PA Governor Corbett Signs Bill Allowing Takeover of Bankrupt Harrisburg

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(Reuters)— Pennsylvania Governor Tom Corbett signed legislation on Thursday that allows for the takeover of the state's capital city of Harrisburg, setting up a legal confrontation between the state and the city.

The bill paves the way for the governor to declare a state of fiscal emergency that leads to a recovery plan for Harrisburg, which filed for bankruptcy last week.

Harrisburg, a city of about 50,000, is struggling to pay for essential services as well as about $300 million in debt that funded an incinerator project that failed to generate expected cash.

The Harrisburg City Council voted 4-3 on October 11 to file for a Chapter 9 municipal bankruptcy as a way of resolving a massive debt crisis brought on by the funding of an incinerator that hasn't generated enough cash.

The action immediately generated conflict between the City Council and the mayor, Linda Thompson, the state legislature, and the governor, who dispute the legality of the Council's action in filing for bankruptcy.

A U.S. bankruptcy judge set a November 23 hearing date on the legality of the bankruptcy.

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Mark Schwartz, a lawyer hired by the City Council to handle the Chapter 9 bankruptcy case, called the governor's signing of the takeover act "absolutely perverse."

"It's too little, too late," he said in a telephone interview on Thursday, dismissing the new law as "clearly unconstitutional."

Schwartz added that the legislation really didn't do anything since the governor "must now get approval from the bankruptcy court" to take over the city.

Governor Corbett signed the bill in a private ceremony, according to the governor's spokeswoman, Kelli Roberts.

"The bill signed into law today will help to enforce Act 47 when municipalities fail to adopt a fiscal recovery plan, making it clear that if there is a failure to act, the state will intervene," Corbett said in a statement.

Under the law, the governor can declare a fiscal emergency after it is determined the city is insolvent or near insolvency, unable to provide vital services and has not adopted a fiscal recovery plan.

"I remain a strong proponent for municipal governments tackling their own problems and coming together to develop a fiscal recovery plan when necessary," Corbett said. "But when that fails to happen, the state has to take action to ensure public safety."

When a fiscal emergency is declared, the State Department of Community and Economic Development Secretary is granted powers to develop an Emergency Action Plan to coordinate essential services. These services include pension and debt payments.

The governor can then petition the state court for the city to be placed into receivership. The receiver will have 30 days to develop a fiscal recovery plan that is submitted to the court. Once approved, the receiver can implement the plan to take control of the municipality's finances relating to the plan.

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Throughout the process, if the city adopts and implements an acceptable fiscal recovery plan, a takeover is averted.

Mayor Thompson said the city will comply with the law. Thompson opposed the bankruptcy filing.

The mayor said in a statement that she will use the current financial recovery plan as the starting point for any discussions, saying implementation of some version of the plan is preferable to entering into receivership or bankruptcy.

"If we don't attempt to solve our own problems, the alternatives will be far worse," Thompson said.

A legislative panel estimated the cost of placing Harrisburg into receivership would be between $2.15 million and $2.55 million in the first year. The costs would be about $1 million for the state and between $1.15 million to $1.55 million for Harrisburg.

"This is all process and no money," Schwartz said. "There's not 10 cents for Harrisburg."

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Pennsylvania capital 'bankrupt'

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13 October 2011 Last updated at 00:51 GMT A final vote on a state takeover plan of the city is expected next week. The US city of Harrisburg - capital of the state of Pennsylvania - has filed for bankruptcy, a move quickly opposed by the city's mayor.

Harrisburg faces debts of $300m (£190m) and has struggled to pay for services.

The move comes as the state legislature considers a takeover of the city and the implementation of a "rescue plan".

Last year, municipal bond analysts expected many bankruptcies from cities under debt pressure, but few localities have actually taken the step.

The city council voted 4-3 on Wednesday to file for bankruptcy under a rarely used code for towns and cities.

Filing for bankruptcy is opposed by the city's mayor, Linda Thompson, who challenged the legality of the vote in a news conference on Wednesday.

According to Ms Thompson, city law requires the mayor and the city solicitor to sign off all hiring of outside lawyers, as well as have the city solicitor approve all ordinances and resolutions considered by the council.

Neither was done in this case, she said.

"They have been dishonest with the entire community for months," the mayor said about the council. "I am ashamed of the behaviour."

'Destitute for decades'

Debt woes have plagued the city of 50,000 since 2010, when an incinerator project funded by municipal bonds failed to raise expected cash.

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They wanted to sell all of our assets and make Harrisburg destitute for decades to come”

End Quote Dan Miller Harrisburg City Controller Although city services should continue, the vote has caused confusion about how bills will be paid.

"We're getting calls from vendors, wondering if they are going to get paid," said Brenda Alton, the director of city's department of parks.

Pennsylvania Governor Tom Corbett told the Associated Press news agency the city should agree to a rescue plan under the state's program for distressed cities.

Pennsylvania's state House of Representatives has already passed a bill that calls for a forced implementation of the plan. The state Senate will vote on the bill next week.

Such a plan would include renegotiating the city's labour deals, cutting jobs and putting its most valuable assets up for sale or lease, correspondents say.

That would include the incinerator, as well as parking garages.

But the city council says that plan would benefit creditors at the expense of the city.

"I think [bankruptcy] is the only real option that we had," said City Controller Dan Miller. "They wanted to sell all of our assets and make Harrisburg destitute for decades to come," he said.

Mark Schwartz, a lawyer for the city council, said declaring bankruptcy would give the city "bargaining power" with its creditors and with the state.

'Bad deal'

Cities and towns rarely file for bankruptcy, but it is not without precedent.

Mayor Linda Thompson opposes the bankruptcy filing

The largest Chapter 9 bankruptcy occurred in 1994, after Orange County, California, suffered more than $1bn in investment losses.

In 2008 the city of Vallejo, California, home to 120,000 people and the small city of Central Falls, Rhode Island also filed for Chapter 9.

While a number of bankruptcies were expected during 2010, with the recession increasing demand for services as revenues were cut, they did not materialise.

Not all states allow local governments to file for bankruptcy, and unlike companies, governments have the ability to tax.

It is also an expensive process and does not necessarily mean municipalities will come out of the process with a vastly improved financial situation, correspondents say.

"Bankruptcy proved to be a bad deal for Vallejo," said Richard Ciccarone, a municipal bond specialist. The city has had to make major cuts in police and fire services.

"I don't see governments jumping in to do it."

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