Harrisburg, PA, Goes Broke

Pennsylvania’s capital city, Harrisburg,  filed for a rare Chapter 9 bankruptcy protection, listing debts of $500 million and assets of $100 million, according to an attorney for the city council.  Mark D. Schwartz said he filed the documents by fax to a federal bankruptcy court.  Such a filing could not be confirmed with the U.S. Bankruptcy Court in Harrisburg.  The filing comes on the heels of the city council’s 4-3 vote Tuesday night to seek bankruptcy protection.  “This was a last resort,” said Schwartz.  “They’re at their wits end.”

“They were tired of being humiliated and denigrated,” Schwartz said, referring to the four council members who voted for a bankruptcy filing.  Chapter 9 is “a much better forum if you really want to address the financial problems of the city,” Schwartz noted.  Chapter 9 bankruptcy allows the financial reorganization of cities, towns, taxing districts, counties, school districts and municipal utilities.

Unfortunately, this is a scenario that other cash-strapped cities across the country could face in the future.  This comes on the heels of Topeka, KS, repealing a law against domestic violence because of the cost of prosecuting offenders.

“This really is our only option out there, ” Councilman Brad Koplinski said. “I believe this is the only thing that will work.”  Controller Dan Miller said that Harrisburg had attempted to tackle the debt problem for years and that he felt the state of Pennsylvania had tried to “railroad” the city’s citizens.  “It’s unfortunate that it came to this,” Miller said.  In June, the Pennsylvania legislature passed a bill saying bankruptcy would result in the loss of state aid, and added an amendment to the bill in September that permits a state takeover of Harrisburg.  The city must repay $310 million in bonds and restructure its debt, as well as reimburse Dauphin County and insurer Assured Guaranty Municipal, which both made payments that the city missed on its incinerator project.

“The size of the outstanding bond debt is overwhelming,” according to the bankruptcy filing.  “Negotiations are impracticable with one group of creditors where negotiations with another key group have hit an impasse.”  Harrisburg’s bondholders include Ambac Financial Group, Inc., with more than $70 million of revenue bonds, and Covanta Holding Corporation, with about $120 million of bonds and advances of funds.

“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,” according to Harrisburg’s filing.  “Under the guarantees the city would need to cover a combined $83 million of past due payments and the 2011 debt service.”