* Harrisburg attorney defends bankruptcy filing
* Legal fight could involve county, bondholders
* Other cities, counties have had filings dismissed
By David Gaffen
NEW YORK, Oct 13 The lawyer for Harrisburg,
Pennsylvania rejected allegations on Thursday that its
bankruptcy filing was illegal in the face of threatened legal
and legislative challenges.
One day after Pennsylvania's state capital filed for
bankruptcy, Mark Schwartz, attorney for the city council, told
Reuters Insider the Chapter 9 filing was "absolutely" legal.
That followed comments by the mayor and county that the
council did not have the authority to take such a step.
Harrisburg is one of a handful of municipalities that has
flirted with bankruptcy in the wake of the Great Recession that
devastated budgets in state and local communities. Some say it
could become a touchstone for whether other cities will follow
this path to extract concessions from creditors and others.
"We're trying to advocate to use the leverage of
bankruptcy," said Dan Miller, Harrisburg City Controller.
But legal experts say this is a complicated process as
states in recent years have erected higher walls for local
governments to overcome if they seek bankruptcy. One in four
Chapter 9 municipal bankruptcies are dismissed, according to a
Several entities, including the county, state, and
bondholders, are expected to contest the filing.
Thursday, Charles Zwally, special council for Dauphin
County, where Harrisburg is located, said the county is
weighing its options.
"We're reviewing it now and we're advising the county...We
don't believe that they are authorized to file," he said.
The Pennsylvania capital's crisis has been a year in the
making. The city of about 50,000 is hampered by $300 million in
debt incurred from an expensive revamp of its incinerator and
is struggling to fund key city services.
Less than half of U.S. states authorize a city or county to
undertake such a move, and states have been making it harder to
A law passed in Pennsylvania earlier in the year prohibits
the city from filing for bankruptcy until 2012.
Glen Grell, a Republican member of the state's house of
representatives for the 87th district said the "bankruptcy
petition that was filed is not authorized by state law as it's
required to be."
"It's horrible for any municipality, especially the state
capital of Pennsylvania, to attempt to walk away from its
creditors," he said. The state Senate is expected to vote next
week on a bill that calls for an eventual takeover of
Schwartz called the legislation's language "deplorable,
incomprehensible and illegal."
Juliet Moringiello, a professor at Widner School of Law in
Harrisburg, said the state's authority is in question. The
state's law says municipalities can file for bankruptcy, but it
changed its law to stipulate that third-class cities -- of
which Harrisburg is one -- cannot file for a year.
"The problem is that the law was aimed at Harrisburg. The
question the city lawyer is raising is, 'Was that
ONE IN FOUR DISMISSED
In 1991, Bridgeport, Connecticut filed but the case was
dismissed as the city could not prove it was unable to pay its
"One of the issues is, is the municipality insolvent? Do
the assets exceed the liabilities? That's why Bridgeport
failed," said Richard Zeisler of Zeisler & Zeisler PC of
Bridgeport, who represented that city in its unsuccessful
Jim Spiotto, a municipal bankruptcy expert at the law firm
of Chapman and Cutler, told Reuters Insider on Wednesday one in
four bankruptcies wind up "having it being dismissed or closed
without a plan." He said Harrisburg's bankruptcy "could" be
Bond insurer Assured Guaranty and the mayor questioned the
legality of the filing, which the Harrisburg City Council
approved in a 4-3 vote late on Tuesday, but Schwartz rejected
"The council basically utilized that remedy, which was
bankruptcy, and filed for it," he said.
Thompson said Wednesday that 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, which was not done in this case, she
The county is one of the most high-profile cities to use
Chapter 9 of the U.S. bankruptcy code, most notably invoked
nearly 20 years ago by Orange County, California.
There have been only 629 municipal bankruptcies under
Chapter 9 of the U.S. Bankruptcy Code since 1937, according to
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. His office
opposes the bankruptcy.
"If you go through the Act 47 plan or the receiver
legislation we're going through right now, the assets are sold
and Wall Street gets paid 100 cents on the dollar. And we'll be
left with no sources of income," said city councilman Brad
"So we're going to have to tax our citizens. Those who can
leave -- will leave. Those who can't leave because of economic
situations are those who can least afford to pay it."
At the root of Harrisburg's troubles is a financing scheme
used to fund a state-of-the-art revamp of its trash-burning
plant that left the city deeply in 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. The state wants
Harrisburg to sell major assets, cut jobs and renegotiate labor
"This mess has been around for a long time," said Joe
Church, a resident of Susquehanna Township, a suburb of
Harrisburg. "The previous administration and the new
administration are not fiscally capable."