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Harrisburg, Pennsylvania Bankruptcy Filing Rejected By Federal Judge

Harrisburg Bankruptcy

MARC LEVY   11/23/11 04:59 PM ET   AP

HARRISBURG, Pa. — A federal bankruptcy judge on Wednesday threw out a petition by the City Council of Pennsylvania's debt-choked capital of Harrisburg, saying it had been legally barred by state law from seeking bankruptcy protection and, in any case, had no authority to file it.

Judge Mary D. France issued the ruling after hearing more than two hours of arguments by lawyers as to whether the bankruptcy petition, filed last month by a divided City Council, satisfied various legal issues and could move forward despite the objections of the city's mayor, Pennsylvania Gov. Tom Corbett, Dauphin County, bond insurers and others.

City Council members, who have framed their fight as a battle between Main Street and Wall Street, said the group will decide whether or not to appeal. In the meantime, the Corbett administration is moving forward with an unprecedented takeover of the city's financial operations in a bid to force it to pay down about $300 million in debt tied to the city's ill-starred trash incinerator.

"The fight from our view is far from over," said Neil Grover, a lawyer who co-founded the taxpayers' group Debt Watch Harrisburg and argued in support of the bankruptcy petition. "This is the kind of issue that goes to the Supreme Court."

If Harrisburg is forced to pay down the entire debt, the cash-poor Susquehanna River city of 50,000 will be just a shell, Grover said.

Grover said only a federal court, not a state takeover, offers the hope of forcing creditors, such as Dauphin County and Assured Guaranty Municipal Corp., to assume part of the debt.

On Dec. 1, a state judge will hold a hearing on whether to appoint a receiver named by Corbett to assemble a financial recovery plan under a month-old municipal takeover law aimed at giving the governor power over Harrisburg's financial operations.

A Corbett administration spokeswoman said it expected the judge's decision, and agreed with it.

"We're busy moving forward with the receiver process to make sure we put Harrisburg back on solid financial footing," spokeswoman Kelli Roberts said.

The Corbett administration has already ordered several layoffs and increases in parking fines and business license fees, but a receiver would have more power, including the ability to sell city assets, negotiate contracts and file for federal bankruptcy protection, but not raise taxes.

The City Council voted last month to file the Chapter 9 bankruptcy petition in a bid to thwart the state takeover and force concessions from creditors.

Mayor Linda Thompson, who had opposed the filing, and City Council had been unable to come up with a debt repayment plan, as the city fell tens of millions of dollars behind on debt payments and lawsuits piled up. That prompted suburban legislators to write legislation prohibiting a bankruptcy filing and enabling a takeover out of fear that a Harrisburg bankruptcy would hurt their constituents and raise borrowing costs for other local governments in Pennsylvania.

France early in Wednesday's hearing dismissed many of the arguments made by a lawyer for City Council before focusing debate on two key areas.

While admitting that she typically doesn't consider matters of state and constitutional law, France had questioned Wednesday whether a four-month-old state law designed to temporarily prohibit a bankruptcy filing by Harrisburg had met state constitutional standards that demand transparency in the passage of legislation.

In the end, she said it did, if only because of the precedent set by state courts to give wide latitude to the Legislature.

She also questioned whether a divided Harrisburg City Council indeed had the authority to go over the mayor's head and file for bankruptcy. After the arguments, she decided it didn't.

Harrisburg is dogged by a number of financial problems: The city has been devastated by the loss of its heavy manufacturing core, almost half its property is tax-exempt and more than a quarter of its families live in poverty, nearly three times the national rate.

But the $300 million in debt on its nearly 40-year-old trash incinerator is the most pressing. Beset by environmental problems and fines for years, U.S. Environmental Protection Agency shut it down in 2003 with about $100 million in debt already piled on it, some of which had gone to finance other city projects.

Faced with the decision to abandon it and clean up the site, or finance an overhaul, City Council voted for the latter in hopes that it would one day emerge as a profitable investment. But the renovation went awry, and ended up being far more expensive. Meanwhile, Harrisburg city residents now pay among the highest trash-disposal rates in the nation, while the facility can't generate nearly enough money to pay the debt.

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