Bloomberg News

Pennsylvania Governor Prepares to Take Control of Harrisburg

October 20, 2011

(Updates with timing in second paragraph.)

Oct. 20 (Bloomberg) -- Pennsylvania Governor Tom Corbett is planning to seize control of Harrisburg’s finances even as City Council members seek bankruptcy for the capital in an effort to ward off state action.

Legislators yesterday empowered the Republican governor to appoint a receiver who will be able to overrule elected officials, a first for the state. After Corbett, who signed the bill today, declares a fiscal emergency, the city would have 30 days to pass a state-approved recovery plan before he may install the manager. The governor may make the declaration next week, Kelli Roberts, a Corbett spokeswoman, said today.

Last week, a divided council authorized a bankruptcy filing, the first for a U.S. capital in at least 40 years, after the city skipped payments on debt tied to a trash-to-energy incinerator project. The state and Mayor Linda Thompson, a Democrat, have challenged the filing, and a judge will consider its fate Nov. 23.

“Our plan is to proceed as if the bankruptcy filing would be found illegal, the fiscal emergency will be declared and a receiver will be named,” Kevin Harley, a spokesman for Corbett, said in an interview yesterday.

Soothing Markets

The receivership law shows that Pennsylvania is moving quickly to stem municipal-bond market worries, said James J. Holman, a bankruptcy lawyer at Duane Morris LLP in Philadelphia. Holman, who isn’t connected to the case, called the legislation a “bold move.”

“Every day that passes by without decisive action by the state before Nov. 23, it creates that very uncertainty that people are worried about,” Holman said in a telephone call.

Corbett, in a statement today, said the state had to move.

“I remain a strong proponent for municipal governments tackling their own problems,” said Corbett. “But when that fails to happen, the state has to take action to ensure public safety.”

The prospect of a takeover and the hearing may set the stage for a deal, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

“Ultimately, this is a ploy,” he said of the filing. “Bankruptcy isn’t the end game.”

Schankel said, “I wouldn’t be surprised” if a settlement were struck before the hearing.

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

In Too Deep

The council had rejected proposals by state consultants and Thompson that would have sold assets to repay creditors and raised property taxes on residents, 29 percent of whom live in poverty. The city owes $310 million. That includes payments it missed and that were then made by Dauphin County, which guaranteed some of the incinerator debt, and bond insurer Assured Guaranty Municipal Corp. of Hamilton, Bermuda.

“Assured Guaranty strongly supports the efforts of the governor and the Legislature to reach a prompt and fair resolution of Harrisburg’s debt obligations,” Ashweeta Durani, a spokeswoman, said in an e-mail today. “We will continue to work with the commonwealth, Harrisburg and Dauphin County to address Harrisburg’s debt situation.”

Bargaining Power

During a first hearing on Harrisburg’s bankruptcy in federal court Oct. 17, Judge Mary D. France urged the council, mayor and commonwealth to enter mediation. Clayton Davidson, a Harrisburg-based lawyer representing Dauphin County, said it would be open to mediation.

“Harrisburg’s Chapter 9 gambit, while in our opinion likely to be invalidated in court, may turn out to be a deft stroke in an attempt to leverage a more equitable outcome” for the city, Bank of America Merrill Lynch analysts including John Hallacy wrote in a note to clients.

Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York, said that wouldn’t please investors. Other Pennsylvania cities might try to do the same, he said.

“If Harrisburg is successful about extracting concessions from the state, then that would be a concern,” Cure said in a telephone interview.

Seizing the Wheel

A receiver would have the power to sell assets, hire advisers and suspend the authority of elected officials who interfere.

“It’s a power grab,” said Councilwoman Susan Brown- Wilson, who supported bankruptcy. She said she was “open to sitting down” to discuss a way out of the crisis.

Under the law, the mayor and council meet eight days after an emergency declaration to discuss a recovery plan. The state would have to approve it and the council enact it.

Thompson in a news conference today said she will request a meeting. “I’m telling council to come to the table and do the right thing,” she said.

Members Brown-Wilson, Brad Koplinski, Eugenia Smith and Wanda Williams said in a statement yesterday that the takeover would leave Harrisburg with limited revenue while creditors are paid in full.

“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,” they wrote. “But by then, all the creditors have been paid, so the bankruptcy would go after our employees and pensioners.”

--With assistance from Steven Church in Wilmington. Editors: Stephen Merelman, Stacie Servetah

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

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


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