Harrisburg, Pa., to seek distressed city status

HARRISBURG, Pennsylvania Fri Oct 1, 2010 2:30pm EDT

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HARRISBURG, Pennsylvania (Reuters) - Pennsylvania's Harrisburg will apply for distressed city status under state law in an attempt to repair its precarious finances, Mayor Linda Thompson said on Friday.

The law, called Act 47, aims to ward off bankruptcy filings by requiring deficit-riddled cities and towns to enact rescue plans with strict state oversight.

The Democratic mayor of Pennsylvania's capital city told reporters that state officials will meet within two weeks to determine whether the city qualifies under Act 47.

The city officials will then present a restructuring plan, which Thompson said may include a renegotiation of bond payments or asset sales. "All options are on the table," Thompson said, offering no further details.

Act 47 is not without its flaws. Scranton has been under its protection since 1992; Pittsburgh entered it in 2003 and also has yet to exit. A total of 19 cities, townships and boroughs were under Act 47 protection as of early July.

Democratic Governor Ed Rendell, at a separate news conference, said that a bankruptcy was theoretically available under Act 47 but added that was a very undesirable option for Harrisburg or any other Pennsylvania city.

"It would have a very debilitating effect. A bankruptcy filing would affect the future viability of other cities across the Commonwealth. It would be a disaster," Rendell said

The recession has amplified so-called "headline risk" in the $2.8 trillion municipal bond market as a number of reports have raised the specter of possible bankruptcies.

However, states are not allowed to file for bankruptcy and municipal bankruptcies are rare. There were less than 500 municipal bankruptcies in the last 60 years, compared with the more than 10,000 Chapter 11 bankruptcy filings for U.S. businesses in 2009 alone.

Only some 26 states allow localities or other entities to file for bankruptcy and lawyers say they advise clients to strenuously avoid them because the court process is so long, so costly, so complex and so uncertain.

Further, any city, town, or village that did so could find itself locked out of the bond market for some time as investors likely would shun its new debt, financial analysts say.

Still, Vallejo, California took this approach in 2008; last year, the New York City Off-Track Betting Corp., an operator of government parlors, followed suit.

Harrisburg's mayor painted a dramatic picture of the city's financial problems, which stem in part from a troubled incinerator project. Harrisburg is the primary guarantor of the incinerator's $288 million of debt and the plant does not generate enough cash to repay its loans.

"The City of Harrisburg stands on the precipice of a full-blown financial crisis as a looming cash shortfall threatens its ability to pay vendors and meet payroll," Thompson said in a statement.

"A finding of distressed status will trigger a requirement to develop a recovery plan to address both short-term and long term fiscal challenges," the mayor said.

The city's financial crisis has at times divided local politicians and spurred talk of a possible bankruptcy. In September, City Controller Dan Miller said Harrisburg should consider entering Chapter 9 municipal bankruptcy to resolve its debt crisis.

(Reporting by Jon Hurdle; Writing by Joan Gralla, Editing by Kenneth Barry)

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