Harrisburg Faces Limbo of Missed Payroll, Default, Takeover

Harrisburg’s City Council has left residents of Pennsylvania’s capital wondering what will become of their struggling community, one so broke it may miss payroll, skip bond payments and face a state takeover.

The council voted down a fiscal-rescue plan Aug. 31, the second time in as many months it rejected a proposed way out from under costs tied to a municipal incinerator that it can’t afford. Without an influx of cash, Mayor Linda Thompson has said the city won’t be able to issue paychecks and cover $3.3 million due Sept. 15 on its general-obligation bonds.

Detective Jason Brinker, the 38-year-old head of the city’s police union, said no one knows what’s coming next. The city may lose state aid if it doesn’t put a fiscal recovery plan in place by Sept. 6.

“It makes an already stressful job 100 times more stressful,” Brinker said in an interview in the union’s downtown office. “Now they’ve got to worry about, Can I pay the mortgage, can I keep the heat on, can I feed my family.”

While U.S. communities have grappled with diminished tax collections and state-aid cuts since the onset of recession in 2007, the capital city on the banks of the Susquehanna River confronts fiscal difficulties all its own. It agreed to back project financing for the money-losing incinerator, leaving taxpayers on the hook for about $300 million, five times the city’s budget.

Distressed City

Last year, Harrisburg entered Pennsylvania’s Act 47 aid program for distressed communities, designed to help stave off bankruptcy. In July, the council rejected a fiscal plan crafted under the program, saying it would scarifice revenue-generating assets without erasing enough debt. Thompson’s proposal was similar. Opponents said it didn’t offer a permanent fix.

Rich Miller, an accountant and 20-year Harrisburg resident, applauded the Aug. 31 rejection. While a vote for the mayor’s plan would have moved the city a step toward getting more state aid, he questioned that approach.

“I am not so sure the state had our best interests at heart,” Miller said. “I think we should have filed for bankruptcy. I think we would have gotten more bargaining power.”

A law passed this year bars Harrisburg from seeking court protection until July, under threat of a state-aid cut.

Seeking Cash

To deal with present cash needs, Thompson is seeking to raise $7.5 million through an extension of leases on city property to the Harrisburg Parking Authority, and by accelerating about $3 million in state funds due next month. The lease deal would require the authority to secure a loan, a transaction Thompson said could be thrown into doubt by the city’s political discord.

Thompson plans to provide more information next week on progress toward securing needed cash this month, she said today. An Ambac Financial Group Inc. (ABKFQ) unit insures the general- obligation debt Harrisburg sold in 1997. The company entered bankruptcy in November.

“The vote last night was devastating to the city,” said Robert Philbin, a Thompson spokesman. He said the move may hasten a state takeover. About a third of Harrisburg residents live below the federal poverty level. The city faces a budget deficit of about $6 million, or roughly 10 percent of spending.

“What now?” said Brinker, the detective. “That’s the million-dollar question.”

A rejection of Thompson’s plan likely would leave the city “mired in litigation and financial chaos,” Governor Tom Corbett, a Republican, said last week in a letter to the mayor. He suggested further “irresponsible economic-decision making” by city officials would raise the probability of a takeover.

Takeover Legislation

A bill to do just that has been pushed by Republican Senator Jeffrey E. Piccola of Susquehanna Township in Dauphin County, which includes Harrisburg. Under the measure, a state- appointed board would be put in charge of distressed cities that fail to adopt recommended recovery plans.

“We’ve already waited too long and cannot afford to further delay,” Piccola said in a statement.

Pressure is also coming from the county and bond insurer Assured Guaranty Municipal Corp., which have both covered some of Harrisburg’s incinerator obligations. Both have sought court hearings this month on lawsuits to obtain city revenue and to name a receiver for the trash-to-energy plant.

The threat of a fiscal takeover by the state unsettles some residents.

A decline in municipal services, such as park and street maintenance, has already begun, said James Brice, a hospital custodian. He worries that may worsen under state control.

“This way, she’ll have the state telling her what to do,” said Brice, 64, referring to Thompson. “If the state takes over, a lot of people they pick to control Harrisburg, they won’t live here.”

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net;

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

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