Nov. 24 (Bloomberg) -- The bankruptcy case filed by Harrisburg, Pennsylvania, the state capital, was thrown out by a judge who ruled the city council wasn’t authorized to file the petition.
U.S. Bankruptcy Judge Mary D. France held a hearing yesterday in Harrisburg on whether the council violated state laws last month when a majority opted to file under Chapter 9 of the bankruptcy code. Mayor Linda D. Thompson opposed the filing.
“For Chapter 9 bankruptcy to work, all of the branches of the municipality must be on the same page,” France said. “Therefore I find that city council was not authorized to file the petition on Oct. 11.”
Pennsylvania now will pursue a plan to put Harrisburg into state receivership. On Nov. 18, Governor Tom Corbett’s administration nominated David Unkovic, chief lawyer for the state economic development department, to be receiver for the city. Under state law, Unkovic’s appointment must be approved by a Pennsylvania court.
“We are very happy with the outcome; we were surprised that the judge ruled so quickly,” said Neal Colton, a lawyer for the state with law firm Cozen & O’Connor in Philadelphia. “Hopefully, we will have a receiver appointed and he will be in a position to present a viable plan for the financial recovery of the city of Harrisburg.”
Brad Koplinski, part of the council majority who voted to put Harrisburg into bankruptcy, said he and other members will consider appealing France’s decision.
During yesterday’s hearing, France asked lawyers on each side of the case to address whether Pennsylvania’s Act 26 of 2011 is unconstitutional. The law, which prohibits cities of Harrisburg’s size from filing for bankruptcy before July 2012, was cited by bankruptcy opponents including Corbett and Thompson as barring the petition.
The judge found Act 26 was constitutional. She also said the city council didn’t have authority by itself to file the petition, rejecting legal arguments made by the council through its attorney Mark Schwartz.
“The mayor fully deserves what she is going to get” from the receiver being appointed in state court, Schwartz said in an interview after the ruling. “She is going to get somebody who will pick this city’s bones.” Schwartz said he hasn’t been paid for his work for the city.
Harrisburg, a city of 49,500, faces a debt five times its general-fund budget because of an overhaul and expansion of an incinerator that doesn’t generate enough revenue. Guaranteed debt is about $242 million, with $65 million overdue, according to the bankruptcy petition.
‘Good for Bonds’
While market reaction to France’s ruling couldn’t be determined because of inactivity ahead of tomorrow’s Thanksgiving holiday, “it’s a good thing for bonds,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.
There are “four or five clouds hanging over the muni market,” and the risk of a Harrisburg bankruptcy was one that will recede, Schankel said yesterday in a telephone interview. Still, the city will face challenges under state financial oversight, he said.
“Although I think the state process will roll on, there will be bumps in the road,” Schankel said.
Thompson yesterday released a proposed $55.5 million budget for the year that begins in January, which for the first time in two years budgeted debt payments on the incinerator. The budget anticipates that the sale or lease of city assets would generate $93.6 million to make the payments.
For the past two years, Harrisburg has skipped payments that the incinerator’s revenue couldn’t cover, sparking lawsuits by Assured Guaranty Ltd. and Dauphin County, which met the obligations instead.
Harrisburg, along with Jefferson County, Alabama, and Central Falls, Rhode Island, was one of a group of municipalities that filed for bankruptcy protection this year. Debt defaults by state and local governments have risen to more than $1.3 billion since Sept. 30, more than twice the amount in any of the three previous quarters, according to data from Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
Harrisburg’s Fraternal Order of Police and the local affiliate of the American Federation of State, County and Municipal Employees, which represents non-professional city workers, also filed objections to the bankruptcy.
The case is In re City of Harrisburg, Pennsylvania, 11-06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg).
To contact the reporter on this story: Steven Church in Wilmington at firstname.lastname@example.org