Wednesday, October 12, 2011

Debt-crippled Pa. capital files for bankruptcy

HARRISBURG, Pa. (AP) -- Pennsylvania's distressed capital city filed for bankruptcy Wednesday, citing "imminent jeopardy" from lawsuits related to a debt-saddled municipal incinerator and setting up a power struggle between the mayor and City Council.

The federal petition for Chapter 9 bankruptcy, being sought to help Harrisburg get out from under crushing debt, listed about $458 million in creditors and claims and six pending legal actions by creditors.

"The city does not have the ability to pay those money judgments or any significant portion thereof and still provide health and safety services to its citizens and other essential government services," wrote Mark D. Schwartz, an attorney hired by the City Council.

A spokesman for Mayor Linda Thompson, who has resisted calls for bankruptcy because of fears that it would further blemish the city's name, said the council lacks the legal authority to seek it.

"There are procedural matters the solicitor objects to, as far as how the resolution was handled, and the quote-unquote hiring of counsel," said mayoral spokesman Robert Philbin. "The solicitor also says only the mayor, in conjunction with the solicitor, can file for bankruptcy on behalf of the City of Harrisburg."

The filing was signed by Councilwoman Susan Wilson after a 4-3 vote late Tuesday by the council to authorize it.

At a news conference, Thompson said she was hiring a law firm to challenge the bankruptcy filing, which she called a "sneak attack" by council members.

"I'm ashamed of the behavior, the road jams, the road blocks, the dishonest statements that keep coming out of four members' spirits," Thompson said.

The legal move comes the week before the state Senate is expected to take up a bill, already passed by the House, that would authorize Gov. Tom Corbett to assume many of the city's financial functions in response to the stalemate between Thompson and the council majority.

The bill would empower the governor to declare a state of fiscal emergency and install someone to make many of the critical decisions about government spending and operations.

Schwartz called the pending bill "a political grab" and said it was designed to protect bond insurers.

"You got paid your premiums, OK?" he said. "So pay your losses. This was a great lucrative game."

Municipal bankruptcies are rare, with only a few dozen filed in the United States in the past three decades, and some of those were dismissed. Among them are Orange County, Calif., which took the action in 1994, and Vallejo, Calif., three years ago.

More recently, a state receiver filed for bankruptcy for Central Falls, R.I., in August, and the recovery plan includes cost cutting, higher taxes and pension reductions. Jefferson County, Ala., is considering Chapter 9 as a solution to a $3.1 billion sewer debt problem.

The trash incinerator in question in Pennsylvania is owned by the public Harrisburg Authority -- an independent government agency with appointed members that owns the city's water and sewer systems, as well as the incinerator. Schwartz wrote that the principal amount the city has guaranteed is about $242 million, with $65 million past due.

"The magnitude of that debt is sufficiently large that it dwarfs the city's other liabilities," Schwartz wrote.

The incinerator began operating in 1972, generating steam heat for steel mills and office buildings. In the 1980s, it began generating electricity -- and cancerous chemicals. Pressure from federal environmental regulators led to its shutdown in 2003, and it didn't fully go back on line until 2008, after a costly overhaul.

The incinerator still didn't make money, even as residents paid some of the nation's highest trash disposal fees. Last year, Moody's Investors Service gave Harrisburg the lowest credit rating of any municipality that hadn't already defaulted.

That has hurt the city's ability to pay for civic improvements without huge interest rates.

Thompson has said bankruptcy would promise a further hit to the city's reputation and expensive legal fees -- but no guarantee of financial relief. She has been working to come up with a permanent plan to pay off the debt and has pressed for concessions from lenders, taxpayers, labor unions and contractors.

Philadelphia lawyer Jonathan Hugg, an expert in municipal liability, said questions about the council majority's right to file in the first place raise issues about the city's status as a state-created entity.

"Way back in the beginning, the commonwealth of Pennsylvania set up Harrisburg," he said. "I think a savvy creditor is going to argue that, having loosed this thing into the world, the commonwealth is going to be responsible if it doesn't meet its obligations."

He said creditors also may challenge whether the city's bankruptcy is in good faith, considering its ability to raise taxes.

"There's a political problem that's developed with government not being able to increase streams of revenue," Hugg said. "This is the final result."

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