February 5, 2010

Pennsylvania State Capital Mulls Bankruptcy as a Budget Option

By Dunstan McNichol, Bloomberg
February 4, 2010

Harrisburg, the capital of Pennsylvania, will consider Chapter 9 bankruptcy protection along with tax increases and asset sales as options to address $68 million in debt service payments due this year, the chairwoman of a City Council committee said last night.

Every option, including tax and fee increases, bankruptcy and a state takeover through Pennsylvania’s Act 47 municipal oversight program will be considered, said Susan Brown-Wilson, chairwoman of the Budget and Finance Committee, which began a week of hearings last night to consider a 2010 spending plan.

The $68 million in debt service payments that Harrisburg faces in connection with the construction of a waste incinerator this year is four times what the city of 47,000 expects to raise through property taxes, and $4 million more than the city’s entire proposed operating budget.
“We need to see, what does Act 47 do for us; what does bankruptcy do,” Wilson said in an interview during a break in the opening budget hearing at Harrisburg City Hall. “You have to have all of them on the table.”
Harrisburg skipped more than $3.5 million in debt-service and swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located. The county has sued the city to recover its payments.

Wilson was among five Council members who voted last year to reject a 2010 budget proposal by former mayor Stephen Reed, who left office last month after 18 years. The proposal would have attempted to cover the debt service costs by selling assets such as an historic downtown market, an island in the Susquehanna River that includes the city’s minor-league baseball stadium, and the city’s parking, sewer and water systems.

Selling Assets

The plan to raise $69 million by selling downtown features was reinstated last month by Linda Thompson, the newly elected mayor, in a substitute budget. The seven-member council has until Feb. 15 to approve a final 2010 budget.

Brown-Wilson said she would support leasing only city assets that don’t generate revenue, as the parking and water systems do.

Carol Cocheres, bond counsel for the incinerator’s operator, the Harrisburg Authority, told the city council at a Dec. 14 hearing that the city is already in danger of legal action for payments that were missed last year on $288 million in debt it has guaranteed with its full faith and credit.
“There’s never been a default like this in Pennsylvania municipal history,” she said. “This is all new territory.”
Risking Suit

Cocheres told council members that by skipping payments that are made on behalf of the authority, the city risks being sued and ordered to raise taxes or fees by Assured Guaranty Municipal Corp., formerly FSA Insurance, which has insured the bonds, or by the deal’s trustee, TD Bank.

City Controller Dan Miller, who was vice president of the council until January, has advocated bankruptcy as an alternative to selling assets.

Harrisburg’s credit rating was lowered two levels below investment grade to Ba2 by Moody’s Investors Service in October. The city faces a $164 million deficit over the next five years, mostly because of debt created by the incinerator, according to Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances as part of a state review.

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