The Pennsylvania state Senate on Tuesday voted for a state takeover of the finances of its capital, Harrisburg, setting up a showdown with the city, which filed for bankruptcy last week.
The plan was already approved by the state's lower house and is expected to be signed into law by Governor Tom Corbett.
Corbett has said the city would have been 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 stressed its opposition to the bankruptcy.
"This ongoing, reckless behavior has become a national embarrassment, not only for this city but for our entire Commonwealth, as Harrisburg is the only municipality in state history to reject an Act 47 recovery plan," said State Senator Jeff Piccola, who helped write the bill.
"The bankruptcy filing recently approved by City Council is illegal and demonstrates the majority's inability and absolute flagrant disregard in governing the city in a responsible manner," Piccola said. "Their behavior has brought us to this point, which is unfortunate but necessary."
The City Council's special lawyer said the state's actions will not supersede the council's action, however.
The Senate's action is "after the fact," said Philadelphia attorney Mark Schwartz, who is representing the council. "The bankruptcy court has jurisdiction over this, and that's the end of the story."
The bill empowers Corbett to declare a state of fiscal emergency in Harrisburg and petition for the appointment of a receiver. The receiver would be charged with drafting and implementing a long-term recovery plan.
Slate Dabney, a commercial bankruptcy attorney and partner in the New York law office of King & Spalding, said he believes the bankruptcy will ultimately be dismissed.
"Once it's dismissed, then with this new law, the governor may very well decide to go ahead with a receiver, given the political stalemate in Harrisburg," said Dabney, who is not involved in the Harrisburg case.
MAYOR AGAINST BANKRUPTCY
On Monday, a U.S. bankruptcy judge declined to rule immediately on the legality of Harrisburg's Chapter 9 municipal bankruptcy filing and set a hearing date for November 23.
The city of 50,000 is struggling with debt approaching $400 million, including about $300 million incurred from an expensive revamp of its incinerator. The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and Dauphin County guarantee much of that debt.
In a bid to resolve the crisis, the Harrisburg City Council last week voted 4-3 to file for bankruptcy.
Harrisburg Mayor Linda Thompson, who opposed the move, filed a petition to have the filing dismissed, claiming it was illegal because the City Council did not follow proper procedure. The state joined Thompson, the county and bondholders in opposing the filing.
In July, the City Council rejected a state-approved rescue plan, which called on Harrisburg to renegotiate labor deals, cut jobs, and sell or lease the city's major assets -- its parking garages and the incinerator. In August, the Council rejected a similar plan put forward by the mayor.
Thompson, in a statement on Tuesday, called the state's actions "regrettable and ... totally avoidable" and faulted the Council for rejecting the recovery plans.
"I did not support this bill, but I will work diligently with all parties involved in the recovery process moving forward," she said.
Dabney said the bill may be relevant to what the bankruptcy judge decides. "It was not in effect at the time that the bankruptcy, or the purported bankruptcy, was filed, which was last week," Dabney said.
Schwartz heaped blamed upon the governor.
"It's too little. It's too late," Schwartz said. "It shows a clear failure of the governor not having a local tax reform plan ... If he were serious about helping these municipalities avert bankruptcy, he would have a local tax plan."
(Reporting by Edith Honan and Jim Christie in San Francisco; Additional reporting by Chip Barnett in New York, and Tom Hals in Wilmington, Delaware; Editing by Andrew Hay and Jan Paschal)