July 20 (Bloomberg) -- Harrisburg’s City Council rejected a fiscal recovery plan, risking the loss of state aid and the Pennsylvania capital’s ability to pay bondholders and workers.
The council yesterday voted 4-3 against the blueprint proposed by state consultants that would have required the sale of municipal assets and a wage freeze to pay debt five times its general-fund budget. Now, Mayor Linda Thompson has 14 days to develop an alternative way to pay the obligations and close the city’s $5 million deficit.
“My first order of business is to reach out to our creditors to make sure they are not hauling off into court and gearing up to file massive lawsuits,” Thompson told reporters in City Hall after the vote.
The rejection was a first for the state’s distressed-city program, known as Act 47, which Harrisburg entered in December. The municipality of 49,500 hasn’t found a way to shoulder the debt burden caused by a failed incinerator project after two years of seeking a solution. It almost defaulted on a general-obligation bond last year and is projected to run out of cash by the end of September.
“I don’t think bondholders will ever be comfortable with the city again in terms of lending us money,” said Gloria Martin-Roberts, the council president, in an interview in the City Hall chamber. “The council made a big mistake.”
Hoping for Better
The plan would have left the city with $26 million in debt even after the sale of revenue-generating assets, leading Councilman Brad Koplinski to oppose it. Nor did it include a levy on commuters or a proposed 1 percent local sales tax that would have raised $37 million annually, he said.
“The fate of our city is at stake and residents deserved a plan that turns over every stone,” Koplinski said in an interview. “We can do better.”
Councilwoman Susan Brown Wilson, who voted against the plan, said the city should negotiate with creditors to lower payments.
“The bondholders took a risk, and when you take a risk on Wall Street, guess what? Sometimes it’s a loss,” she said.
Thompson’s new proposal will reflect most of the consultants’ initiatives, with modifications, she said in a statement before the vote. She said she’ll ask a court to increase property and income taxes if necessary.
“There are better days ahead and we will get through this,” she said yesterday.
Strongarming a City
The council must act or the state can withhold aid, said Martin-Roberts.
The city must make $3.3 million in general-obligation debt payments on Sept. 15, according to bond documents. Alan Schankel, director of fixed-income research at the Philadelphia financial-services firm Janney Montgomery Scott LLC, said he expects to see the state press for resolution of the matter.
“I’m disappointed but not surprised,” he said in a telephone interview today. “The City Council from my 100-mile-away viewpoint seems to be pretty intractable. I don’t think they can make it without some help.”
Pennsylvania has already taken steps. The Legislature passed a bill June 30 that bars the city from seeking bankruptcy protection for a year at the cost of state aid.
Harrisburg needs $310 million to make bond payments, restructure debt and repay Dauphin County, whose seat it is, and insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy incinerator.
Assured shares traded at $15 today, unchanged from its close yesterday before the vote.
A Harrisburg municipal bond maturing in 2019 traded yesterday before the council vote at an average yield of 9.95 percent, down from 11.33 percent on April 15, the most recent transaction recorded in data compiled by Bloomberg.
Dauphin County commissioners said in a joint statement today that legal action against the city will continue until it implements a recovery plan.
“We’re disappointed that Harrisburg City Council has rejected the Act 47 plan and, once again, failed to take any action that would chart a plan toward financial recovery,” said the statement from commissioners Jeff Haste, Mike Pries and George P. Hartwick. “We’re hopeful that Mayor Thompson will offer a fair and workable proposal that utilizes much of the work included in the Act 47 plan, and that the majority of City Council will reconsider its action.”
Ashweeta Durani, an Assured spokeswoman, said in an e-mail that “We will continue to work with the city and county in their efforts to resolve the city of Harrisburg’s financial stability.”
Schankel, of Janney, said he doesn’t think the city would be able to get respite from creditors without selling assets to prove that it can’t make the payments.
“From the Street’s perspective, nothing has really changed,” he said.
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