Harrisburg, Pennsylvania, Bankruptcy Ban to Be Extended

Governor Tom Corbett plans to give creditors and Harrisburg, Pennsylvania’s capital, more time to work out a resolution to the city’s debt by extending a ban on seeking bankruptcy until after Nov. 30.

Corbett, a Republican, is expected to sign a measure including the extension later today, said Eric Shirk, a spokesman. Adding five months to the yearlong prohibition against the step by the city, where about 30 percent of 49,500 residents live in poverty, may help creditors.

“Long-term, it doesn’t hurt bondholders to get an extension so they can work out the disposition of assets in an orderly way,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

Legislation to extend the ban passed the state Assembly June 30, two days after Stockton, California, became the biggest U.S. city by population to seek bankruptcy-court protection. The agricultural center about 80 miles (130 kilometers) east of San Francisco may be the first to force bondholders to take losses. Stockton listed debt of as much as $1 billion in its filing in Sacramento, California’s capital.

Consultants under Pennsylvania’s distressed cities program, known as Act 47, said in a June 2011 report that a Harrisburg bankruptcy might raise borrowing costs for the state and its municipalities. The city is currently overseen by a state receiver, who is implementing a fiscal recovery plan that calls for asset sales and an income-tax increase.

Receiver’s Reaction

“We can live with it,” William B. Lynch, the receiver, said today by telephone about the extension. He said that, “for negotiating purposes,” he would’ve preferred the ban to end June 30.

Harrisburg faces a debt burden of more than $300 million, mostly tied to an overhaul and expansion of a trash-to-energy incinerator. The plant doesn’t generate enough revenue to cover the obligations. Members of the City Council unsuccessfully sought to put the municipality in Chapter 9 bankruptcy in October and were rejected a month later by a federal judge who said the filing wasn’t authorized.

Lynch can put the city in bankruptcy once the prohibition ends, provided the state’s community and economic development secretary consents.

Law Challenged

Harrisburg’s council, joined by Dan Miller and John Campbell, the municipal controller and treasurer, respectively, challenged the constitutionality of the law that empowered the state receiver in U.S. District Court last week. Lynch said it may require court action to force the council to comply with provisions of the recovery plan it hasn’t implemented, such as the tax increase.

Meanwhile, Lynch is pursuing proposed asset sales. He said he chose to negotiate a final incinerator sale agreement with the Lancaster County Solid Waste Management Authority, in the nearby city of the same name, from among four qualified bidders.

Discussions are continuing on the disposition of other Harrisburg assets, including its parking system and a management contract for its water and sewer operations, he said last week in an interview in his office. Lynch didn’t set a timeframe for any agreements.

“I’m more interested in doing it correctly,” said the former Air Force general.

Harrisburg faces a $12.7 million deficit this year on $57.9 million in total spending, according to a report filed with the state’s Commonwealth Court, where the recovery plan and Lynch’s appointment were both approved earlier.

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