Updated: Harrisburg Still Mulling Bankruptcy Despite PA Run on Chapter 9 Options

The city council of debt-hobbled Harrisburg, PA voted down a debt-restructuring plan suggested by the state and reportedly continues talks with bankruptcy efforts despite the state’s move to make filing a Chapter 9 much more difficult, not to mention painful.

After months of rumors regarding a possible Chapter 9 bankruptcy filing necessitated largely by massive debts from a trash incinerator project in Pennsylvania’s capital city, Harrisburg lawmakers voted on a debt-recovery plan on Tuesday. By opponents won out, saying tax payers had to carry an unfair share of the pain compared with investors/bondholders. Pennsylvania political experts have noted that bankruptcy is an option that still remains on the table, even as the state passed a new law seeking to stymie such a move.

State lawmakers hurried in recent weeks to pass legislation, S.B. 907, that would strip any third-level city – Harrisburg fits into that distinction – of state funding if it files for bankruptcy before July 2012. Though more than 50 Pennsylvania cities would be affected by this, it was a thinly-veiled attempt to prevent Harrisburg, specifically from filing amid its massive problem with getting debts under control. Among the concerns would be the sullying of the capital city’s reputation and, by default, that of the state. That’s not to mention the subsequent concern likely on the part of investors and bondholders, thus making it more expensive for other third-class Pennsylvania cities to borrow even if they’re much better off than Harrisburg fiscally, which most are.
The legislation is the latest, and strongest, political action taken by state governments hoping to prevent municipalities from more frequently going the bankruptcy route when its financial situation grow difficult to control. Other states where actions, albeit slightly less direct, have been taken in the wake of damage caused by the ongoing low economic recovery include California, Rhode Island and Michigan. The question remain is whether or not more states will take bold moves to nip the municipal bankruptcy issue in the bud, so to speak. Stay tuned…

(Editor’s Note: Is Chapter 9/municipal bankruptcy a topic on which you’d like to hear more about, primarily in the form of a teleconference hosted by one of NACM’s top legal experts? Please let us know what you think by e-mailing traceyf@nacm.org. Please put “Chapter 9 teleconference” in the subject line of your response e-mail.)

Brian Shappell, NACM staff writer

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