Harrisburg bankruptcy sets up fight with state
(Reuters) - Pennsylvania's capital, Harrisburg, filed for bankruptcy on Wednesday in a desperate bid to resolve its debt crisis, setting up a showdown with the state over control of the city.
Harrisburg becomes one of the most-high profile cities to opt for the little used Chapter 9 of the U.S. bankruptcy code, most notably tapped nearly 20 years ago by Orange County, California.
The Pennsylvania capital's crisis has been a year in the making as the city of about 50,000 struggles to pay for critical services as well as roughly $300 million in debt incurred from an expensive revamp of its incinerator.
While city services should continue uninterrupted, the move has caused confusion about how bills will be paid.
"We're getting calls from vendors, wondering if they are going to get paid," said Brenda Alton, the director of city's department of parks, recreation and enrichment. "I feel it is a bad decision."
Municipal bankruptcies are rare. But if Harrisburg is successful in winning concessions with bondholders, pensioners and other stakeholders, it could lead other financially troubled cities to seek bankruptcy.
Bankruptcy gives the city "bargaining power" with its creditors, municipal workers, retirees and the state, which is considering a takeover, said Mark Schwartz, an attorney for the council.
There have been only 629 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, according to James Spiotto, a municipal bankruptcy expert at the law firm Chapman and Cutler.
"I think it's more of an example of an aberration," Spiotto told Reuters Insider. "It's event-driven from a failed incinerator plant that's unique to the Harrisburg situation. That isn't a contagion that's going to spread to other municipalities."
Orange County, California, filed the largest Chapter 9 bankruptcy in U.S. history in December 1994 after it suffered more than $1 billion in investment losses on derivatives. Vallejo, California, with 120,000 residents, filed for Chapter 9 in 2008, and Central Falls, the smallest city in Rhode Island, the smallest U.S. state, filed earlier this year.
Harrisburg's City Council approved the bankruptcy filing in a 4-3 vote. It was opposed by Mayor Linda Thompson, who in a news conference on Wednesday challenged the legality of the City Council's vote.
Under city law, the mayor and the city solicitor must sign off on all hiring of outside counsel and the city solicitor must approve all ordinances and resolutions considered by the council, and neither was done in this case, Thompson said.
"They have been dishonest with the entire community for months," Thompson said of the council. "I am ashamed of the behavior."
The bankruptcy has the potential to stoke political passions as it will likely pit firefighters and police against municipal bond investors, who are often perceived to be wealthy retirees, said Peter Kaufman, president of Gordian Group and a financial restructuring specialist.
"It's disgusting, it really is," said Warren Jones, 68, a retired corporate manager. "I talk to people I know who are in business and they're worried."
)
