Harrisburg Judge to Approve $362 Million Recovery Plan

Harrisburg, the insolvent capital of Pennsylvania, won tentative approval from a judge for a plan to end the city’s fiscal crisis by settling with creditors owed about $362.5 million.

“This is a thoughtful, well-conceived and well-calculated plan,” Commonwealth Court Judge Bonnie Leadbetter said at a hearing today. “It’s the best chance I think this city has seen in a long time to get its fiscal house in order.” She said she will confirm the plan “within a day or two.”

The judge must find that the city’s plan isn’t arbitrary or capricious, a legal standard that should be easy to meet, said Mark Kaufman, the attorney for the state receiver who negotiated the settlement. The receiver, William B. Lynch, forged a plan that saved the city more money than if it had remained in U.S. Bankruptcy Court, Kaufman said.

“Hopefully, this stands as a bellwether of how cities ought to” restructure their debt, Kaufman said in a phone interview before today’s hearing. In the past year, the city council has come to support the plan, he said.

The council on Sept. 16 approved legislation needed to implement the recovery, including the sale of a waste-to-energy incinerator, the lease of the parking system, an extension until 2017 of an income-tax increase on residents and changes to two union contracts, according to Kirk Petroski, the city clerk.

Harrisburg’s crisis stemmed from an overhaul and expansion of the incinerator, which doesn’t generate enough revenue to cover the debt. Governor Tom Corbett, a Republican, appointed Lynch under a state law that gave the receiver the authority to negotiate a settlement -- but not impose taxes or take other actions needed to implement the deal.

Controller Objects

Most of the bills tied to the receiver’s plan passed unanimously, over the objections of City Controller Dan Miller, who urged the council to demand more concessions from creditors Assured Guaranty Municipal and Dauphin County.

“We could not have gotten a worse deal in bankruptcy than what we’re getting now,” Miller said in a phone interview before today’s hearing. “You come out of bankruptcy better than this.”

Miller, a Democrat, is running for mayor in November after winning the Republican write-in nomination in the May primary. He lost the Democratic nomination.

The amount raised by the incinerator sale and the parking lease wouldn’t fully repay the claims of Harrisburg’s largest creditors. They might get more money later, according to the plan. Municipal workers also agreed to make concessions.

After the lease and sale of assets, bond insurer Assured Guaranty Municipal and Dauphin County would recover at least $210 million on claims totaling $298.5 million.

Fuel Tax

Proceeds from a fuel tax, if authorized by the state legislature, and from future parking revenue would satisfy the remainder.

The insurer and the county covered debt payments on the incinerator that the city skipped starting in 2009.

Lynch has been negotiating with all of the Harrisburg groups since he took over last year, following the resignation of lawyer David Unkovic. The rescue plan is designed to deal with a municipal debt burden of about $362.5 million, or roughly seven times the city’s general-fund budget.

In 2011, the council defied the mayor and state officials by placing the city of almost 50,000, which has a poverty rate more than twice the statewide average, under federal bankruptcy protection. The case was thrown out of bankruptcy court when the judge concluded that the council didn’t have the necessary authority from the state to file.

The case is Walker v. Harrisburg Authority, 569-MD-2011, Pennsylvania Commonwealth Court, Pennsylvania (Harrisburg).

Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

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