HARRISBURG—Pennsylvania's capital city faces a time-consuming process with an uncertain outcome should it file for a rare municipal bankruptcy, experts told the City Council Monday evening.
Harrisburg is coping with $288 million in debt related to a failed revamp of an incinerator. The $68 million in payments on the debt this year exceed the city's annual budget.
City Controller Daniel C. Miller has advocated filing for municipal bankruptcy, known as Chapter 9, to deal with the debt.
"We are looking for the least worst option," he told the seven-member council during a committee meeting Monday, and added, "bankruptcy is a viable option" and one that "does provide immediate benefits."
J. Gregg Miller, attorney at Pepper Hamilton, talked about the Chapter 9 filing of Westfall Township, the first municipality in Pennsylvania to restructure under the bankruptcy code. The Pike County municipality was facing a legal claim of over $20 million to a real-estate developer whose civil rights were violated; the settlement reduced the payment to $6 million over 20 years with no interest, Mr. Miller told the council.
A bankruptcy judge in a Chapter 9 case can order a cramdown—a settlement that a municipality prefers even if its creditor opposes it, said Mr. Miller. Key, though, is that the settlement must have the support of at least one class of impaired creditors.
In addition, judges can't force asset sales or liquidate a municipality, Mr. Miller said. A Chapter 9 filing also sparks an automatic stay of all litigation and gives municipalities a chance to reject union contracts.
But there are major drawbacks to the "expensive" and "time-consuming" municipal bankruptcy, Mr. Miller warned. Pennsylvania's community and economic development department must authorize the filing, and plays a big role in the process. Fees from Mr. Miller's firm and accountants totaled $600,000 in the Westfall filing.
Also, "the outcome is always uncertain," Mr. Miller said. "You really can't know where the case will come out" unless agreements are struck with creditors beforehand.
The council took no action during the committee meeting, which was aimed to help the members "gather data and information," said Council President Gloria Martin-Roberts.
However, council vice president Patty Kim said during the meeting she was opposed to filing for bankruptcy, while another councilwoman commented that she thinks municipal bankruptcy may be the best option because taxpayers can't afford higher taxes or asset sales. "This city is so indebted, there is no way out," said Susan Brown Wilson.
Meanwhile, the city over "the next week or so" may finalize a forbearance agreement withAssured Guaranty Municipal, which is responsible for the bulk of the bond payments should the city and Dauphin County fail to make them, said the city's interim finance director, Bob Kroboth.
The bond insurer, a unit of Assured Guaranty, has proposed a forbearance agreement giving the city 90 days to develop a plan to address its debt load. The city is requesting a longer period, and is also working on a forbearance agreement with Covanta Energy, which operates the incinerator and gave the city a $25 million loan.
In addition, the state's community and economic development department is reviewing Harrisburg's request to fund several recommendations made by a consultant paid for by the state, such as merging 911 services with Dauphin County and managing the city's fleet, said Fred Reddig, executive director of Governor's Center for Local Government Services. "That process is moving forward as we speak."
No matter what option the city takes—filing for bankruptcy or seeking financially distressed status under state law—hard work and negotiations with creditors are necessary, said Perry Mandarino, head of restructuring at Price Waterhouse Coopers. "In any restructuring there are no silver bullets," he told council members. "There are no easy answers."