UPDATE 2-Pennsylvania capital rejects debt recovery plan
* City council votes against mayor's rescue plan
* Harrisburg could miss Sept. 15 bond payment
* Governor says state could take over city finances (Adds details, quotes)
By Edith Honan
HARRISBURG, Pa., Aug 31 (Reuters) - Pennsylvania's capital of Harrisburg rejected a rescue plan designed to address its debt crisis on Wednesday, in a move that could prompt a state takeover of its finances.
In an 4-3 vote, the Harrisburg City Council rejected a plan put forward by Mayor Linda Thompson, saying it was unworkable. The vote came less than two months after the council rejected another plan presented by a state-appointed advisor.
Harrisburg -- a city of 50,000 about 100 miles west of Philadelphia -- is one of a handful of U.S. cities and counties that have teetered toward economic collapse in the wake of the 2007-09 recession. A string of failures could rattle the $2.9 trillion U.S. municipal debt market.
The mayor has said that Harrisburg could run of money next month, meaning it could miss a Sept. 15 bond payment and be unable to pay city workers.
Council President Gloria Martin-Roberts, who supported the plan, said the council was making a grave mistake and warned that the next step would be the forced implementation of the rescue plan by the state. "We have a takeover that's coming, mark my word," she said.
"Wall Street gets paid and Main Street gets the shaft," Councilman Brad Koplinski, who voted against the plan, said during the angry, packed council meeting.
At the root of Harrisburg's troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning incinerator that left the city saddled with a $300 million debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt. Harrisburg Authority is investigating how its debt load mounted up.
Harrisburg is due to make a $3.3 million general obligation bond payment on Sept. 15. The city is counting on getting an advance lease payment of $7.4 million from the Harrisburg Parking Authority to address what the mayor's office has estimated will be a $6.9 million cash-flow deficit. But the authority has said it has had difficulty securing a bank loan.
Last December, with Harrisburg facing the prospect of bond defaults and deep service cuts, Pennsylvania put the city under its Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 municipal bankruptcy filings.
But in July, the Harrisburg City Council rejected a state-approved rescue plan, which called on the city to sell the incinerator, renegotiate labor deals, cut jobs, and lease its parking garage.
The burden then fell to the mayor, whose eventual plan closely mirrored the state-approved roadmap, but added a payroll tax.
Pennsylvania Governor Tom Corbett and the state legislature have repeatedly expressed frustration with the city for not moving faster to enact a recovery plan.
In an Aug. 23 letter to the mayor, Corbett threw his support behind her plan and threatened a state takeover of the city's finances if the council rejects it. The governor also warned there would be no bailout.
"This is the last best chance for all stakeholders to agree on a process and a plan," Corbett said. "If the city continues down the path of irresponsible economic decision making, it is probable that legislative action will result in the city losing control of it's ability to make such decisions."
"If there is no plan approved at this point ... the Commonwealth will not bail the city out," he wrote. (Reporting by Edith Honan, editing by Anthony Boadle)