Capital City Crisis

Could a decision to guarantee an authority’s debt on an incinerator turn Harrisburg’s finances to ashes? It seems to be the case as the state’s capital (population 47k) is in such a pickle that elected officials including the city’s controllerare suggesting Harrisburg needs to "…decide which way to go, in bankruptcy or Act 47". Much hinges on debt service payments that the City agreed to make for a waste-to-energy incinerator owned by a separate authority.

The Mayor stated that finances are so bad that they "might not be able to meet payroll this month". Tax increases, asset sales, and an exploration of takeover remedies are on the table.

At least it does not appear that pension costs are what plague the city, at least not yet. Harrisburg showed a very healthy fund ratio in 2007 with more than enough assets to meet its liabilities (118% funded).

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 more appropriate). In order to preserve the Federal-state balance of power, states are free to prohibit their municipalities from filing and those that do can place as many restrictions on filing as they wish. In Pennsylvania authorities cannot file for bankruptcy and the only statutory language on municipal filings flow through Act 47. Thus, a municipality would have to be in Act 47 status and meet certain criteria in the Act 47 statute to proceed to bankruptcy. No community in Act 47 has yet to file for Chapter 9 bankruptcy.

Maybe communities that are faced with a sudden catastrophe of an economic kind ought to have a quicker route to Chapter 9 than first entering into Act 47. Consider that Harrisburg is in a really bad spot: the Act 47 process has to play out, then a recovery plan has to be written, and then one of the criteria related to a Federal filing has to be satisfied. There may be some cases that require swifter action.

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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