Harrisburg: long-awaited bankruptcy

Pensylvania state capital files for bankruptcy’

Mish’s Global Economic Analysis,

12 October, 2011

At long last, Harrisburg Files for Bankruptcy on Debt

Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator.

The council made its 4-3 decision against the advice of a city attorney who said the panel did not follow proper procedure. It was the ninth bankruptcy filing this year by a municipal-bond issuer, according to James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

“This was a last resort,” Mark D. Schwartz, the council’s Bryn Mawr-based lawyer, said after he faxed the documents to a federal court yesterday. “They’re at their wits’ end.”

Harrisburg would be the biggest city bankruptcy since Vallejo, California, filed in 2008, according to a ranking by Municipal Market Advisors, a research firm in Concord, Massachusetts. Municipalities across the nation have been battered by the financial crisis. Harrisburg’s filing came less than a month after Alabama’s Jefferson County Commission voted to try to avert what would the nation’s biggest municipal bankruptcy, and nine months after Vallejo emerged.

While Chapter 9 bankruptcy, named for the section of federal law that governs insolvent municipalities, would mean the loss of state aid under a law passed in June, it would be better than pain caused by a state-imposed recovery plan, said Councilwoman Susan Brown-Wilson.

“We’re not incompetent,” Brown-Wilson said. “We’re just not going to let you run us over with the train anymore.”

Going Rogue

Jason Hess, acting city attorney, told council members that they didn’t follow procedure and their action wouldn’t be binding. The members went ahead.

The filing is “a ridiculous idea not worth taking seriously,” Robert Philbin, a spokesman for Mayor Linda Thompson, said in a phone call today.

Although Harrisburg was officially in bankruptcy when it filed the Chapter 9 petition, whether it stays there is an open question. Unlike companies, whose Chapter 11 filings are rarely dismissed, a municipality can find itself tossed out of court.

Federal law lets states place restrictions on bankruptcy filings by municipalities. As a result, the Bankruptcy Code calls for the judge to entertain objections.

If an objector shows that the filing wasn’t authorized under state law, the bankruptcy court dismisses the petition.

A state law bars Harrisburg from filing until July 2012. Of the 629 Chapter 9 filings since 1937, 161 cases have been dismissed or their plans haven’t been confirmed, Spiotto said.

Harrisburg finally did what should have been done three years ago. Instead, taxpayers have been put through hell because the city council refused to do what needed to be done.

Unfortunately, those against bankruptcy will likely waste months of time, energy, and dollars fighting the decision instead of going along with it. If the law requires Harrisburg wait until July 2012, nothing will stop the city council from doing the same thing eight months from now.

Hopefully, Mayor Linda Thompson is shown the door in the next election, assuming a court receivership plan does not effectively remove her in the meantime.