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Nov. 23 (Bloomberg) -- Pennsylvania will pursue a plan to put Harrisburg, its bankrupt capital, into state receivership even if a U.S. judge allows the city to seek bankruptcy protection in federal court.
U.S. Bankruptcy Judge Mary D. France will hear arguments today about whether the council members who voted for the bankruptcy filing violated local and state laws. If France rules that the filing wasn’t authorized, she can dismiss the bankruptcy.
The petition for receivership “will continue to move forward,” said Kelli Roberts, a spokeswoman for Governor Tom Corbett, in an e-mail. “We support the commonwealth’s objection that the bankruptcy filing was illegal and expect that it will be dismissed.”
On Nov. 18, Corbett’s administration nominated David Unkovic, chief lawyer for the state economic development department, to be receiver for the city. Under state law, Unkovic’s appointment must be approved by a Pennsylvania court.
A majority of the Harrisburg council voted to put the city into bankruptcy last month. Since then, Mayor Linda D. Thompson, Corbett and creditors have asked Frances to dismiss the bankruptcy petition, which was filed under Chapter 9 of the U.S. Bankruptcy Code.
If the bankruptcy is thrown out, the city will lose protection from creditor lawsuits and be forced to respond to any court actions filed related to its debt. The City Council would have the right to appeal the decision, their attorney, Mark Schwartz said in an e-mail.
“Bankruptcy court is the best place to get away from politics, process and cover-up and to focus on substance,” Schwartz said in an e-mail.
Should the bankruptcy be dismissed, the receiver and the city council should work with the mayor on her proposal for fixing the city’s financial troubles, said bankruptcy attorney Ken Lee, who was hired by the mayor, in an interview.
“For both practical and legal purposes, they need to work off the mayor’s alternative final plan,” Lee said.
Municipal bond market participants will be watching for any statements to suggest that either France will uphold the bankruptcy or that the state receivership won’t go forward, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia, in an interview.
“Bankruptcy is a loaded, bad word in the muni market,” he said.
If Harrisburg’s bankruptcy is validated, “it opens up a whole realm of unknowns,” Schankel said. “There would be a lot more unknowns than there would be with a state receiver running the show.”
Roberts, Corbett’s spokeswoman, declined to comment on how the receiver would be affected should the bankruptcy be upheld.
“We’ll cross that bridge when it comes, but we don’t think the bankruptcy will be upheld,” she said.
In addition to the mayor and the governor, the bankruptcy is opposed by Ambac Assurance Corp., the insurer of Harrisburg’s general obligation bonds, and city unions and Dauphin County, of which Harrisburg is the seat.
Harrisburg, along with Jefferson County, Alabama, and Central Falls, Rhode Island, is one of a group of municipalities that have filed for bankruptcy protection this year. Debt defaults by state and local governments have risen to more than $1.3 billion since Sept. 30, more than twice the amount in any of the three previous quarters, according to data from Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
Harrisburg’s Fraternal Order of Police and the local affiliate of the American Federation of State, County and Municipal Employees, which represents non-professional city workers, also filed objections to the bankruptcy.
Ambac’s parent, Ambac Financial Group Inc., filed for bankruptcy in New York and remains under court protection. Ambac Assurance is being overseen by Wisconsin regulators. The bond insurance company that guaranteed repayment of Harrisburg’s incinerator bonds, Assured Guarantee Municipal Corp., also filed an objection, based on the state and the mayor’s opposition.
Harrisburg, a city of 49,500, faces a debt five times its general-fund budget because of an overhaul and expansion of an incinerator that doesn’t generate enough revenue. Guaranteed debt is about $242 million, with $65 million overdue, the bankruptcy petition said.
The case is In re City of Harrisburg, Pennsylvania, 11- 06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg).
--Editors: John Pickering, David E. Rovella
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