Harrisburg is insolvent

By Cate Long
October 20, 2011

The capital of the Keystone State is swirling with political infighting and power grabs over the issue of money. There is just not enough of it to pay all of Harrisburg’s creditors who have appeared at the door. Now that the county has said “Enough!” to providing more loans to cover debt payments, it’s the end of road and events are accelerating.

Harrisburg had already filed for municipal bankruptcy a week ago, but that didn’t stop the state from finalizing legislation that will put the city into receivership. Pennsylvania’s latest move adds another layer of complexity to the resolution process. The Harrisburg City Council responded to the state’s action with the following statement published in the Patriot News:

“First, they attempted to restrict the city’s ability to generate revenue and negotiate with its creditors, which were allowed in the Act 47 law, as well as penalize the city if it filed for bankruptcy. But that wasn’t good enough. Now, this takeover legislation gives a receiver unlimited power to sell any resource the city and its authorities have, without allowing Harrisburg an alternate source of revenue.”

“Wall Street can get paid 100 cents on the dollar and the people of Harrisburg will be subjected to exorbitant property tax and other increases so that we can pay our operating budget. And after all the city’s assets are sold and the city is on its knees, the receiver has the ability to file for bankruptcy to pick the bones of our city clean.”

Harrisburg mayor Linda Thompson rightly contends, in the Bloomberg video above, that the city is not technically in bankruptcy. This is true because the federal bankruptcy judge overseeing Harrisburg’s case has not yet ordered a public notice of the Chapter 9 bankruptcy filing to be publicized in the Wall Street Journal and Harrisburg Patriot News. But this is a mere technicality because Mayor Thompson’s city is drowning in debt and doesn’t have sufficient assets and annual cash flows to support that debt. In blunt terms Harrisburg is insolvent; there are three paths forward that it can travel.

The first option would be for the mayor and city council to work collaboratively in the next 30 days and approve a plan to sell assets, cut the city’s budget, raise taxes, appeal to the state for some form of “payment in lieu of taxes” (about half of the commercial properties in the city are owned by the state and pay no property tax), and negotiate with bond creditors and guarantors to reduce those liabilities. Given the animosity between the city council majority and the mayor the probablity of this course of action appears to be zero.

The second course is receivership, which was adopted by the state legislature yesterday. This path allows the receiver unlimited power to sell any asset of the city and its authorities. The problem with this path is that the assets of the city — principally the incinerator and the parking garages — are worth about $262 million net. The city needs to pay off approximately $314 million of liabilities related to the incinator. This leaves the city with an additional $52 million in “stranded debt” which will be added to other city debt of $130 million for a total of $182 million. The city council rightly objects to having to service this additional debt with no new revenues.

The third path leads through the bankruptcy court and truly offers the city a chance to reduce its debt load. This is why bankruptcy courts exist. When a debtor has multiple creditors knocking on the door and suing him in common court, the safest place for the debtor to be is in bankruptcy court. The court becomes a shield against the chaos of the competing demands of the creditors who all feel that their claim is superior to all others. In Harrisburg’s case there are currently six creditor lawsuits pending in Dauphin County Common Pleas Court. It’s a dogfight.

The federal bankruptcy code dictates four requirements for a muncipalisty to file Chapter 9. The third is the most relevant to Harrisburg. From a brief from law firm Jones, Day:

Third, the municipality must desire to effect a plan to adjust its debts. The dictate that a municipality “desires to effect a plan to adjust” its debts requires that the purpose of the chapter 9 filing must not be simply to buy time or evade creditors. This requirement, however, does not require the municipality to have a plan in place and ready to go before or as soon as it files, nor does it require the debtor to agree to creditor demands that may result in short-term solvency but will lead to insolvency in the long term.

Poor beleaugued Harrisburg needs a plan for long-term solvency. Its school district was ranked 494 out of 498 in Pennsylvania in 2011 by the Pittsburgh Business Times. The public fighting between the mayor and the city council augurs more gridlock. The problems beg for a long-term solution that leaves the city sufficient assets to start anew without the burden of massive indebtedness.

Harrisburg is insolvent and needs a fresh start. Bankruptcy court could be their best path there.

Further:

Bloomberg: Pennsylvania’s Seizure of Harrisburg Finances Opens Door to Creditor Talks

CNN Money: After Harrisburg, odds still favor muni bondholders

2 comments

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Comment emailed from City Council attorney Mark Schwartz after PA Governor Corbett signed the Harrisburg takeover legislation.

“This Governor has no money for anyone but his friends. Yesterday he give a small investment bank $11.5 million of state money (probably less than its bonus pool) Today he signs a clearly unconstitutional and illegal takeover bill that will pay milliions to other friends that he might name as receiver.

It would have been nice if there had been some legal analysis but then again, remember his general counsel was the head of a law firm that represents the bond insurance company that got paid a premium to insure the bonds. This is about his protecting an insurer over the health welfare and safety of City residents. Its about throwing a blanket over prior financings that his cronies have benefitted from. The Governor is putting himself in an untenable and conflicting position as the executive of the state and also standing in the shoes of a municipality. Moreover, instead of addressing the problem and authoring local tax reform legislation to allow municipalities to get away from relying on the regressive real estate tax, he is trying to plug a hole in a bursting dam where without relief, a host of Pa municipalities will be in the same situation as Harrisburg.

The Governor was told it would take an additional 1% sales tax and the problem would be remedied. This is the same as the solution that rescued Philadelphia a decade ago. Without any solution he said no. People hate government because it is all about process and not substance. Same in Pa.

Not one cent for Harrisburg but $11.5 million for an investment bank. In a word, forget unconstitutional, its just plain perverse.

Happily, the bankruptcy court jurisdiction makes the signed legislation DOA (dead on arrival).”

See story :http://www.philly.com/philly/columnists  /joseph-distefano/20111020_PhillyDeals_ _Would_Janney_have_really_left_city_with out_deal_.html?viewAll=y&c=y

Posted by Cate_Long | Report as abusive

crazy stuff, and very interesting. what stops the legislature from simply revoking the municipal charter? why cities can seek federal bankruptcy court protection boggles the mind.

would be nice to know how much property tax is foregone due to state ownership of real estate. i would imagine what’s lost in property tax is indirectly recovered through the jobs offered by state gov.

Posted by ee85715 | Report as abusive