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Harrisburg’s Residents Weigh Municipal Bankruptcy Against ‘Fiscal Suicide’

By William Selway and Romy Varghese
October 13, 2011 12:01 AM EDT

Elliott Ross pointed to the sidewalk outside his Harrisburg, Pennsylvania, military surplus store, where parking meters are set to be installed to raise money for a city drowning in debt.

The state Legislature is considering taking over the town of 49,500, and Ross applauded the City Council’s bid to file for bankruptcy, a shot at sparing taxpayers the full cost of a money-losing incinerator project that has left Harrisburg laden with debt.

“It’s going to come back to the city,” said Ross, owner of the store for 38 years. “Taxes are going to go sky high.”

As protesters from New York to Los Angeles stage sit-ins demanding that Wall Street atone for the economic collapse, this state capital is debating its own version of the dilemma: how to share the burden among a city that’s in over its head, those who loaned the money and insurer Assured Guaranty Municipal Corp., which promised that bonds would be repaid.

Across the U.S., local governments are struggling with falling property-tax revenue, dwindling state aid and rising bills. Central Falls, Rhode Island, filed for bankruptcy protection in August to escape pension costs. Jefferson County, Alabama, is trying to avert a similar fate with a settlement reached last month to ease the crushing cost of failed financing for sewer renovations.

Decay Beneath

Harrisburg has problems that are all its own. It guaranteed bonds sold by the independent Harrisburg Authority to overhaul and expand the trash-to-energy incinerator. When the project didn’t generate enough revenue to repay the bonds, Harrisburg was left with a debt burden five times its taxpayer-funded budget. It narrowly avoided defaulting on its general-obligation bonds in September and a year before.

Its standing as a state capital, with a downtown strip of bars and restaurants and brick townhouses near the banks of the Susquehanna River, has masked underlying strains. Twenty-nine percent of residents live in poverty, according to the U.S. Census Bureau. The tax base is limited: Nonprofits -- including state government -- own about 50 percent of the property, according to Pennsylvania consultants.

In August, Harrisburg officials said they weren’t able to fill all the city’s sinkholes.

They have struggled to find a way out. In July and August, the council rejected plans drawn by state-appointed consultants and Mayor Linda Thompson that would have sold city assets to repay creditors. Members said the proposals weren’t certain fixes and might undermine municipal finances.

Enter the State

Without a plan, Pennsylvania lawmakers began advancing legislation to take control. Lawsuits by bondholders and Dauphin County, which also guaranteed the project, are seeking to force the city to divert tax money to bondholders.

So, on Oct. 11, a majority of the council defied the mayor and voted to file for Chapter 9 bankruptcy protection in federal court. It was the first state capital to file for bankruptcy in at least four decades, said James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

Councilwoman Susan Brown-Wilson said Assured Guaranty isn’t sharing enough of the burden and faulted politicians for not wanting to spread the costs by taxing everyone in Dauphin County -- not just Harrisburg.

“It’s about political gamesmanship and people making sure their pockets are lined and that the backs of the people in Harrisburg are stripped and they’ll never know,” Brown-Wilson said at a council meeting where the bankruptcy vote took place.

Placid Market

The council turned the city into the biggest municipality to seek bankruptcy since 2008, when Vallejo, California did so to escape from labor contracts it couldn’t afford.

The decision didn’t rattle the municipal bond market, where Harrisburg’s struggles have long been known. Some Harrisburg general-obligation bonds traded at higher prices, according to data compiled by Bloomberg. A zero-coupon bond maturing in 2014 traded yesterday at an average price of 80.856 cents on the dollar, up from 78.525 the day before.

“The market is giving one big yawn to this event,” said Tim Pynchon, who helps oversee $3 billion of municipal bonds as a portfolio manager with Boston’s Pioneer Investments. “It caused nary a ripple.”

In Harrisburg, the bankruptcy decision sowed confusion and discord. During the council meeting, the president threatened to have police remove Mark Schwartz, the council-hired lawyer who later filed the bankruptcy petition, if he tried to chime in unapproved.

Will It Stand?

Thompson spent much of a 40-minute news conference yesterday criticizing council members who pursued bankruptcy.

“I am ashamed of the behavior, the road jams, the road blocks, the dishonest statements that keep coming out of the board members,” she said.

Opponents say the filing may not stand up in court. Jason Hess, acting city attorney, told council members that their action wouldn’t be binding because they didn’t follow procedure. Three Dauphin County commissioners said it was nothing more than a stalling tactic. Governor Thomas Corbett’s spokeswoman, Kelli Roberts, said it was illegal because of a law passed in June that barred such a filing. She said the state is evaluating its next steps.

Adrian Archett, a roofer, said he expected and would welcome a state takeover. He said he’s waited months for city workers to replace streetlights that have been knocked down.

“They aren’t doing their job,” he said.

Eric Jackson, a 54-year-old retired teacher who works for a church, had doubts about whether Corbett would put the city’s interests first after a takeover. He said he just wants the whole debacle behind the city, so politicians can focus on matters such as crime and rejuvenating the municipal economy.

“I don’t know what this is going to do to the city, as a taxpayer, citizen, and a former public-school teacher,” he said.

In a bookstore cafe, resident Stanley Gruen said Harrisburg faces a dilemma.

“The choice is fiscal suicide or a state takeover,” he said. “I don’t know which is better.”

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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