Harrisburg Contemplates Bankruptcy

Harrisburg Contemplates Bankruptcy

Could a $288 million debt, most of which is related to a publicly owned trash incinerator, turn Harrisburg’s finances to ashes?

 

That’s a question officials in Pennsylvania’s state capital are now grappling with. Because of a complex series of financial arrangements between the City, Dauphin County, and the Harrisburg Authority concerning the Authority’s incinerator at the Resource Recovery Center, the City is raising the possibility of tax increases, revisiting asset sales, and looking at entering Act 47 and possibly Chapter 9 municipal bankruptcy. 

 

The failure of the incinerator to produce adequate revenues to make timely bond payments has pushed the bond obligation onto the City. News reports indicate that, as a result, Harrisburg now faces enormous financial difficulties and will need to find over $68 million in 2010 to cover incinerator related obligations, including a working capital loan payment. Over the next five years, the City is looking at $164 million in deficits largely as a result of incinerator related obligations.  Note that Harrisburg’s general fund budget is only $64 million.

 

Harrisburg’s credit rating has already been lowered by Moody’s to Baa2, the second lowest investment grade rating. The debt rating could be lowered further according to the Moody’s statement. Harrisburg skipped a $3.5 million payment in 2009 forcing the County to step in. Dauphin County has sued for recovery of the funds. The Authority’s bond counsel noted that “there’s never been a default like this in Pennsylvania municipal history”. 

 

This situation has prompted one City Council member to say “we need to see, what does Act 47 do for us; what does bankruptcy do. You have to have them all on the table”.

 

Is bankruptcy a realistic option? As our 2009 report on Chapter 9 bankruptcy pointed out, the U.S. Constitution allows Congress to write uniform bankruptcy laws and municipalities are permitted to file for bankruptcy protection (debt adjustment may be a more appropriate term).  In order to preserve the Federal-state balance of power, states are free to prohibit their municipalities from filing and states that do permit municipal bankruptcy can place as many restrictions on filing as they wish. 

 

In Pennsylvania authorities cannot enter Act 47 or file for municipal bankruptcy-this would prevent the Harrisburg Authority from pursuing these remedies for the incinerator debt.  The only statutory language on municipal filings is found in Act 47 and that language requires the municipality to be in Act 47 distressed status before any steps toward a Chapter 9 filing can get underway.  Thus, Harrisburg would first have to be granted Act 47 status by the state and then meet certain criteria in the Act 47 statute to proceed to bankruptcy.  It cannot happen in the opposite order, i.e., file for bankruptcy and then seek Act 47 status (though a municipality in northeast PA recently tried). To date no community in Act 47 distressed status has pursued a Chapter 9 bankruptcy.

 

All this suggests a very cumbersome, tedious process. The application for distressed status could take several weeks (if not months) to collect and prepare adequate documentation, hold hearings and then wait for the Department of Community and Economic Development to rule on the application.  After that, preparing the bankruptcy filing and getting necessary high level state signoffs would require more weeks. In short, faced with the dire situation suddenly thrust on the City, the options open are unlikely to be of much assistance unless the state decides to waive all the normal procedures to move the City into a position where a Chapter 9 can be filed. 

 

Certainly, the state should not offer a bail out for Harrisburg that involves transferring large amount of tax dollars collected from across the Commonwealth.

 

Whether comparatively easier or very difficult as is now the case, entering Chapter 9 bankruptcy is a huge step with possible unforeseen negative consequences.  For one thing, the judge involved might require asset sales, labor contract renegotiations or other actions the municipality would rather than not be forced to undertake. But once in Chapter 9 protection, some exposure to such risks has to be contemplated. Then too, the stigma attached could hamper future municipal borrowings for many years and thus reduce the ability to provide needed capital intensive services. Being a bankrupt community could make attracting new residents and businesses harder.

 

In sum, filing for Chapter 9 is a very big step and must never be undertaken without careful weighing of potential benefits and consequences.  But as matters now stand in Harrisburg and the daunting task it faces, Chapter 9 discussions will undoubtedly be at the top of City government’s agenda items.