Harrisburg Council’s Stalemate on City Debt Plan Risks State Receivership

Harrisburg leaders failed to agree on a plan to deal with municipal debt and keep Pennsylvania’s bankrupt capital from becoming the first city placed under a receiver through a state law to manage fiscal emergencies.

A meeting of the City Council with Mayor Linda Thompson today on a proposal was called off because of a stalemate among members, President Gloria Martin-Roberts said in a statement.

Without adopting a course of action today, the city may be put under a state-appointed receiver empowered to implement measures without the council’s consent. Governor Tom Corbett’s nominee for the post may be reviewed by Pennsylvania’s Commonwealth Court as soon as Nov. 28, said Steven Kratz, a community and economic development department spokesman.

“Because these negotiations reached a stalemate based on not having a majority of council involved -- the negotiation process is closed and the meeting for tonight at 5:05 p.m. has been canceled,” Martin-Roberts said in the statement.

Four council members -- Brad Koplinski, Susan Brown-Wilson, Wanda Williams and Eugenia Smith -- said in a statement earlier today that meeting with creditors at 10 a.m. was a “meaningless exercise” and none of them showed up.

Challenging the Move

The four, constituting a majority of the seven-member council, voted to seek bankruptcy protection for the city last month in a bid to ward off state action. Thompson and Corbett challenged the move, and a federal judge will weigh their claims in a Nov. 23 hearing. The community, facing a debt burden five times its general-fund budget, has missed payments to creditors.

Harrisburg guaranteed about $242 million of debt related to an overhaul and expansion of a municipal incinerator that hasn’t generated enough revenue to cover the obligations it incurred. The community of about 49,500 said in a bankruptcy court filing that more than $60 million in payments on the debt are overdue.

Federal authorities should investigate bonds and related derivative transactions to determine whether they were properly handled, Mark Schwartz, the lawyer hired by the four council members to seek bankruptcy protection for the city, said in a letter to the U.S. Internal Revenue Service. In the Nov. 9 request, he questioned the securities’ designation as revenue debt and the tax-exempt status of the bonds.

Questioning Bond Disclosure

Schwartz, who made the letter public today, said he also sought a U.S. Securities and Exchange Commission examination of the issues. He asked regulators to probe whether “adequate disclosure” was made on the incinerator overhaul.

John Nester, a spokesman for the SEC, declined to comment on the letter from Schwartz. Terry Lemons, an IRS spokesman, didn’t immediately respond to an e-mail seeking comment.

The Chapter 9 bankruptcy also faces challenges from city unions and Dauphin County, which includes the community. Insurers Ambac Assurance Corp., which backs Harrisburg’s general-obligation bonds, and Assured Guaranty Municipal Corp., the company standing behind the incinerator debt, also contested the filing.

Members of the council who supported the bankruptcy have said that the county and Assured Guaranty should do more to ease the burden. At a meeting on Nov. 7, council members and Thompson agreed to sell and lease assets with conditions and to ask for concessions from their creditors.

‘No Rationale’

A request to forgive $100 million in debt has “absolutely no rationale,” Assured said Nov. 9 in a letter to Thompson. The company also guaranteed debt of Alabama’s Jefferson County, the largest-ever U.S. municipal bankruptcy.

Harrisburg’s council has rejected fiscal recovery proposals by state consultants and the mayor that would have sold assets to repay creditors while raising property taxes on residents, 29 percent of whom live in poverty.

Disagreement between the mayor and her council opponents led state legislators to pass a law letting the governor begin the process of putting a receiver in charge of city finances.

A short-term action plan already imposed by C. Alan Walker, the state community and economic development secretary, mandates a freeze on hiring and nonessential purchases, while raising parking and business fees. Harrisburg will face a $1 million deficit by year-end and, to close the gap, must sell tax liens that may fetch $1.4 million, Walker told city officials Nov. 3.

State law requires the city to follow Walker’s mandates under Corbett’s fiscal emergency declaration.

Should a receiver take control of the community’s finances, the measures will remain in place pending the creation of a recovery blueprint, which the city also must follow. A state- appointed receiver would have the power to sell assets such as the incinerator and the city’s parking facilities, hire advisers and suspend the authority of elected officials.

To contact the reporter on this story: Romy Varghese in Harrisburg at rvarghese8@bloomberg.net

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

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