By Dave Warner and Edith Honan
HARRISBURG, Pa. Oct 12 Pennsylvania's
capital, Harrisburg, filed for bankruptcy on Wednesday in a
desperate bid to resolve its debt crisis, setting up a
showdown with the state over control of the city.
Harrisburg becomes one of the most-high profile cities to
opt for the little used Chapter 9 of the U.S. bankruptcy code,
most notably tapped nearly 20 years ago by Orange County,
The Pennsylvania capital's crisis has been a year in the
making as the city of about 50,000 struggles to pay for
critical services as well as roughly $300 million in debt
incurred from an expensive revamp of its incinerator.
While city services should continue uninterrupted, the
move has caused confusion about how bills will be paid.
"We're getting calls from vendors, wondering if they are
going to get paid," said Brenda Alton, the director of city's
department of parks, recreation and enrichment. "I feel it is
a bad decision."
Municipal bankruptcies are rare. But if Harrisburg is
successful in winning concessions with bondholders, pensioners
and other stakeholders, it could lead other financially
troubled cities to seek bankruptcy.
Bankruptcy gives the city "bargaining power" with its
creditors, municipal workers, retirees and the state, which is
considering a takeover, said Mark Schwartz, an attorney for
There have been only 629 municipal bankruptcies under
Chapter 9 of the U.S. Bankruptcy Code since 1937, according to
James Spiotto, a municipal bankruptcy expert at the law firm
Chapman and Cutler.
"I think it's more of an example of an aberration,"
Spiotto told Reuters Insider. "It's event-driven from a failed
incinerator plant that's unique to the Harrisburg situation.
That isn't a contagion that's going to spread to other
Orange County, California, filed the largest Chapter 9
bankruptcy in U.S. history in December 1994 after it suffered
more than $1 billion in investment losses on derivatives.
Vallejo, California, with 120,000 residents, filed for Chapter
9 in 2008, and Central Falls, the smallest city in Rhode
Island, the smallest U.S. state, filed earlier this year.
Harrisburg's City Council approved the bankruptcy filing
in a 4-3 vote. It was opposed by Mayor Linda Thompson, who in
a news conference on Wednesday challenged the legality of the
City Council's vote.
Under city law, the mayor and the city solicitor must sign
off on all hiring of outside counsel and the city solicitor
must approve all ordinances and resolutions considered by the
council, and neither was done in this case, Thompson said.
"They have been dishonest with the entire community for
months," Thompson said of the council. "I am ashamed of the
The bankruptcy has the potential to stoke political
passions as it will likely pit firefighters and police against
municipal bond investors, who are often perceived to be
wealthy retirees, said Peter Kaufman, president of Gordian
Group and a financial restructuring specialist.
"It's disgusting, it really is," said Warren Jones, 68, a
retired corporate manager. "I talk to people I know who are in
business and they're worried."
Pennsylvania Governor Tom Corbett has said the city would
be better off if it agreed to a rescue plan under the state's
Act 47 program for distressed cities -- which has seen
Philadelphia and other cities through crises -- and his office
stressed its opposition to the bankruptcy.
Pennsylvania's state Senate will vote on a bill next week
that calls for an eventual takeover of Harrisburg and the
forced implementation of a fiscal rescue plan. The state's
lower house has already passed the bill.
"Rather than wasting precious time on illegal filings and
engaging expensive attorneys, the majority of City Council
should be about working with the mayor and the commonwealth to
resolve this crisis via the Act 47 process," said state
Senator Jeff Piccola, who helped write the bill.
WALL STREET v. WALNUT STREET
The City Council has rejected rescue plans, one backed by
the state and one by the city's mayor. Those plans called on
Harrisburg to renegotiate labor deals and sell or lease its
most valuable assets -- the incinerator and parking garages.
The City Council said those plans demanded too much of
Harrisburg residents and did not ask enough of the county,
bondholders and the bond insurer, Assured Guaranty.
City Councilman Brad Koplinski, who voted in favor of
bankruptcy after opposing both of the rescue plans, said the
council is looking for "a global solution with shared pain for
all of the stake-holders."
By selling its assets, and cutting off major revenue
streams, the city could risk another fiscal crisis down the
road, Koplinski said. If that happens, the city's only options
for addressing cash-flow problems would be to raise property
taxes or further reduce benefits for public workers, he said.
Koplinski said he would not support a solution where "Wall
Street gets paid in full and the people of Walnut Street have
to pay for it many times over."
In a statement, Assured questioned the vote's legality,
saying that as a distressed city of the third class of
Pennsylvania cities, Harrisburg is "specifically prohibited
from filing for bankruptcy."
"Assured Guaranty realizes the complexity of the situation
facing Harrisburg and continues to be eager to work with
Harrisburg, Dauphin County and the Commonwealth in formulating
solutions to address Harrisburg's debt."
The company "also strongly supports the efforts of the
Governor and the Legislature to reach a prompt and fair
resolution of Harrisburg's debt obligations."
However, City Controller Dan Miller said the filing was
the right move for Harrisburg.
"I think it's the only real option that we had," said
Miller, adding that the previous plans rejected by the City
Council would have benefited creditors at the city's expense.
Harrisburg's bankruptcy filing wants to go where previous
municipal bankruptcies have not: toward cutting the principal
owed to bondholders, Kaufman said.
Daniel Berger, senior market strategist at Municipal
Market Data, said there was very little trading in
Harrisburg's bonds on Wednesday. "Investors have written off
these bonds for years as distressed credits," he said.
WAVE OF MUNICIPAL BANKRUPTCIES?
Financial analyst Meredith Whitney, one of the few on Wall
Street who foresaw the 2008 financial crisis, said last year
she expected a wave of municipal bond defaults.
Chapter 9 bankruptcies remain uncommon, however. The
process is very expensive, and not all states let local
governments file for bankruptcy. Governments also have a power
that ailing companies do not have: the ability to tax.
Alabama's Jefferson County settled with its creditors last
month to avoid what would have been the biggest-ever municipal
Despite Harrisburg's filing, municipal bankruptcies will
likely remain rare, said Richard Ciccarone, chief research
officer and municipal bond specialist with McDonnell
Investment Management LLC.