Here's a little more background from the study:

“Municipalities have rarely defaulted on their debt. As a consequence, municipal debt is regarded as having an extremely low risk for investors. There are disconcerting trends developing that may change this historical view. The combination of the weak U.S. economy, high municipal debt levels, and large under-funded pension liabilities coupled with unfunded retiree health benefits raises the likelihood that more municipalities will become insolvent going forward.

“Declaring bankruptcy (officially Chapter 9 bankruptcy) is an option available to a financially troubled municipality— more precisely to state leaders who must consent to a municipality’s bankruptcy filing—if they meet the eligibility conditions. A municipality can only declare bankruptcy if it is insolvent and only after the municipality has conducted good faith negotiations with its creditors to resolve its financial obligations.

“To provide greater perspective on this subject, this study overviews the purpose of Chapter 9 bankruptcy and then reviews the bankruptcy (or near-bankruptcy) of several prominent cases including: Vallejo, California; Detroit, Michigan; Stockton, California;  San Bernardino, California; San Jose, California; Jefferson County, Alabama; Harrisburg, Pennsylvania; Scranton, Pennsylvania; and New York City, New York.”

“There are important similarities across these high-profile municipal bankruptcies and near bankruptcies that provide  valuable lessons regarding how financial insolvency arises and the value and limits of bankruptcy protection.”

Here's the link.

Editor’s Note: This is the 11th in a CalWatchDog.com Special Series of in-depth articles on municipal bankruptcy.

Nov. 14, 2012

By Chriss Street

Up through September 2011, Wall Street underwriters, bond counsels and other assorted securities industry camp followers were gloating over the supposed failure of predictions in late 2010 by Meredith Whitney and me that there would be a coming surge of state and local bond defaults.  These camp followers had been hitting the public airways to crow there were only 24 municipal defaults in the first half of 2011. That was down from 60 defaults in the first half of 2010. And it was down substantially from the 144 defaults in the first half of 2009.

But all the giddy glee state and local government were exempt from the Great Recession came crashing down on Oct. 12, 2011 when the city of Harrisburg, the state capital of Pennsylvania, filed the second largest bankruptcy in U.S. history with more than $500 million in liabilities. And on Nov. 8, 2011 when Jefferson County, Ala., filed the largest bankruptcy inU.S. history with more than $3.1 billion in liabilities.

Most Americans cannot fathom that state and local (“municipal”) governments in 2011 spent $2.89 trillion and commanded 20 percent of the American economy. To fund this muscular economic intervention, municipalities collected $2.62 trillion in revenue and borrowed hundreds of billions of dollars by selling municipal bonds to the public.  Over the last 10 years, the outstanding amount of municipal bonds more than doubled from $1.197 to $2.8 trillion.

Then there’s debt. According to a June 25, 2011 report by James E. Spiotto, “The debt of state and local governments has more than doubled in the last 10 years, from $1.197 trillion in 2000 to $2.8 trillion at the end of 2010. (Some [Citicorp] contend that the market is actually $3.7 trillion with individual holders being $1.8 trillion [rather than $1 trillion] or 50 percent of the market but hard to verify.)

“This does not include over $1 trillion of unfunded pension liabilities and in addition OPEB liabilities over $200-300 or more billion plus the needed debt financing over the next five years to bring infrastructure up to acceptable standards of $2.5 trillion.”

Add it all up, and municipalities look like subprime borrowers.

Since the Great Recession began in 2007, Americans have personally cut spending, reduced debt and increased savings, while their local governments have increased borrowing to increase spending.  With municipal government revenues now falling fast and economizing voters mostly opposed to higher taxes, thousands of over-leveraged municipalities appear doomed to default on their debt and be forced into bankruptcy.

About 71 percent of municipal bonds are purchased by wealthy individuals who often loathe the government cronyism and inefficiency, but have been willing to invest huge amounts of their net worth in “tax free” municipal bonds. Armed with a tax-advantaged ability to borrow for 20 percent to 30 percent cheaper than taxable borrowers, municipalities went on a borrowing binge and have increased their bond debt from $1.2 trillion to $2.62 trillion over the last 10 years. This red hot 8.9 percent compounded growth rate for debt far out-distanced the American economy’s annual growth rate of 4 percent.

U.S. Treasury Loses $40 Billion

According to Congressional Joint Committee on Taxation, this rapid growth of tax exempt municipal bonds now costs the U.S. Treasury $40 billion per year in lost taxes. Although the U.S. Supreme Court ruled in 1895 that there is no constitutional prohibition against taxing municipal bond interest, Congress authorized an exemption with the Revenue Act of 1913.  But with the U.S. credit rating recently downgraded, President Obama is trying to reduce or eliminate the exemption.

Unlike the U.S.equity and corporate bond markets that are tightly policed by the U.S. Securities and Exchange Commission, the municipal bond markets have been collegially self-regulated by the brokers that sit on the Securities Industry and Financial Markets Association and have dominated the Municipal Securities Rulemaking Board.  But the Dodd-Frank Wall Street Reform and Consumer Protection Act on Oct. 1, 2010 required the MSRB to be independent of SIFMA. Furthermore, MSRB was given expanded jurisdiction and enforcement authority to protect the interest of municipal entities and “obligated persons” — better known as taxpayers.

To review the potential impacts Dodd-Frank would have on investors, Bloomberg Television held a seminar in lower Manhattan in early October 2010.  As the treasurer of Orange County, Calif., and the whistleblower who helped expose the county’s $2 billion investment loss that forced the county to file for bankruptcy in 1994, I was invited as the token speaker to warn about the risks to the economy from potential municipal bond defaults.

Each panel session consisted of strident reassurances by underwriters, bond counsels and other assorted securities industry camp-followers that the municipal bond market was financially strong. Then I would reiterate why a combination of collapsing property tax collections, huge debt leverage and unfunded pension obligations would doom the muni bond market to years of defaults. After the sessions, we would gather for coffee and conversation.  The same panelists who had vociferously argued in public the muni bond markets were safe, fretted in private about their firm’s professional liability for future defaults. Several stated, “I hope it doesn’t blow up too soon. I still have to pay for kids in college.”

Two months later, the CBS “60 Minutes” television show aired a 14-minute piece about U.S. state and local finances. Correspondent Steve Kroft interviewed Wall Street banking analyst Meredith Whitney, who in 2007 correctly warned that losses from sub-prime mortgage bonds would devastate the solvency of the U.S. banking industry. Whitney pessimistically noted that state and local governments were minimally facing collective annual operating deficits of $500 billion per year and a least $1 trillion more in un-funded pension obligations. The show closed with Whitney projecting a wave of defaults by counties and cities: “You could see 50 to a hundred sizable defaults, [maybe] more.” 

A rattled Steve Kroft asked her when people should start worrying about local finances.  Whitney answered: “It’ll be something to worry about within the next 12 months.”

The next morning all hell broke loose on Wall Street as municipal bond prices plunged by 10 percent. Over the next two months, prices fell another 10 percent to 15 percent as the shock and awe of the market disruption fueled panic among bondholders and froze out all but the highest rated municipalities from borrowing money in the public markets.

Fortunately for muni bondholders, the U.S. Federal Reserve Board took action in spring 2011 to force down long-term interest rates. The higher rate of interest on depressed municipal bonds attracted high-yield investors who drove the prices of municipal bonds back to just below when prices collapsed.  But tax-exempt municipal bonds that once yielded 20 percent to 30 percent less than U.S. Treasury bonds now yield a whopping 20 percent to 30 percent more.

Threats to Bondholders

The higher yield for municipal bonds represents the level of risk bondholders are taking. If the economy improves, interest rates will rise rapidly and the price of municipal bonds will crash again.  If the economy contracts, tax collections will continue to shrink and municipal bond prices will be crushed over fears of potential defaults. Under either economic scenario of good or bad times, municipal bond prices seem precariously doomed to fall. Add in the probability that Congress takes back the $40 billion tax exemption and bondholders face huge threats.

For Harrisburg, Chapter 9 bankruptcy filing is the only strategy that might allow the city to escape from being a permanent debt slave. The city was once a mixed use community of heavy manufacturing, food processing and state government. But after the private-sector industries pulled out, the property tax base collapsed, because all the state government property is tax exempt.  To subsidize operating deficits and generate revenue, the Harrisburg city council sold $463 million in municipal bonds to invest in upgrading a huge trash incinerator, constructed parking lots and built a Wild West Museum.

For a working class city of 49,000 with a near poverty line median household income of $26,920, Harrisburg has a bloated municipal bond debt per household of $23,734.Harrisburg residents also pay some of the highest fees in the country to support what’s called The Incinerator, rather than hauling trash to a lower cost landfill. To fully service the city’s debt burden, each household would have to pay another $1,104 in taxes.  With The Incinerator running negative cash flow, parking lots featherbedded and the museum defunct, residents of Harrisburg are now debt slaves.

Given this ludicrous indebtedness, Harrisburg would have seemed an excellent candidate to file under 11 USC § 904 of the U.S. Bankruptcy Code (“Chapter 9”) when the city announced in September 2010 it would miss a payment on its general obligation bonds and incinerator bonds.  In bankruptcy, the city would have turned The Incinerator over to the bondholders, restructured city operations and negotiated down its debt burden to a manageable level.

But the Harrisburg mayor had fought against a filing for bankruptcy to protect her own political future. And the state of Pennsylvania was adamantly opposed to a Chapter 9 bankruptcy for fear of a daisy-chain of defaults across Pennsylvania as other municipalities and their taxpayers tried to escape similar debt-slavery.

Pennsylvania’s Act 47

To stave off an immediate bankruptcy in 2010, Pennsylvania’s then-Gov. Ed Rendell advanced $3.3 million in future state grants to pay bondholders. In July 2011, new Gov. Tom Corbett offered another grant advance of $3.6 million if the city would enter Pennsylvania’s Act 47 municipal recovery program by turning control of the city over to the state. Essentially, the state’s plan would have raised taxes, then sold off The Incinerator, city garages, parking meters and any other city property to pay bondholders in full.

After racking up millions of dollars in consultants and legal bills, a taxpayer-supported coalition elected to the Harrisburg city council voted 4-3 to file for bankruptcy on Oct. 12, 2011.  The state Legislature screamed foul and voted to put Harrisburg into receivership. The city remained in federal Chapter 9 bankruptcy until a bankruptcy judge on Nov. 23 voided the bankruptcy, but decided the state had the right to take over the city and appoint a receiver.

Corbett then appointed attorney David Unkovic as the city’s receiver, setting off howls that Unkovic’s former law firm, Saul Ewing, actually represents the city’s largest creditor, Assured Guarantee Municipal Corp. Harrisburg listed $458 million in creditor claims when it filed its bankruptcy petition. City council attorney Mark Schwartz said the Chapter 9 filing was aimed at giving the city “bargaining power” with creditors and the state of Pennsylvania.  In addition to its debt and state buildings not paying property taxes, the city also is also being battered by the state’s unfunded pension crisis.

Ten years ago the Pennsylvania State Employees’ Retirement System claimed its pension plan was “substantially over-funded” based on an assumption its investments would earn an 8 percent rate of return forever. State lawmakers then spiked public employee pension benefits and PSERS cut employers’ (including Harrisburg’s) contribution rate to just 5 percent of their payroll.

But with employees retiring early with lush benefits and the stock market losing 43.2 percent after inflation over the last 10 years, PSERS recently admitted it has a $30 billion unfunded liability. Today only 109,000 public sector workers are now supporting 111,000 retirees. To prevent the liability from jumping to $55 billion in six years, PSERS ordered Harrisburg to increase its employer contributions to 28.1 percent of payroll.

Muni bond advocates stress that there have only been 625 Chapter 9 municipal bankruptcies since 1937, versus 58,322 business bankruptcies in 2010 year alone. This conveniently avoids the fact that eight states and one territory defaulted in the 1840s. Thirteen states repudiated their debt entirely in the 1870s. And approximately 4,770 municipalities, or 18 percent of the entire municipal bond market, defaulted during the Great Depression.

Bankruptcy: Good or Bad?

The municipal bond industry has always screamed that a bankruptcy filing will deny municipalities any access to borrowing.  But given that over-barrowing by state and local governments is the primary risk for default, this is just seen to be the cost of tough love.

Historically, the results of Chapter 9 bankruptcy filings seem beneficial to municipalities and their taxpayers. Orange County, Calif. filed in 1994 after losing $2 billion in speculative investing.  After county supervisors tried and failed to convince voters to raise taxes, the county issued layoffs to 4,000 employees (20 percent of staff). And it collected $600 million in a legal settlements from Merrill Lynch, KPMG and others.

Surveys demonstrated that most residents could not identify any lower levels of service and today the county has a stellar AA credit rating. The city of Vallejof iled for bankruptcy after being overwhelmed by municipal bond debt, high wages and pension liabilities. After cutting police and fire by 50 percent, the city discounted $500 million in bond debt and other claims for $6 million.

Only municipalities in 11 states are specifically authorized to file for Chapter 9 bankruptcy. And another 13 states authorize Chapter  9 after approval by some state official or commission. But Harrisburg filed for bankruptcy without “permission” when it became clear the state’s plan was to take over the city, quickly sell the assets and raise taxes to pay off bondholders.

The day after Harrisburgfiled bankruptcy, the Jefferson County, Ala. sewer district board met to consider filing Chapter 9. After defaulting on $3.14 billion in municipal sewer district bonds, JP Morgan had already offered $647 million to settle bribery charges. But even after the settlement, the district would still need to permanently raise local sewer bills from $63 to $395 a month to pay off their municipal bond debt.

When the county’s bankruptcy lawyer, Ken Klee, was asked by Alabama lawmakers what would be the negative if the sewer district filed for bankruptcy, he could not see a negative for the sewer district, but he did believe it “would be like Chernobyl” for other districts’ bond ratings in Alabama. But since the bankruptcy filing, high credit quality issuers in Alabama have already sold billions of new municipal bonds to investors.

State and local governments have been living in a fantasy world where borrowing money was deemed a responsible way to operate huge organizations. Wealthy local individuals fed that fantasy by lending irresponsible amounts of money to bureaucrats. In a post-Lehman Brothers world, corporate bondholders of insolvent companies have had to suffer “cram-downs” of part of their debt to establish a more sound financial position for the company to survive.

The bottom line for over-indebted and over-taxed municipalities is they need to stop borrowing money. If they are insolvent and need to consider filing for Chapter 9 bankruptcy, the key question they ask is: “Are we better off continuing as debt slaves?” The answer will be usually be no.

Street was treasurer of Orange County, Calif. and blogs at Chriss Street And Company. His recent book is, “The Third Way: Public-Sector Excellence Through Leadership and Cooperation”

Editor’s Note: This is the seventh in a CalWatchDog.com Special Series of 12 in-depth articles on municipal bankruptcy. In a warning for California, it examines the bankruptcy of Harrisburg, Pa.

April 17, 2012

By Tara Leo Auchey

What happened in Harrisburg, Pa.? One day there was nothing but murmurs about Pennsylvania’s capital city being in a fiscal mess. Then, all of a sudden, Harrisburg filed for Chapter 9 Municipal Bankruptcy protection.

What made the declaration all the more significant is that it’s the state’s capital. Everyone had been talking Jefferson County, Ala. or Central Falls, R.I., which filed for Chapter 9. But few figured Harrisburg would be the next to do so. However, the signs for this abrupt, bold move were there despite the state doing its best to control the situation. which includes not only a grave municipal fiscal crisis, epitomized by a defunct public project, but a power vacuum left behind by a seven-term mayor.

In November 2011, as Reuters reported, “Pennsylvania is poised to take over its struggling capital of Harrisburg after a federal judge said the city cannot file for bankruptcy to get out of its $300 million outstanding debt.” As the Wall Street Journal explained, “Judge Mary France of the U.S. Bankruptcy Court inHarrisburg ruled that a band of city councilors lacked the authority to put the city of roughly 49,000 residents under bankruptcy protection when they filed the Chapter 9 petition on Oct. 11.” City councilors who favor bankruptcy may challenge the ruling, but however it ends up, it’s clear that Harrisburg needs to be rescued from itself.

The picturesque city along the Susquehanna River is located halfway between Philadelphia and Pittsburgh. With a population of just under 50,000 people, it seems and acts more like an oversized town than a metropolis. Its daytime commuting population doubles the total residential population, as state government workers come in from the surrounding suburbs and countryside. About 53 percent of the city’s residents are African-American; and 30 percent of the citizenry live below the poverty line. Also note that 50 percent of the city’s assessed property is tax-exempt: government buildings, hospitals, colleges and universities, churches and non-profits are concentrated there.  As the city’s financial and infrastructure problems grow, more residents who can are leaving behind the spark of renaissance the city was starting to benefit from.

Operating under a strong-mayor model, Harrisburg’s government consists of an executive branch (the mayor) and a legislative body of seven city council members. On Oct. 12, the council voted 4-3 to pass back-to-back resolutions to retain a bankruptcy attorney and file for Chapter 9. As soon as the vote was over, the council’s new attorney, Mark Schwartz of Bryn Mawr, Pa., faxed off the petition. The next morning, it was officially received by the U.S. Middle District Bankruptcy Court. 

New Mayor

Mayor Linda Thompson was near the end of her second year in office. She had overthrown the 28-year-reign of Stephen R. Reed by beating him in the primary, then winning the general election against Republican opponent Nevin Mindlin. Thompson decried council action as “a sneak attack” and defined it as “procedural defectiveness” since the process of passing the resolutions did not proceed per city rules.

The state of Pennsylvania and Dauphin County also proclaimed the move invalid. On Oct. 17, the parties met in front of Federal Bankruptcy Judge Mary France for a Scheduling Conference of the proceedings. Attorneys from high-powered New York and Philadelphia firms filled the room, representing creditors, bond insurers and trustees. The state of Pennsylvania, joined by the county, requested an expedited dismissal of the city’s bankruptcy petition, arguing it is unlawful to file for Chapter 9 without the state’s approval. The office of the mayor argued for the petition’s dismissal, claiming it is unlawful for Chapter 9 to be filed without the mayor’s involvement. The bankruptcy opponents all asked Judge France to declare the filing illegal as soon as possible so all parties could move forward with their plans for Harrisburg

It’s precisely the bankruptcy opponents’ plans that drove the city council to file for municipal bankruptcy. A year ago, the city received a $4.3 million bailout from then-Gov. Ed Rendell in order to pay a $3.3 million general-obligation bond payment. Rendell insisted it was “not a bailout.” 

Act 47

Mayor Thompson unilaterally requested admission to Pennsylvania’s Municipal Financial Recovery Program, known as Act 47. Act 47 is Pennsylvania’s statutory response to a) dealing with fiscally challenged municipalities and b) controlling municipal bankruptcy filings. Pennsylvania is one of 19 states that require state authorization of Chapter 9, and its Act 47 program is its mechanism to do so. If a municipality finds itself unable to maintain essential public services, meet debt obligations, make payroll and pay bills — or ultimately, run the ship — then it must turn to the state for help. That help includes financial and professional assistance to devise a plan of solvency, called an “Act 47 Plan.” The goal is that an Act 47 Plan will fix the impoverished place’s problems. The statute lays out a formula and path for success. If success is not able to be met, then the state will permit Chapter 9 filing.

Since 1987, when Act 47 became a law, 26 municipalities have entered the program. Only six have emerged, and those were boroughs, each with a population of less than 5,000 people.

In Pennsylvania, Third Class Cities are defined as “cities under 500,000 population that have not elected to become a city of the second class A.” No Third-Class City has ever come out of it, and the longest one in has been there since 1987.

Only one Pennsylvania municipality had ever filed for Chapter 9 before Harrisburg. Westfall Township filed for Chapter 9 in 2009 because of a $20 million judgment against it, which was 20 times its yearly operating budget. Because the township had experienced no municipal fiscal distress prior to the judgment, Westfall was not in the Act 47 program, yet was able to skip the state’s requirements and file for Chapter 9 under “emergency” conditions triggered by the ruling.

Mayor Thompson applied for Act 47 status after nine months in office in Harrisburg and failing to get a grasp on the city’s financial crisis. Although she had served on the city council for 10 years, she said she did not know just how bad things were and indicated that the complicated financial problems of Harrisburg were far greater than her skill, experience or capabilities. A polarizing personality, the mayor found it challenging to secure the internal help she required to face a city insolvency that was decades in the making. Thus, Thompson turned to the state for assistance and applied for Act 47. 

Resistance

There was substantial resistance to Harrisburg entering the program. Residents, business owners and public officials testified in front of the state that Act 47 wasn’t designed to handle Harrisburg’s complex financial problems, which centered around a trash-burning facility, dubbed The Incinerator — what the Wall Street Journal called, “The Incinerator That Kept Burning Cash.”

To say The Incinerator is a regional public project gone bad is an understatement. In 1972, The Incinerator was built as the region’s answer to its waste. Ideally, the facility would convert trash to steam and electricity, which the city would sell. Ideally, the trash would be flowing in from places local and afar. Ideally, the whole thing would run cleanly, smoothly, efficiently and profitably. That was the public message. In reality, that hasn’t happened. Never quite right since it was built, the peak of The Incinerator’s troubles came in the 1990s, when massive disrepair plagued it and the county decided it was cheaper to use a landfill for 10 years instead of the city’s facility.

In 2003, when a modernization and retrofit was getting underway, The Incinerator was $104 million in debt. Fortunately, upon completion of the construction, the county agreed it would bring all of its trash back to The Incinerator. The county committed to guaranteeing some of the retrofit bonds and even received fees for doing so. 

More Funds Needed

The construction didn’t go as planned. Barlow Projects Inc. was unable to finish what it started.  More funds needed to be taken out. In 2007, the Harrisburg Authority that owned and operated The Incinerator borrowed more money. The city and county stepped in again to provide loan guarantees, and to guarantee received fees for doing so. As with the first guarantee agreement, this one was voted on by county commissioners and the city council, brought together by then-Mayor Reed, with only one dissenting vote among 10 elected officials. Current Mayor Thompson in 2007 sat on the city council for this guarantee and voted in favor of the borrowing. By the end of 2007, The Incinerator carried $230 million in debt, with very little revenue coming in from converting the trash into steam and electricity.

Currently, Harrisburg residents pay $200 a ton to dispose of their own waste at a facility within city limits, one of the highest trash rates in the country. Harrisburg residents are also on the hook for what has become an accumulation of principle, interest, penalties, legal fees, consulting fees, advisory fees and more. Harrisburg is the first and only full guarantor of The Incinerator’s debt. As second guarantor, Dauphin County guaranteed $144 million of it, but the agreement states that any payment the county makes, the city will pay back. Neither the authority nor Harrisburg has been able to make any of  The Incinerator’s debt payments for the past two years. For that reason, both the city and the authority have suits filed against them by the county, bond insurer and trustees.

Taking what probably should have been a private business and attempted to make it something to generate revenue for the city, The Incinerator is what makes Harrisburg’s financial crisis so distinctive and serious. While several parties facilitated the debt of The Incinerator over 15 years of debacles, it is the city that’s left holding the bag. The details of The Incinerator saga tell a chronicle of political maneuvering, creative financing, cronyism, bad business and citizen apathy. 

Beyond Act 47

In the past few years, though, details of Harrisburg’s crisis have caught the attention of more people. As the public became more aware of the city’s financial woes, people argued that the convoluted conundrum surrounding The Incinerator was beyond the scope of Act 47’s structural solutions. Act 47 was designed for dying industrial towns, not small cities with more intricate issues and massive debt. By last October, when Mayor Thompson applied for Act 47, the city was estimated to owe more than $320 million in debt tied to The Incinerator, along with a budget deficit of at least $5 million a year. In December 2010, Pennsylvania declared Harrisburg “fiscally distressed.”

From then until now, the city has been presented with two Act 47 fiscal recovery plans: one by the state-appointed coordinator, Novak Consulting Group; and a second by the mayor, who was required to present her own plan after a vote by the city council rejected the state coordinator’s plan. The coordinator’s plan and the mayor’s plan were essentially the same. The main solution of both plans is to sell or lease the city’s two primary revenue-generating assets, The Incinerator and the city’s parking system. While there isn’t much dispute that those privatizations are necessary, they still don’t resolve Harrisburg’s debt. According to the Act 47 plans, projections and anticipations, those transactions would still leave behind $26 million in stranded debt the city would be responsible for. Based on other interested parties’ calculations, the stranded debt has been calculated as much higher, upwards of $60 million to $80 million.

The four city council members who voted to file for Chapter 9 protection consistently voted down the Act 47 plans put before them. To vote to pass or reject the plans is one of the only powers the legislative body has in the Act 47 process.

Said Brad Koplinski, a councilmember who voted yes to move forward with Chapter 9, “In the Act 47 Plan, the numbers just weren’t going to work. In general, the plan overestimates revenues and underestimates costs and liabilities.Harrisburg residents can’t pay for those errors. Our residents have already absorbed some significant blows including increased trash fees and decreased services. Based on the Act 47 Plans, taxpayers will see a 30, 40, even 50 percent increases in taxes. There’s got to be shared pain among the parties. There’s no way the Act 47 suggestions can succeed in solving Harrisburg’s massive and unique financial problem.”

Both the state and the mayor have admitted the plan has errors, but contend, “It is a living, breathing document.” What worries the city council members is if Harrisburg passes an Act 47 plan and it becomes an ordinance. Then the city must follow the ordinance, or risk Act 47 consequences, which now include brand new legislation for a state-appointed receiver to manage the city’s financial recovery. “The State changed the rules on us,” Koplinski said. “And it’s the city that has the most at stake.”

The city council members in favor of Chapter 9 say the city has been bankrupt for years. They maintain now is the time to use the official tool of bankruptcy to get everyone to the table to work out a fair and equitable plan. The previous mayor, Reed, was efficient at moving money around without many checks and balances. Up until this point, the city was able to avoid what the city council sees as this inevitability of a bankruptcy filing. Through a series of municipal authority transfers and borrowing, Reed was able to bury the city’s deficits all the while hoping to reach the tipping point into legitimate solvency. 

Unsustainable Policy

Nevin Mindlin, the Republican who lost the 2009 mayor’s race to Democrat Linda Thompson, also criticized her predecessor, former Mayor Reed. Mindlin said Reed’s policy on The Incinerator was unsustainable, referring to it as a classic tale of robbing Peter to pay Paul. “Steve Reed kept moving money around, kicking the can down the road, and ended up having to cut the things that make a good community function,” Mindlin said. “When his gambles failed, it was the taxpayers that had to pay. That’s where we are now.”

While there is dispute about the best way to confront the city of Harrisburg’s fiscal quagmire, some taxpayers looked to municipal bankruptcy protection to help Harrisburg with the massive pubic debt it guaranteed.  However, on November 23, Judge France dismissed the Chapter 9 petition, declaring that the city council did not have the authority to make such a filing without the mayor’s or the state’s approval.

A week later, a state-appointed receiver was confirmed, bond attorney David Unkovic.  Unkovic had been outspoken that creditors will have to pay a fair share in Harrisburg’s debt solution – especially in light of what he testified as the “uncommon” Incinerator debt structure. Whether he will be able to negotiate “fair share” results is yet to be seen.

But on March 30, 2012, Unkovic resigned in the midst of receiving bids for The Incinerator and the parking system. Reported Reuters, Unkovic, “said in his resignation letter that he was no longer in a position to find a solution to the city’s financial crisis.” But Steven Kratz, spokesman for the Pennsylvania Department of Community and Economic Development, said, “The process is going to continue to move forward.”

Auchey is editor of todaysthedayhbg.com, a Harrisburg news site

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Check out other articles in our Special Series on Bankruptcy.