Harrisburg Files For Bankruptcy Protection

(Wall Street Journal)
NEW YORK—After months of contentious debate among city and state officials, Harrisburg, Pa., filed for municipal bankruptcy protection, days before the state Senate was scheduled to vote on taking over the struggling capital city's finances.

The city, which faces $300 million in debt over a failed trash incinerator project, filed the paperwork in U.S. Bankruptcy Court for the Middle District of Pennsylvania, in Harrisburg. A faxed filing late Tuesday wasn't valid, according to Terry Miller, clerk of the bankruptcy court.

The overnight fax had first been reported by Bloomberg News.

Robert Philbin, a spokesman for Mayor Linda Thompson, who had opposed such a filing, said the mayor thinks the move is unfortunate and that it will complicate matters and add to expenses for the city. Mr. Philbin said the mayor would have preferred the council come to her with an alternative plan, and pointed to a recent poll of registered Harrisburg voters showing only 13% supported a bankruptcy filing.

On Aug. 31, the city council had rejected Ms. Thompson's financial recovery plan, which opened the door for Pennsylvania Gov. Tom Corbett to make good on his threat to take over the state capital's finances.

The plan called for an 8% property tax increase and the outsourcing of some city services, but didn't seek to raise revenue with a 1% sales tax surcharge or a tax on commuters, as some city officials had suggested. The mayor had also backed the state's previous proposals to sell the incinerator, as well as the city's parking-garage system.

Mr. Corbett had pledged state funding to the city if it adopted the recovery plan and warned the state wouldn't bail out the city if it rejected the proposal.

Pennsylvania's General Assembly has passed legislation that would allow it to establish a state-run panel to operate Harrisburg, or other cities that reject recovery plans, under Act 47 for aid to distressed municipalities. The state Senate is due to take up the legislation when it reconvenes next week.
City Councilman Brad Koplinski has long advocated for a bankruptcy filing and voted in favor of the filing on Tuesday to give Harrisburg court-ordered protection from its creditors while it seeks solutions to its financial crisis. The filing was made under Chapter 9, the municipal market's equivalent of Chapter 11.

But opponents believed such a filing would likely impose significant losses on bondholders, which could have ripple effects on the state's credit rating and the broader municipal-bond market.
In addition to Mr. Koplinski, council members Susan Brown-Wilson, Wanda Williams and Eugenia Smith voted in favor of the filing, while Kelly Summerford and Patty Kim joined Gloria Martin-Roberts in opposing the action.

Harrisburg is projected to run out of cash to pay bills and cover payroll costs by the fourth quarter.
The filing had little effect on the municipal bond market Wednesday because the city's troubles had been brewing for a long time and because local-government defaults remain rare.

"This has been one of the slowest-moving train wrecks in my memory," so it isn't likely to affect the market, said Christopher Ryon, a portfolio manager at Thornburg Investment Management in Santa Fe, N.M. "For the calendar year, if you include about $500 million in Harrisburg's liability, that would be $1.6 billion of defaults, which is still very low."

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