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.
This is what we wrote in February of 2010 when the possibility of Harrisburg declaring municipal bankruptcy was rather slim. Eight months later, in October of 2010, the City was declared to be in Act 47 status and fiscally distressed. Since then there has been a coordinator’s recovery plan that was rejected and a mayoral plan that was rejected. There was also a sweeping change to Act 47 that would apply to cities of the third class, of which Harrisburg is one. Then just last night Harrisburg’s City Council voted 4-3 to file for Chapter 9.
Whether the motion to file or the changes to state law win the day to determine whether Harrisburg can get into a bankruptcy court is probably going to be decided by courts prior to then. Obviously the fact that Council did not like the coordinator’s recommendations to address its structural deficit and debt payments as a result of the City’s relationship to the financing of a trash incineration facility moved them closer to this point. The coordinator’s plan stated that to avoid bankruptcy the City would need "cooperation from its creditors, a consensual debt solution, and immediate reopening of labor contracts". If the matter does make it in front of a bankruptcy judge it is a good possibility that a solution would hinge upon similar themes.
Just last week, the state’s capital city, Harrisburg (population 47k), was declared financially distressed under Act 47. Harrisburg becomes the 20th city since the statute became law in 1987 to be so designated, joining Pittsburgh, Reading, and Scranton among others.
A press release from the state’s Department of Community and Economic Development (DCED) yesterday ended the suspense about the status of Pennsylvania’s capital city of Harrisburg as to whether the City would be declared financially distressed under Act 47. It has been done; Harrisburg is now the 20th city in Act 47.
Fully one-half of the Commonwealth’s ten largest cities, representing about 16% of total population based on Census data, are now under some sort of state oversight-either a cooperation authority (Philadelphia), Act 47 (Harrisburg, Scranton, and Reading) or both (Pittsburgh).
DCED’s secretary noted in the release that that the designation will soon be followed by "a comprehensive recovery plan that will lay the groundwork for long-term financial solvency" that will get the City back on track.Recovery could take a long time: eleven Act 47 communities have been in that status since 1995 or earlier. Only one community (Ambridge) entered and exited distressed status in a period of three years.
An interesting angle to the determination was that a separate community group petitioned DCED to direct Harrisburg to file for Chapter 9 municipal bankruptcy. The press release and the DCED order noted the conditions for bankruptcy outlined in Act 47, and among them there is no mention that DCED can compel a city to file for Chapter 9.
The Allegheny Institute’s recommendations on Chapter 9, included in our most recent report, include streamlining the process for pursuing a bankruptcy filing and creating an independent panel to review filings so as to prevent misuse.
A Tribune Review article of November 8 reminds once again just how desperate the unfunded pension plan situation is for many Pennsylvania communities, including the two largest cities as well as several midsized cities. With assets to liabilities ratios below 50 percent in Pittsburgh, Philadelphia and Scranton and others below 65 percent, there can be little doubt that a crisis is at hand.