UPDATE 1-Harrisburg, Pa. may renew bankruptcy threat as ban ends

Wed Nov 28, 2012 3:45pm EST

* State ban expires this week, unlikely to be extended

* Receiver still trying to sell city assets

By Mark Shade

HARRISBURG, Pa., Nov 28 (Reuters) - A state ban preventing Harrisburg, Pennsylvania, from filing for municipal bankruptcy protection is due to expire after Nov. 30, giving the debt-laden capital a powerful tool for negotiating with creditors: the threat of bankruptcy.

Since October 2011, when Harrisburg tried to file for bankruptcy protection, the city's debt has risen to $340 million from $300 million. There is no guarantee that it will not seek court protection again.

On Wednesday, Mayor Linda Thompson proposed a $56.3 million spending plan for her fiscal 2013 budget that would leave the city's general fund with a $3.15 million deficit.

Its general fund, comprised of real estate tax collections and other income, is projected to decline by $1.7 million, or more than 3 percent, even after an extra $5.4 million from a higher earned income tax rate of 2 percent.

"They're still having a problem bridging the revenues and the liabilities they have to pay," said Emanuel Grillo, chair of the financial restructuring group at law firm Goodwin Procter.

"They haven't gotten bondholders or other constituencies to take a big enough hit," he said. "Waving the bankruptcy option out there is really an important tool, even if (the state-appointed receiver) never uses it."

Harrisburg, with a population of about 50,000, became a poster child for U.S. cities trying to cope with lower property tax revenue and growing pension and healthcare costs, salaries and other expenses. About a third of its residents live in poverty.

It was brought to the brink of financial collapse after it took on substantial debt during several rounds of bond deals to finance the repair and retrofit of its incinerator, which then failed to make enough money to cover the debt.

Its receiver, William Lynch, had to skip a $3.4 million general obligation debt service payment in September in order to pay city employees. Harrisburg, with a population of 49,673, faces a projected cumulative deficit of $14.8 million by the end of fiscal 2012.

Harrisburg is closer to selling some assets such as its trash incinerator and public parking system as part of its recovery plan, but any sale agreement must be approved by the state court overseeing the plan.

Mayor Thompson had banked on $71.4 million in anticipated revenue from the sale or long-term lease of city assets. Even if that revenue materializes, the proposed 2013 budget still has an $11.8 million deficit when funds for water, sewer and debt service are included.

EXTENSION OF BAN UNLIKELY

About two weeks after Harrisburg's city council filed its bankruptcy petition, Pennsylvania Governor Tom Corbett declared a state of fiscal emergency for the city. A federal judge later blocked the city council's Chapter 9 petition after state lawmakers banned it.

Urged on by Republican state lawmaker Jeff Piccola, the Pennsylvania legislature later extended the ban. Piccola represented Dauphin County, which guaranteed some of Harrisburg's incinerator debt and is one of its creditors.

Many city and state officials believe that with Piccola retiring and a Democrat taking his place, state lawmakers will not extend the ban a second time, especially since they are not scheduled to consider any new legislation until January.

"The lack of threat from Senator Piccola and the legislature to reinstate the bankruptcy ban is going to be an effective tool for negotiations. There's no doubt about it," said Harrisburg City Councilman Brad Koplinski.

CREDITOR PRESSURE

Lynch, the only person who can put the city into bankruptcy, has said that he should be allowed to do so if need be.

Bankruptcy "is an option that needs to be on the table," said Cory Angell, a spokesman for Lynch.

The threat of bankruptcy could get creditors, including bond insurer Assured Guaranty Municipal Corporation, or AGM, to return to negotiations and consider forgiving as much as a third of the city's debt.

Harrisburg skipped several incinerator debt service payments that were due in September, leaving AGM to cover the $1.4 million in payments. All together, AGM has $155.2 million of net par exposure to Harrisburg and as of June 30 had paid $8.6 million on claims.

The bond insurer declined to comment on the expiration of the city's bankruptcy ban.

AGM, along with creditors TD Bank and bondholder trustee M&T Bank, won county court approval in March for a separate receiver, who oversees the cash flow of Harrisburg's incinerator and operates independent of Lynch.

According to Angell, attempting to implement the recovery plan is important so Harrisburg can show that it tried other remedies before asking a court for relief from creditors.

"I think if we were to go into a bankruptcy situation, of course that court is going to ask you what have you done to meet your obligations, and I think the answer to that should be we've tried to implement this recovery plan," Angell said.