Nov. 18 (Bloomberg) -- The City Council of Harrisburg, Pennsylvania, filed for bankruptcy Oct. 11, a move challenged by Mayor Linda Thompson and Governor Tom Corbett. A judge on Nov. 23 will weigh their claims that the bankruptcy violates local, state and federal laws. Mark Schwartz, an attorney for the City Council, spoke about the events happening in the state capital for today’s issue of the Bloomberg Brief: Municipal Market newsletter.
Q: What are the benefits of bankruptcy for a municipality?
A: Bankruptcy preserves the autonomy of locally elected officials, which is something that the mayor of Harrisburg and certainly the opponents just don’t understand. And it basically takes the politics out of the process. It’s supervised by a judge. You can put together a plan and you can resolve things.
Q: Did you approach the Harrisburg City Council members or did they approach you about filing for bankruptcy? How did that unfold?
A: They approached me back in June. I think it took them a while to get a core consensus of what they wanted to do. And then what happened was they got back to me in mid-September, I was hired on Sept. 27, and on Oct. 11, they basically passed a resolution directing me to file for bankruptcy, and that was filed the evening of Oct. 11.
Q: What’s the point of going after Assured Guaranty, the bond insurance company?
A: A lot of my practice has been to back away from deals that shouldn’t have been done. I remember as a bond lawyer, I could never understand the fact that you weren’t paid to say no. A bond lawyer’s opinion is really what makes for a bond issue to go forward or not. You don’t get paid to say, ‘This isn’t something that should be done.’
Similarly, with this Harrisburg deal, I don’t understand how all these participants that were paid so much money to do this bond issue, Assured Guaranty included, could have been in their right minds to basically certify that this deal and the incinerator would pay for itself. My argument then becomes: Maybe it’s not a proper tax-exempt deal. The IRS should look at it. The SEC should look at it. Maybe there wasn’t proper disclosure. And maybe everybody that brought this menace to Harrisburg should not be called creditors, but should be called civil defendants in the lawsuit.
Q: What do you hope the Securities and Exchange Commission and Internal Revenue Service will do regarding Harrisburg, and why should they do it?
A: One, I’ve had some success in the past with a deal in Spokane that the IRS looked into back in 1998. Two, what the IRS deals with is whether bonds were properly issued and whether they are deserving of tax exemption. So that’s something for them to look at.
And for the SEC, there’s this notion of whether there was adequate disclosure with respect to an untested contractor who was supposed to build this, who later filed for bankruptcy after the deal was done.
It’s a particularly good time, because I believe the IRS announced that it’s going after conduit deals. This should be the poster child for what it’s looking for.
Q: What will the impact be of the Harrisburg bankruptcy court’s decision on whether to dismiss the bankruptcy filing, both for the city and as future precedent?
A: Obviously I’m confident that the bankruptcy judge will uphold the petition, otherwise I wouldn’t have filed it to begin with. I think bankruptcy laws are supposed to be liberally construed to afford relief. I don’t just think -- I know that’s what they say, and that’s what courts have held. That’s really the message here.
I don’t think that the impact could be any worse. People say, ‘Did you hurt the city’s ability to finance?’ Well, I don’t know if the city has any ability to finance. Did you hurt other cities in Pennsylvania in terms of their ability to finance? Actually, the markets have been fine. And then people might say that’s a small bankruptcy -- Harrisburg is only hundreds of millions of dollars, not like Jefferson County. Well Jefferson County filed and it didn’t have any effect on markets either.
That was always the great fear. The fact of the matter is the rating agencies don’t look at just the municipality. They look at everything in the whole. The big straw man always said ’They’ll paint a broad brush and the commonwealth is going to be affected as well.’ The nice thing about what’s happened here and in Jefferson County is that it’s shown those straw-man arguments to be exactly that: pointless. And comfort can be taken in that.
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