Debt-hobbled Harrisburg?s options might soon be whittled down to one: a state takeover.
Arguments begin this morning to help federal bankruptcy Judge Mary France decide whether City Council had the legal right to file its municipal bankruptcy petition last month. The hearing is expected to last several days.
More than the future of Harrisburg is at stake. Capital city employees could be hit with a commuter tax. Municipalities around the state could see higher borrowing costs, and bond markets around the world are concerned.
Should France decide that the council didn?t have the right to file for bankruptcy, the state takeover is a lock and a state-appointed receiver would take over Harrisburg?s finances. The receiver would be charged with implementing a fiscal-recovery plan for the city.
If France decides Harrisburg was within its rights to file, the council improves its chance of averting the takeover, but Harrisburg would have to jump through one more hoop to get into bankruptcy. France still would rule on whether the city?s fiscal crisis would allow it to receive bankruptcy protection.
And city officials still would be forced to develop a fiscal-recovery plan approved by the bankruptcy court if it gets Chapter 9, and City Council thus far has been unable to produce such a plan.
?What is at stake is the long-term growth and economic development of the city,? said municipal finance expert David Fiorenza, professor at Villanova University School of Business. ?A couple of things go into it. The Democratic majority on City Council, and you have a Republican governor. I think that plays into it. Some of it has to do with non-economic issues like pride.?
Mark Schwartz, the attorney the council hired to file its bankruptcy petition, will argue that the state?s Act 47 program did not give Harrisburg real relief from its $317 million in incinerator debt.
The commonwealth and Mayor Linda Thompson?s office will argue that the council did not have the legal right under the city code or state law to file for the Chapter 9 petition. The state and Thompson supported the adoption of the Act 47 fiscal-recovery plan council rejected.
Thompson?s plan mirrors the Act 47 plan that calls for selling or leasing city assets, cuts in services and increases in fees and taxes. The mayor also wants the option of instituting a commuter tax on workers who live outside the city.
But bankruptcy could be the end result even if a takeover should take place, said Juliet Moringiello, a bankruptcy law professor at Widener University School of Law. Council members supported bankruptcy because a court could approve a plan that calls for bondholders to accept less than what they are owed.
?There is a third option out there. It might be possible the receiver tries to get through a plan and not all the creditors agree to it,? Moringiello said. ?It could be in the best interest of the receiver to file for bankruptcy. The receiver for Central Falls, R.I., filed its bankruptcy.?
No municipality that has entered the Act 47 program has exited it, and some towns use the program as a crutch, said Fiorenza, who also is a member of the Pennsylvania and National Government Finance Officers Association.
That could be a valid argument the council uses in bankruptcy court, he said.
A takeover still is better for the city than bankruptcy, though, because Harrisburg would continue to get state assistance in developing a fiscal-recovery plan and bankruptcy paints a bad picture for the capital city, Fiorenza said.
?Act 47 brings into play people who work in economic development throughout the entire commonwealth. So, [a takeover] would bring a broader sense of what kind of city it can be,? he said. ?With bankruptcy, I think just the perception of the public throughout the commonwealth and the nation lends itself to failure. It?s failure with people?s tax money.?
Harrisburg and Jefferson County, Ala., filed for municipal bankruptcies during the past month, but Chapter 9 filings are rare.
A decision regarding Harrisburg?s legal right to file for bankruptcy will not set a precedent because the city?s situation is so unique, Moringiello said.
?If it were about the judge granting orders for relief and plan confirmation issues, it might be precedental. But we?re not there yet and we might not ever be,? she said.
Harrisburg essentially already is in bankruptcy, as its filing has stayed lawsuits creditors filed against the city, Moringiello said.
?The city is in bankruptcy. What it hasn?t gotten yet is an order for relief. Once an individual is in bankruptcy, it gets an order of relief. For Chapter 9, [municipalities] gets the benefit of an automatic stay [of lawsuits],? she said. If the city is accepted into bankruptcy, lawmakers argue it would shake up the municipal bond market in Pennsylvania and perhaps across the nation.
That isn?t necessarily the case, however, said Bill Brandt Jr., president and CEO of Development Specialists Inc., an Illinois firm that specializes in turning around troubled companies.
The bond market is built to sustain one-off situations that devastate municipalities, and it definitely will not rock the international bond market, Brandt said. Brandt said he doesn?t believe Harrisburg will be accepted into Chapter 9. But how the debt crisis is handled could affect the municipal bond market across the state.
?Like everything else in life, how it is handled will absolutely affect how other Pennsylvania bonds are seen in the marketplace,? Brandt said.
Schwartz said the state takeover is moving too fast and in a response to DCED?s receivership petition to the Commonwealth Court, he asked the for a stay of the takeover until France rules on the legality of the city?s bankruptcy filing.
Thompson asked the court Tuesday to require David Unkovic, whom Gov. Tom Corbett has chosen as city receiver, to implement her fiscal-recovery plan for the city. She also requested the court only allow the receiver to control the city?s purse strings for a year.
Takeover time line
State officials are proceeding with the state takeover of Harrisburg on the premise that the city didn?t have the legal right to file for bankruptcy. The following are key dates pertaining to the takeover process:
? Tuesday: The date parties must file objections with Commonwealth Court against Gov. Tom Corbett?s pick of David Unkovic as city receiver.
? Dec. 1: Commonwealth Court will hold a public hearing on Unkovic?s nomination for receiver.
? Jan. 17: Commonwealth Court must rule on Unkovic?s nomination by this date. ?
Unkovic would have 30 days after his appointment to develop and implement a recovery plan for the city.
Source: http://www.pennlive.com/midstate/index.ssf/2011/11/bankruptcy_hearing_affects_mor.html
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