As the Recession Pummels Cities and Towns, Harrisburg Faces Bankruptcy
Policy + Politics

As the Recession Pummels Cities and Towns, Harrisburg Faces Bankruptcy

HARRISBURG, Pa. – Dan Miller, the city controller in the capital city of Pennsylvania, does not mince words these days: Harrisburg, he freely admits, is broke.

The city can’t pay the interest and principal on the $225 million debt it incurred to retrofit an incinerator. The newly installed mayor, Linda Thompson, is mulling draconian budget cuts that include massive employee layoffs, merging city departments, partially farming out its 911 service and even selling the city’s parking garages.

Moody’s Investors Services has pinned junk status on Harrisburg’s debt. The city’s budget and financial problems are so dire that some officials are contemplating seeking protection from creditors under the federal Municipal Bankruptcy Act, also known as Chapter 9. 

Fitch Ratings, another agency that evaluates creditworthiness, cautioned city officials against even discussing the use of Chapter 9, but that has not stopped Miller, the controller, from speaking out.

“I think that we will go the way of Chapter 9,” Miller said.

Harrisburg’s woes highlight the financial distress that is rippling through American municipalities with frightening speed. While state governments have struggled with a collective budget gap of $300 billion since the start of the recession, cities and local governments from California’s Bay Area to the Deep South to the Northeast  are just now facing up to the country’s economic woes.   At the federal level, “people are talking about a slow move out of the recession,” said Chris Hoene, research manager at the National League of Cities in Washington. “But we in the cities are talking about the impending crisis.”

The common denominator among localities nationwide is the simultaneous decline in revenues from property, sales and income taxes. Previous recessions hit one or another of these revenue sources, but this one is whacking them all at the same time, Hoene said.

Without the federal government’s flexibility to run deficits at will — localities typically borrow only for specific projects — the painful decisions are just beginning.

There have been 206 municipal bankruptcies since 1980, and about 650 since the 1930s, when Chapter 9 was created, according to Chapman and Cutler, a Chicago law firm. Richard Ciccarone, head of research at McDonnell Investment Management, which specializes in municipal bonds, said that the federal stimulus package helped a number of cities avert bankruptcies last year. In all likelihood, more insolvencies are in the offing.

Many of the cities contemplating bankruptcy made a bet in the recent past that seemed bold at the time, but now looks rash.

In the case of Harrisburg, that bet lies beyond the signs to the “Bureau of Garbage and Ash.” Retrofitted in 2004, the city’s incinerator, a cavernous structure, is perched atop a hill near the spot where Interstate 83 crosses the Susquehanna River, and is often wreathed in fine, white smoke.

Literally and figuratively, the incinerator looms over Harrisburg, a city of about 50,000 residents. Upriver lays the state capitol, an Italian Renaissance-style building modeled on St. Peter’s Basilica.  Harrisburg has struggled economically over the past three decades.  In 1981, following sharp declines in the steel and dairy industries, Harrisburg was declared the second most distressed city in the nation. The city staged an economic comeback and a revival of the downtown area under its former mayor, Stephen R. Reed, with nearly $3 billion in new investments during his lengthy tenure. But some major industries relocated outside the city limit, keeping Harrisburg’s tax base small.

The incinerator was upgraded and retrofitted in the expectation that usage fees, rather than the comparatively paltry city revenues, would be enough to service a $225 million debt, but those fees never met expectations. The city is on the hook for $68 million in debt service payments this year alone, a per capita burden of $9,500, the highest in the state and three times that of Philadelphia, according to Miller.

During a rare Saturday session, the city council approved a budget on Feb. 13 that excluded funding for debt service, arguing that it should deal with debt-reduction measures like city asset sales. “This budget was about getting cops and firefighters on the street,” said Brad Koplinski, one of the council members who voted for the budget. But Thompson, the new mayor, vetoed the budget, charging that the council was irresponsible in failing to address the city’s debt service requirements. Now she is looking at ways to come up with that money by cutting city services.

 “Any mayor that signs a bill that doesn’t budget for its debt obligations certainly is in violation of debt act ordinances and also its own city ordinances,” Thompson said following the vote.

The budget battle between the council and the new mayor has left many Harrisburg residents a bit befuddled by the fiscal situation, and inclined to play down its severity.

“I wouldn’t say this is a big issue people talk about,” said Wendy Yanich, 43, a retail shop employee. “You don’t know what’s true or false.”

For now, Ed Rendell, the governor of Pennsylvania, is keeping his distance from the fiscal crisis in the state’s capital, though he has met with the mayor and urged her to start slashing spending.

Miller, who was elected independently of the mayor,  argues that Chapter 9 would allow the city to shed at least some debt, the same way that bankrupt firms renegotiate terms with creditors. This approach rests on the premise that the city’s main assets — its water, sewer and parking systems — generate revenue for the “general fund” that finances day-to-day operations like fire and police protection. Together, those assets yielded $18 million in 2009, more than the city collected in real estate taxes.

“If we sell these assets, we create a huge hole,” Miller said. “The whole point of municipal bankruptcy is to keep your assets and reduce debt.”

Thompson, the mayor, argued in an interview that asset sales need to be part of a broader strategy that includes negotiations with bondholders to reduce the city’s debt load.  She bluntly acknowledged that those talks would carry the implicit understanding that bankruptcy is an option.

Creditors “know we are in a position” to go into bankruptcy, Thompson said. “I did not have to say ‘We will file Chapter 9 if you don’t do this,’” she said.

Thompson said that she is negotiating with the bondholders to reduce the debt load, and argued that the bondholders bear some responsibility for the city’s fiscal straits because they lent money to a locality that has long had financial problems. A spokeswoman for Assured Guaranty, a New York-based firm that is the ultimate insurer of the bonds, said the firm is “working with the folks in Harrisburg on finding a solution,” but insisted that its guarantee of the Harrisburg debt is firm.

Thompson also said that Harrisburg is tapping reserve funds to service the debt, but warned that “there is not a lot of money left” for payments this year — leaving the business community in Pennsylvania’s capital nervous about whether default is in the offing.
“There is an obligation there, and if the city does not make a legitimate effort, they’ll pay for decades,” said David Black, president of the Harrisburg Regional Chamber and CREDC, a business and economic development group. “They will not be able to float a bond anywhere.”