Pennsylvania capital considers bankruptcy as California city seeks to emerge
Continued from: Cash-starved cities increasingly look to dangerous, rarely used Chapter 9
By Mike Hinshaw
A Dec. 22 article at the Allegheny Institute for Public Policy asks the question: “Is the Capital City Headed for Bankruptcy?“:
Just last week, the state’s capital city, Harrisburg (population 47k), was declared financially distressed under Act 47. Harrisburg becomes the 20th city since the statute became law in 1987 to be so designated, joining Pittsburgh, Reading, and Scranton among others.
As we wrote earlier this year (Policy Brief Volume 10, Number 8) much of Harrisburg’s difficulties can be traced to the intricate financial ties it has with the Harrisburg Authority and a garbage incinerator that requires hefty debt payments. The Secretary of the Department of Community and Economic Development (DCED), whose department houses the machinery that drives Act 47, issued an order on December 15th finding Harrisburg met two of the eleven criteria necessary to be declared distressed.
First, the Secretary found that criterion 3 that a “municipality has defaulted in payment of principal or interest on any of its bonds or notes in payment of rentals due any authority” was satisfied due to the City failing to make debt payments of $10 million and $34 million in 2010.
Second, the order noted that “the aggregate sum of separate claims asserted against the City which are presently involved in litigation before the Dauphin County Court of Common Pleas equals $73,212,366.85″. Note that Harrisburg’s budget is $64 million. Thus, criterion 9, “a municipality has sought to negotiate resolution or adjustment of a claim in excess of 30% against a fund or budget and has failed to reach an agreement with creditors”, was met.
City doesn’t need state’s permission, says spokeswoman
For background, we look to a Dec. 15 piece at Bloomberg.com: “Harrisburg sought aid under Pennsylvania’s Act 47 for distressed communities in the face of $282 million in debt it has guaranteed for an incinerator operated by the independent Harrisburg Authority. City officials could still seek bankruptcy protection without the state’s approval, Jamie Yates, a spokeswoman for the community department, said in an e-mail.
“ ‘This is an important first step on the city’s road to fiscal recovery,’ Mayor Linda Thompson, a first-term Democrat who opposes bankruptcy, said in a statement e-mailed by her office. ‘There will be difficult choices to be made by the city’s leaders as we craft a comprehensive long-term recovery plan. But, we have an opportunity to become the model for comeback cities, and it is my intention to seize that opportunity.’ ”
Chapter 9 differs from other forms of bankruptcy protection
As mentioned in our preceding post on this topic, Chapter 9 bankruptcy is unlike Chapter 7 or Chapter 13 bankruptcy protection for consumers–or even Chapter 11 for businesses. The latter three are designed to allow a fresh start for an individual or a company without undue collateral damage to society. Even the Wall Street Journal makes a distinction, as seen in this article from Feb. 2010: “Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9.
“The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.”
City workers’ paychecks threatened
Meanwhile, a Jan. 4 article in the online Wall Street Journal reported that a budget protocol issue–not directly related to the potential bankruptcy filing, yet indicative of the city’s financial condition–was causing Harrisburg’s city workers to face a delay in getting their current paychecks: “Employees in the distressed capital city Harrisburg, Pa., once again find their paychecks this week in jeopardy—this time because of a disagreement over protocol.
“City Controller Dan Miller is barring the release of paychecks due Thursday for the city’s 543 workers because the 2011 budget hasn’t been enacted.
” ‘Without a budget, we can’t pay bills,’ ” Mr. Miller said.
However, an update on Jan. 5 reveals that Miller has relented, based on information from the city council, so workers will get their checks: “Employees in the distressed capital city Harrisburg, Pa., are getting their paychecks Thursday, after a dispute over protocol was resolved.
“City Controller Dan Miller had said he would bar the release of paychecks for the city’s 543 workers because the 2011 budget hasn’t been enacted. Mayor Linda Thompson’s administration argued the paychecks should be released because the pay period was for 2010.
“But Miller decided to release the paychecks after he received confirmation that the five council members who voted for the budget on Dec. 30 would also vote to override a possible veto by the mayor.”
Vallejo planning exit from Chapter 9
A Dec. 29 piece at Bloomberg Businessweek says Vellejo, California serves as an example of why cities should avoid Chapter 9, which it entered in 2008:
By Jan. 18 the city of Vallejo, Calif., must submit a bankruptcy-exit plan to a Sacramento court. The plan will outline how the municipal government will meet $195 million of unfunded pension obligations, trim employee benefits, delay payments to bondholders, and set aside money for unsecured creditors.
If the court approves the plan, the city of 120,000 will be one step closer to the end of a painful experiment in restoring Vallejo’s finances. When Vallejo filed for Chapter 9 bankruptcy protection in May 2008 after failing to win pay cuts from the city workers’ unions, Vice-Mayor and Councilwoman Stephanie Gomes said officials around the U.S. would have their eyes trained on the city, which sits 32 miles north of San Francisco.
The lesson other cities have drawn from the two-year-old case, which has cost Vallejo $9.5 million in legal fees and made it a nationwide symbol of distressed municipal finances, is that out-of-court negotiations yield better results. “They spent a lot of money with very little outcome,” says Jay M. Goldstone, San Diego’s chief operating officer, who relied on negotiated pay cuts and higher benefit contributions from the unions to resolve his city’s fiscal crisis in 2009.
Still, Chapter 9 remains an option for municipalities and other smaller-than-state entities that can find no other way. According to the Businessweek piece, 10 municipal entities filed Chapter 9 in 2009, and five did so in 2010. According to various sources, Chapter 9 has been filed about 600 times since it was allowed in the 1930s.
Next: Some say a “Chapter 8″ should be created, allowing states to file for bankruptcy protection.
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Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. If you think your home is a candidate for a short sale, be sure to ask your attorney about it–it could greatly affect your standing and strategy for starting over.
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