Harrisburg Files for Bankruptcy on Overdue Incinerator Debt

Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator.

The council made its 4-3 decision against the advice of a city attorney who said the panel did not follow proper procedure. It’s the ninth bankruptcy filing this year by a municipal-bond issuer, and the first by a U.S. state capital since 1980 when the municipal bankruptcy laws were overhauled, said James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

“This was a last resort,” Mark D. Schwartz, the council’s Bryn Mawr-based lawyer, said after he faxed the documents to a federal court yesterday. “They’re at their wits’ end.”

Harrisburg is the biggest city to file for bankruptcy since Vallejo, California, filed in 2008, according to a ranking by Municipal Market Advisors, a research firm in Concord, Massachusetts. Municipalities across the nation have been battered by the financial crisis. Harrisburg’s filing came less than a month after Alabama’s Jefferson County Commission voted to try to avert what would have been the nation’s biggest municipal bankruptcy, and nine months after Vallejo emerged.

The petition lists insurer Ambac Financial Group Inc. (ABKFQ) as a creditor due more than $70 million, and Covanta Holding Corp. (CVA), with about $120 million of bonds and advances of funds to Harrisburg. The petition listed both assets and debt of between $100 million and $500 million.

‘Generally Not Paying’

The city of 49,500, the seat of Dauphin County, faces a debt burden five times its general-fund budget because of an overhaul and expansion of the incinerator, which doesn’t generate enough revenue. Its total guaranteed debt is about $242 million, with $65 million of it overdue, according to the petition.

“The city meets the ‘generally not paying’ definition of insolvency, because it has repeatedly failed to pay the guaranteed incinerator bond debt as it has become due,” Harrisburg said in the filing. “Under the guarantees the city would need to cover a combined $83 million of past due payments and the 2011 debt service.”

While Chapter 9 bankruptcy, named for the section of federal law that governs insolvent municipalities, would mean the loss of state aid under a law passed in June, it would be better than the pain that would be caused by a state-imposed recovery plan, said Councilwoman Susan Brown-Wilson.

‘Not Incompetent’

“We’re not incompetent,” Brown-Wilson said. “We’re just not going to let you run us over with the train anymore.”

Dauphin County commissioners said the city council’s bankruptcy filing isn’t “properly authorized under the law.”

“This latest action by City Council is nothing more than a delay tactic to avoid making the tough decisions necessary to resolve the city’s debt crisis,” said commissioners Jeff Haste, Mike Pries and George P. Hartwick III in an e-mailed statement.

Harrisburg, as guarantor of the incinerator bonds, said it filed for bankruptcy to escape lawsuits seeking judgments that would force it to divert tax money to make payments.

The “remedies” demanded in six suits by Dauphin County, Covanta and Toronto-Dominion Bank, a trustee for bondholders, “would substantially interrupt the city’s ability to provide health or safety services to its citizens,” according to the bankruptcy petition. “Thus, the city is in imminent jeopardy of creditor action” that would affect essential services.

Not Binding

Jason Hess, acting city attorney, told council members that they didn’t follow procedure and their action wouldn’t be binding. The members went ahead.

The filing is “a ridiculous idea not worth taking seriously,” Robert Philbin, a spokesman for Mayor Linda Thompson, said in a phone call today.

State Senator Jeffrey E. Piccola of Susquehanna Township in Dauphin County called the council’s move unlawful and said it puts the city closer to what would be the state’s first municipal receivership.

“Rather than wasting precious time on illegal filings and engaging expensive attorneys, the majority of City Council should be about working with the mayor and the commonwealth to resolve this crisis,” he said in an emailed statement.

Bankruptcy is going to mire the city in unaffordable litigation, said Councilwoman Patty Kim, who voted against it.

“We still don’t have money, and we still haven’t moved one foot forward,” Kim said.

Pennsylvania Governor Thomas Corbett, a Republican, doesn’t support bankruptcy because “it’s likely to adversely affect the credit rating of the county and surrounding municipalities,” said a spokeswoman, Kelli Roberts, in a phone call today.

Evaluating Options

Asked if there would be a legal challenge, she said, “options are being evaluated.” Noting the state law that was passed in June that barred Harrisburg from filing, she said, “it’s an illegal act.” How much in state aid can be withheld from the city isn’t stated in the law, she said.

Although Harrisburg was officially in bankruptcy when it filed the Chapter 9 petition, whether it stays there is an open question. Unlike companies, whose Chapter 11 filings are rarely dismissed, a municipality can find itself tossed out of court.

Federal law lets states place restrictions on bankruptcy filings by municipalities. As a result, the Bankruptcy Code calls for the judge to entertain objections.

If an objector shows that the filing wasn’t authorized under state law, the bankruptcy court dismisses the petition.

A state law bars Harrisburg from filing until July 2012. Of the 629 Chapter 9 filings since 1937, 161 cases have been dismissed or their plans haven’t been confirmed, Spiotto said.

Bankruptcy won’t provide revenue the city needs, Spiotto said in a phone call today. “Working with the state, as they’ve seen, provides more funds for them,” he said.

One Way Out

Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida, said the council’s action is rational.

“They’re in trouble, and putting the bad image of bankruptcy aside, this is a way for them to resolve the issue,” he said.

Harrisburg needs $310 million to make bond payments, restructure debt and repay the county and Hamilton, Bermuda- based insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility. Schwartz said he expects Assured Guaranty will reduce the value of its debt.

“Why should they be first in line?” he said.

In an opinion article published yesterday in a local newspaper, the Patriot-News, the four council members who voted for bankruptcy said Assured Guaranty and bondholders should forgive at least $100 million of the debt.

They also said there should be a countywide sales tax of 1 percent to help pay off the debt. Schwartz, in the interview, said that could forestall asset sales.

State Stepping In

The Pennsylvania Senate still plans to take up legislation next week that would place Harrisburg in receivership, said a spokesman, Erik Arneson, in an e-mail today.

The council in July and August rejected fiscal rescue blueprints from consultants hired by the state and Mayor Linda Thompson, triggering the legislative response.

The bill would let Corbett declare a fiscal emergency and name a receiver who would develop a recovery plan. The manager would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere. Unlike in Michigan, the receiver wouldn’t be able to change union contracts.

Cravath Swaine

Richard Levin and Paul Zumbro of Cravath Swaine & Moore LLP, the New York-based law firm that was advising Harrisburg free on municipal bankruptcy issues, said they aren’t involved in today’s filing. “The council retained Pennsylvania counsel,” Levin said. He declined to say if Cravath had dropped out, or the reverse.

Harrisburg’s filing hasn’t affected bond prices of other Keystone state issuers. Investors realize that the problems faced by the capital city are unusual and that the state is proactive in addressing financially distressed municipalities, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

“We haven’t seen any negative impact,” Schankel said.

In fact, the filing may help bondholders by pushing the state legislature next week to approve legislation that would allow a state takeover of Harrisburg, Schankel said.

Bonds

Some Harrisburg general obligation bonds traded at higher prices to yesterday and weeks earlier, according to data compiled by Bloomberg. A zero coupon bond maturing in 2014 traded today at an average price of 80.856 cents on the dollar up from 78.525 yesterday.

Assured Guaranty’s “net par exposure” to Harrisburg is $252.8 million including incinerator debt and debt issued by the parking and redevelopment authorities, spokeswoman Ashweeta Durani said in an e-mail.

The case is In Re: City of Harrisburg, 11-06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg.)

To contact the reporter on this story: Romy Varghese in Harrisburg at rvarghese8@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net.

To contact the editors responsible for this story: William Glasgall at wglasgall@bloomberg.net; John Pickering at jpickering@bloomberg.net

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