFindings TheParkingTransactionmonetizesfuturecashflowsofvariousparkinggaragesandlotsinorder torelievetheCityofasubstantialburdengeneratedasaresultoftheincineratordebt. Transaction is highly sensitive to interest rates, and the delay in time to close the transaction substantially reduced the overall value. Further erosion due to interest rates could further reducethevalueandpotentiallyderailthetransaction. The parking transaction includes a number of moving parts, several legal requirements, and concessions that have been made on both sides in order to consummate a deal. As a result, the transactionhasbecomeincreasinglycomplexandchallengingtocommunicate. ParkingSystemRevenues

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The 5 to 10 year trend of revenues for garage and lot fees appears to be a reasonable starting point for 2014. The initial growth rates beyond 2014 are a little higher, primarily driven by increasesingarageoperatingandcapitalcosts.

The enforcement and meter revenues grow in excess of 30 percent for the initial two years, beforestabilizingat3percentgrowththereafter. The level of uncertainty in the revenue projections is a risk for the City and the Creditors. The enforcement and meter increases are based on limited underlying data resulting in a higher variability in the forecast. The estimates seem conservative, but the confidence in the underlyingdataisnotstrongenoughforanaccurateprediction.

ParkingSystemOperatingExpenses Trend in operating expenses appears to be in line asa starting point but the onetime reduction in labor costs in 2015/2016 could be aggressive, and/or impact generation of enforcement revenues. TheincentivestructureandrisktransferoftheAEWtransactionshouldmatchthecompensation being received by AEW. Since this is being negotiated as we speak, the validation was challenging. TheAEWtransactionhas beensimplifiedbasedon apercentofrevenuesversusanannual fixed fee GovernanceofCapitalReserveaccountremainsaconcern. Level of Capital Reserve account driven more by negotiations than forecast spend. Account should have a reasonable but not too high balance. More rapid buy down of debt will benefit bothparties. TermsandConditions Components of the transaction are changing on a daily basis, creating challenges with maintainingtheproperoversightoftheenvironment. TheCitywillreceivethreedifferenttypesoffunding: o o o Upfrontproceedsfromthesale Ongoingsenioroperatingandleasepayments($1.5M+$0.5M) Split of surplus funding between the creditors and City after setting aside $15M in CapitalReserves.

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Asaresultandthesubstantiallossassociatedwiththerecentspikeininterestrates,theCityhas hadtoagreetoconcessionsthatwerenotplannedforattheoutsetofthedeal. Thefluidnatureandneedforconcessions,createschallengeswithmaintainingproperoversight oftheenvironment.Asanexample,therewereseveralconcessionsrelatedtotheCitypayments thatneededtobemadeinordertoholdthetransactiontogether. o o The$1.5millionCitypaymentstoppedescalatingafterYear6. The City payment was pushed behind debt payments (i.e., subordinated) in the priority ofpaymenttoallowforthelevelofdebtnecessary. o These changes are reflected in the Harrisburg First forecast cash flows, but are not reflectedinthetermsheet.

Thelimitationofgrowthontheseniorpaymentandtheparkinggroundleaseafter6yearswill limit future City earnings streams, with increasingly larger impacts in future years. This will be offset slightly by the surplus revenue payments after the Capital Reserve account has been toppedup.

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VI. APPENDIX APPENDIXA.DocumentsReviewed AssetPurchaseAgreementbetweenTheHarrisburgAuthorityandLancasterCountySolidWaste ManagementAuthority(8/23/2013) CityofHarrisburgCostofIssuanceforParkingandResourceRecoveryFacility CityofHarrisburgLiquidFuelTaxSummary CityofHarrisburgsOverallFlowofFundsSummary CityofHarrisburgsProjectedParkingTransactions20142050(9/3/2013) CityofHarrisburgsStrongPlan(8/26/2013) Desman Associates Financial Review of the LongTerm Concession and Lease of the Harrisburg PublicParkingSystem(8/28/2013) HarrisburgFirstsCashFlowsReportforCityofHarrisburg(August2013) HarrisburgFirstsDGSParkingAgreementfortheCityofHarrisburg(2/12/2013) HarrisburgFirstsFinancialModelforCityofHarrisburg:CommonwealthStructure(5/24/2013) HarrisburgFirstsReportonCommonwealthBondsfor20years,County/AGMbonds(atAmount MeetingCoverageRequirements),100/70Allocation,TurbofromBack(8/23/2013) HarrisburgFirstsReportonCommonwealthBondsfor20years,County/AGMbonds(atAmount MeetingCoverageRequirements),100/70Allocation,TurbofromBack(9/6/2013) HarrisburgFirstsSourcesandUsesofFundsReportforParkingMonetization(7/1/2013) Harrisburg Firsts Summary of Proposed Terms of Asset Transfer of Harrisburg Parking AuthoritysParkingSystem(8/16/2013) Harrisburg Parking Authority Parking System Rates Graphed for Report to Receiver (August 2012) HarrisburgParkingAuthorityTransactionstoCityofHarrisburgPlusProjections(19992011) Public Resources Advisory Groups Report on Harrisburg Parking Authoritys Cash Defeasance of OutstandingDebt(8/21/2013) Summary of Realized and Projected Net Revenues, Parking Rates, Operating Expenses, Net Income, Debt Service, and Capital Expenditures Responses from Interested Parties 20122041 (WilburSmith Business Valuation, Boenning & Scattergood, Harrisburg Forward, Harrisburg First, Harrisburg Parking Partners, Keystone Parking Group, National Development Council, NW FinancialGroup,MorganStanleyInfrastructurePartners,andOntarioTeachersPensionPlan) WilburSmith Associates Business Valuation of the Harrisburg Parking Authority Parking System (3/7/2011) CityofHarrisburgFY2013Budget YeartoDateActualsPeriodEndingJuly31,2013 ReceiverBudgetProjectionsandMonthlyCashFlowStatements CollectionBargainingAgreementsandSummaryofMajorContractChanges WasteAgreementbetweenHarrisburgandLCSWMA

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APPENDIXB.

IndexofMajorCreditors

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