Bloomberg News

Harrisburg Files for Bankruptcy on Overdue Incinerator Debt

October 12, 2011

(Updates with mayor’s comment in 15th paragraph.)

Oct. 12 (Bloomberg) -- Harrisburg, Pennsylvania, which faces a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator.

The City Council made its 4-3 decision yesterday against the advice of a city attorney who said members did not follow proper procedure. It’s this year’s ninth bankruptcy filing by a municipal-bond issuer and the first by a U.S. state capital in at least three decades, said James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

“This was a last resort,” said Mark D. Schwartz, the council’s Bryn Mawr, Pennsylvania-based lawyer. “They’re at their wits’ end.”

Harrisburg is the biggest city to file for bankruptcy since Vallejo, California, in 2008, according to a ranking by Municipal Market Advisors, a Concord, Massachusetts, research firm. U.S. municipalities have been battered by the financial crisis. Harrisburg’s filing came less than a month after Alabama’s Jefferson County Commission voted to try to avert what would have been the nation’s biggest municipal bankruptcy, and nine months after Vallejo emerged.

The petition lists among the creditors insurer Ambac Financial Group Inc., due more than $70 million, and Covanta Holding Corp., with about $120 million of bonds and advances of funds to Harrisburg. The petition listed both assets and debt of between $100 million and $500 million.

‘Generally Not Paying’

The city of 49,500, which is the seat of Dauphin County, faces a debt five times its general-fund budget because of an overhaul and expansion of the incinerator, which doesn’t generate enough revenue. Its guaranteed debt is about $242 million, with $65 million of it overdue, according to the petition.

Harrisburg “has repeatedly failed to pay,” the filing said. “The city would need to cover a combined $83 million of past due payments and the 2011 debt service.”

While Chapter 9 bankruptcy, named for the section of federal law that governs insolvent municipalities, would mean the loss of state aid under a law passed in June, it would be better than the pain of a state-imposed recovery plan, said Councilwoman Susan Brown-Wilson.

“We’re just not going to let you run us over with the train anymore,” Brown-Wilson said.

No More Money

Harrisburg, as guarantor of the incinerator bonds, said it filed to escape lawsuits seeking to force it to make payments.

Six suits by Dauphin County, Covanta and Toronto-Dominion Bank, a trustee for bondholders, demand judgments that “would substantially interrupt the city’s ability to provide health or safety services to its citizens,” according to the petition.

The bankruptcy attempt itself will mire the city in unaffordable litigation, said Councilwoman Patty Kim, who voted against it.

“We still don’t have money, and we still haven’t moved one foot forward,” Kim said.

Mayor Linda Thompson called the vote a “sneak attack” during a news conference in City Hall today.

Jason Hess, acting city attorney, told council members yesterday that their action wouldn’t be binding because it was not reviewed by his office before they voted.

State law bars Harrisburg from filing for bankruptcy until July. The council committed “an illegal act,” said Kelli Roberts, a spokeswoman for Republican Governor Thomas Corbett.

Staying Power

Although the city was officially in bankruptcy when it filed the petition, whether it stays there is a question. Federal law lets states restrict filings by municipalities, and judges entertain objections.

Of the 629 Chapter 9 filings since 1937, 161 have been dismissed or their plans haven’t been confirmed, Spiotto said.

Harrisburg needs $310 million to make bond payments, restructure debt and repay the county and Hamilton, Bermuda- based insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility. Schwartz, the council’s lawyer, said he expects Assured Guaranty will reduce the value of its debt.

“Why should they be first in line?” he said.

In an opinion article published yesterday in a local newspaper, the Patriot-News, the council members who voted for bankruptcy said Assured Guaranty and bondholders should forgive at least $100 million.

State Stepping In

The council in July and August rejected fiscal rescue blueprints from consultants hired by the state and the mayor. The Pennsylvania Senate next week will take up legislation to place Harrisburg in receivership, said a spokesman, Erik Arneson, in an e-mail today.

The bill would let Corbett name a receiver who would develop a recovery plan. That official would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere.

Assured Guaranty has insured $286.3 million in bonds backed by the city, Ashweeta Durani, a spokeswoman, said in an e-mail. The company “strongly supports the efforts of the governor and the Legislature to reach a prompt and fair resolution of Harrisburg’s debt obligations,” Durani wrote.

Harrisburg’s filing hasn’t affected bond prices of other Pennsylvania issuers. Investors realize that the situation is unusual, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

“We haven’t seen any negative impact,” Schankel said.

Taken Into Account

Some Harrisburg general-obligation bonds traded at higher prices compared with yesterday and weeks earlier, according to data compiled by Bloomberg. A zero-coupon bond maturing in 2014 traded today at an average price of 80.856 cents on the dollar, up from 78.525 yesterday.

The market has already accounted for the possibility of bankruptcy, said Stephen Winterstein, chief municipal strategist of Wilmington Trust Co., a unit of M&T Bank of Buffalo, New York.

“It’s a relatively small blip on the radar screen of the muni market,” he said.

In Harrisburg, however, it is the city’s very independence at stake. Thompson said the council action makes ceding control more likely, which would disenfranchise residents.

“They don’t want to take our city,” she said of state officials. “But if they have to take it they will.”

The case is In Re: City of Harrisburg, 11-06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg.)

--With assistance from Bill Rochelle, Cullen Wheatley, Martin Braun and Stephen Merelman in New York, Steven Church and Dawn McCarty in Wilmington, Delaware, and Darrell Preston in Dallas. Editors: Stephen Merelman, John Pickering

To contact the reporter on this story: Romy Varghese in Harrisburg at rvarghese8@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net.

To contact the editors responsible for this story: William Glasgall at wglasgall@bloomberg.net; John Pickering at jpickering@bloomberg.net


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