Harrisburg Bankruptcy: Will Filing Be Dismissed?

Harrisburg, Pa. faces bankruptcy after failing to pay debts on a trash-to-energy incinerator, but most oppose the controversial move to file, advocating state invervention instead.

Harrisburg, a city of 49,500 people located in Dauphin County, faces a total debt burden of around $458 million, with $242 million owed for a trash-to-energy incinerator and $65 million in overdue funds.

The debt is five times the city's general-fund budget. The city chose to file for bankruptcy to escape lawsuits that would force it to use tax money for the back-payments.

The city of 49,500, the seat of Dauphin County, faces a debt burden five times its general-fund budget because of an overhaul and expansion of the incinerator, which doesn't generate enough revenue.

The city meets the 'generally not paying' definition of insolvency, because it has repeatedly failed to pay the guaranteed incinerator bond debt as it has become due, Harrisburg said in its official filing. Under the guarantees the city would need to cover a combined $83 million of past due payments and the 2011 debt service.

Filing for Chapter 9 bankruptcy will cut state aid under a law passed in June. Councilwoman Susan Brown-Wilson, however, feels it would be better than attempting a state-imposed recovery plan.

We're not incompetent, Brown-Wilson told Bloomberg News today. We're just not going to let you run us over with the train anymore.

Controversy Over Bankruptcy Filing

While Harrisburg the city may be prepared to file for bankruptcy, many of the citizens of the Pennsylvania capital disagree.

Mayor Linda Thompson feels the Council lacks the legal authority to seek bankruptcy, and Dauphin County commissioners agree.

This latest action by City Council is nothing more than a delay tactic to avoid making the tough decisions necessary to resolve the city's debt crisis, said commissioners Jeff Haste, Mike Pries and George P. Hartwick III in an e-mailed statement to Bloomberg.

Councilwoman Patty Kim, who voted against the move, fears bankruptcy will mire the city in unnecessary and unaffordable litigation.

We still don't have money, Kim said, and we still haven't moved one foot forward.

Pennsylvania Governor Thomas Corbett, a Republican, similarly opposes the bankruptcy filing, worried that it will affect the credit rating of Dauphin County and its neighbors.

Everyday citizens are similarly antagonistic about the motion. A majority of those interviewed in a recent ABC News poll do not believe bankruptcy is the city's best option for economic recovery, and almost none have confidence that Mayor Linda Thompson and the City Council can solve the situation alone.

Findings showed only 13 percent of city residents saw bankruptcy as a good option. The majority, 53 percent of voters, feel the mayor and Council should seek a compromise. 59 percent had little or no confidence in Thompson's abilities, while 41 percent had little or no confidence in the Council.

This does not mean, however, that Harrisburg voters blame Thompson for the current crisis, nor that they are unwilling to shoulder some of the burden. 29 percent of those polled said they would be willing to pay higher taxes to alleviate the capitol's burden, while 42 percent blamed former Mayro Stephen Reed, not Mayor Thompson, for the city's difficulties.

The poll was a telephone survey of 946 voters within the city limits. Non-residents were quicker to blame Mayor Thompson, and to favor state intervention.

Only 10 percent of those interviewed outside city limits, 855 voters in Dauphin County, Pa., supported filing for bankruptcy. Only 17 percent of non-residents, however, would be willing to pay more.

Is the Case Illegal?

Although Harrisburg was officially in bankruptcy when it filed its petition, Chapter 9 filings can be tossed out by a judge if it seems to be unauthorized under state law.

Already, 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, said James Spiotto, a partner at Chicago's Chapman & Cutler who tracks bankruptcy cases.

Spiotto believes that Thompson and the council's decision was foolish. Working with the state, as they've seen, provides more funds for them, he said.

Richard Lehmann, however, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Fla., feels the council is making the right call.

They're in trouble, and putting the bad image of bankruptcy aside, this is a way for them to resolve the issue, he said.

This is the ninth bankruptcy filed this year by a municipality. It comes less than a month after Jefferson County, Ala. Tried to avert what would have been the nation's biggest municipal bankruptcy on record, and nine months after another big city, Vallejo, Calif., filed a claim, according to Concord, Mass. Research firm Municipal market Advisors.

Harrisburg is the first U.S. capital to file for bankruptcy since 1980.