Bloomberg News

Harrisburg Approves Preparation for Possible Bankruptcy Move

June 22, 2011

(Updates with Assured Guaranty stock price in fifth paragraph)

June 22 (Bloomberg) -- Harrisburg, the capital of Pennsylvania, may prepare a bankruptcy petition even as consultants working for the state try to avoid it.

The City Council voted 4-3 yesterday to approve Councilman Brad Koplinski’s recommendation that the city draw up papers. Harrisburg must protect its interests as it faces lawsuits and state legislation that would remove power from elected officials should they fail to implement a fiscal recovery plan, he argued. His measure doesn’t authorize an actual filing.

The council’s meeting also included testimony from the consultants who drafted the recovery plan under Pennsylvania’s distressed-cities program, called Act 47. The proposal calls for the sale of municipal assets, dismissals and changing workers’ contracts.

“This is a responsible action by this body to be prepared for an uncertain future,” Koplinski said about the resolution to prepare for bankruptcy.

The city of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator, which doesn’t generate enough revenue to cover the obligations.

On The Hook

Harrisburg needs $310 million to make bond payments, restructure debt and repay Dauphin County and insurer Assured Guaranty Municipal Corp., which made payments the city skipped, according to the Act 47 consultants led by Julia Novak, president of Cincinnati’s Novak Consulting Group.

At 11 a.m., Assured Guaranty stock slipped 26 cents to $15.63 in trade today on the New York Stock Exchange. The 1.6 percent drop was the steepest decline since June 10.

Mayor Linda Thompson doesn’t think bankruptcy is the best course, Robert Philbin, a spokesman, said in an e-mailed statement before the council meeting. The mayor thinks there are better options in the consultants’ Act 47 plan, he wrote.

The resolution can’t compel any action by the mayor, Philbin said in an e-mail today.

Councilwoman Patty Kim, who opposed the resolution, said she thinks preparing for bankruptcy sends the wrong message to Assured Guaranty.

“This is unnecessary,” she said before the vote. “We’re getting soundbites scaring everybody.”

Grinding Forward

Kevin Harley, a spokesman for Republican Governor Tom Corbett, today referred a request for comment to the Community and Economic Development Department, which administers the distressed-cities program.

“The Act 47 process is going to move forward,” Steven Kratz, a department spokesman, said in a telephone interview.

Under legislation proposed by Republican Senator Jeffrey E. Piccola of Susquehanna Township in Dauphin County, a city that fails to approve its Act 47 blueprint would be taken over by a three-member board appointed by the governor and home county. The board would enforce the plan’s actions, such as selling assets, and the city would be barred from entering bankruptcy.

“Virtually every municipal official elected in the city of Harrisburg has taken an irresponsible position concerning the city’s fiscal mess,” Piccola said in a statement June 15.

The lawmaker “intends to vigorously pursue passage of his legislation,” Colleen Greer, a spokeswoman, said in an e-mail today.

Suing and Fasting

Harrisburg is also facing the reinstatement of a lawsuit by Dauphin County, which is demanding the city repay $35 million on the incinerator debt that the county covered in December. The case “could put significant additional strain on Harrisburg’s financial operations and drive the city one step closer to insolvency and Chapter 9 bankruptcy,” Josellyn Yousef, a Moody’s Investors Service analyst, said in a note to investors and reporters June 20.

A Harrisburg general-obligation bond maturing in 2014 traded today at an average yield of 10.68 percent, up from 10.3 percent on June 30, according to data compiled by Bloomberg.

Thompson will be subsisting on liquids alone starting today as she participates in a three-day fast to help solve the fiscal crisis, Philbin said in an e-mail yesterday.

At least 12 leaders of Christian, Jewish and Muslim congregations around Harrisburg say the rite will focus on a “cooperative spirit among government leaders, the business community and citizens,” according to a statement from Philbin on June 17.

--Editors: Stephen Merelman, Pete Young, Mark Schoifet

To contact the reporter on this story: Romy Varghese in Harrisburg at rvarghese8@bloomberg.net

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


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