A Case Study for Chapter 9 Reform?

Westfall Township, a community of just over 2,800 people in northeastern Pennsylvania’s Pike County, might be the tiny engine that could prompt some thinking about the process through which municipalities proceed to bankruptcy (debt readjustment is likely more appropriate) under Chapter 9 of the U.S. Code.

As we pointed out in earlier Policy Briefs and a full-length report, Chapter 9 filings are very rare and, under the national-state division of power in the U.S., under the discretion of the states. Due to amendments passed in 1994, a state must specifically authorize its local governments to enter into Chapter 9. If they grant permission, they are free to attach as many pre-conditions as they like. In Pennsylvania the requirements are spelled out in Act 47, the fiscal distress statute.

Westfall Township faced a $20 million bill due to a developer and could not pay it. They filed for Chapter 9 bankruptcy, four days later were placed into Act 47 status, and after going to court the bill was renegotiated to something more manageable ($6 million).

The municipality’s bankruptcy counsel pointed out that "filing for Chapter 9 should be the last resort for municipalities. The ideal option is to negotiate with the creditors. If that fails, the second alternative is to go through a financially distressed municipality proceeding under Pennsylvania’s Act 47…if those options fail, or if there is an emergency, then Chapter 9 should be considered" (emphasis added).

Perhaps the General Assembly will look to this recent example and ponder whether there should be an alternative way to enter Chapter 9 if there is a sudden catastrophe or fiscal emergency that cannot wait for the Act 47 process to play out. Then too, in light of the massive pension bill that is coming due for school districts in the near term it ought to be considered if school districts should have the right to pursue Chapter 9 filings (Act 47 applies to municipalities only, so school districts have no avenue by which to pursue debt adjustment under Chapter 9).

State won’t Bailout its Host City

Regarding the tangled web of debt between the City of Harrisburg, Dauphin County, and the Harrisburg Authority over obligations on a trash incinerator and whether those obligations could lead Harrisburg into Act 47 distressed status or Chapter 9 municipal bankruptcy, the Governor of Pennsylvania offered this statement:

"There’s no easy, pain free way out…there is no Santa Claus riding into the aid of the City".

Maybe not as harsh as the 1975 headline "Feds to New York: Drop Dead" but clearly a message that the Commonwealth won’t advance funds or bailout Harrisburg over the debt. Instead, a meeting between the Governor, the Mayor of Harrisburg, and other officials produced a consensus that technical advice from the state would be available, but the City should look to sell assets and increase disposal fees to County residents.

The Mayor wants to avoid Act 47, and said that "bankruptcy would be the last option". With some $17 million in debt coming due in four months, that last option might be approaching rapidly.

What Happens in a Chapter 9 Bankruptcy?

In a previous Policy Brief (Volume 9, Number 51) we raised the question of whether Pittsburgh’s legacy costs could force the City to seek relief under Chapter 9 of the U.S. Bankruptcy Code. Under Chapter 9 a judge would oversee a readjustment of debts.  Pennsylvania’s Act 47 permits a municipality in financial distress to pursue a Chapter 9 filing if one of the following conditions is present:

 

  • The Act 47 coordinator recommends filing
  • There is imminent action by a creditor that would threaten the ability of the municipality to provide services
  • A creditor has rejected the Act 47 plan and the rejection cannot be resolved
  • A condition causing financial distress could be solved by filing
  • The governing body has failed to adopt an Act 47 plan or carry out the recommendations of the coordinator

 

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Will Legacy Costs Force Pittsburgh Into Chapter 9 Bankruptcy?

“…the notion that the second largest city of this Commonwealth would record the unprecedented status of bankruptcy is simply an unacceptable alternative”-

Report of the Intergovernmental Cooperation Authority, April 12, 2004

 

Five years ago when the City was new to Act 47 status and the oversight board was getting its bearings there had to be some inkling of a very real possibility Pittsburgh could find itself in front of a bankruptcy judge.  The City was characterized as being saddled with an outmoded tax structure and out of budgetary gimmicks to meet its spending needs.  Per capita debt was far out of line with other U.S. cities. To forestall a worsening situation, the state had approved the City’s petition for Act 47 status, created a new, separate oversight board, and enacted a tax reform package for the City.   

 

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