HARRISBURG, Pennsylvania (Reuters) ? Pennsylvania is poised to take over its struggling capital of Harrisburg after a federal judge said the city cannot file for bankruptcy to get out of its $300 million outstanding debt.
Disappointed city officials said they were considering an appeal after Wednesday's decision.
Harrisburg in October became one of the most-high-profile cities to opt for the little-used Chapter 9 of the U.S. bankruptcy code to gain relief from debts incurred as a result of an expensive overhaul of the city's incinerator.
The ruling by U.S. Bankruptcy Court Judge Mary France paves the way for the state to use its Act 47 process for distressed cities, once used for Philadelphia, the state's largest city.
A recent change in state law prohibiting municipalities of a certain size to file for bankruptcy thwarted the city's attempt to protect itself from creditors.
"While we respect (the judge's) opinions we will take some time after Thanksgiving to determine whether we want to file an appeal," said Brad Koplinski, a city councilman who voted for bankruptcy.
The crisis has been a year in the making as the city of about 50,000 struggles to pay for critical services, as well as the debt incurred from an expensive revamp of its incinerator.
Harrisburg's incinerator debt has resulted in cuts to key services, and the city earlier in the month voted to sell the incinerator and lease several parking garages to help pay debts.
Bankruptcy tends to ruin a government's credit rating, making it difficult to borrow for years. But a state takeover can also hit taxpayers and reduce key services. Koplinski has said if the city paid creditors now and ran out of money again, it might have no choice but to cut its police force, reduce services to the elderly and close fire stations.
"We still believe that bankruptcy is the best option for the taxpayers of Harrisburg," he said.
James Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler, said Harrisburg's dismissal from bankruptcy court was not surprising. State law did not authorize a filing until mid-2012, he said, and the state still had the power to appoint a receiver who could have filed to dismiss the case.
State takeovers are more common than bankruptcies, and more large cities are facing this possibility due to falling tax revenue and weak economic growth. The mayor of Detroit, Michigan, has warned that his city may be headed toward a state takeover, as it may run out of cash by April.
In November, Jefferson County, Alabama, filed a $3 billion Chapter 9 petition, the largest U.S. municipal bankruptcy in history.
AMENDED LAWS
Earlier in the year, Pennsylvania's state law was amended to prevent Harrisburg from seeking bankruptcy protection until July 1, 2012.
That amendment sparked controversy, with council members saying it was specifically targeted at Harrisburg because it applied only to municipalities of a certain size. Judge France noted during the hearing that this amendment revoked the city's authority to file for bankruptcy.
"I'm elated and I have a spirit of Thanksgiving because now the cloud has been removed from around the city in terms of the uncertainty," said Mayor Linda Thompson, at her office on Wednesday. When she was a member of the council, Thompson voted in favor of the incinerator overhaul several years ago.
Pennsylvania Governor Tom Corbett signed a bill on October 20 that allows for a takeover of the city's finances, and he named David Unkovic, a lawyer with ties to the city's biggest creditors, as receiver last week.
A spokesperson for Corbett said the governor was "not surprised" by the ruling and is "moving forward with the receiver process to ensure Harrisburg is put back on sound fiscal footing as soon as possible."
Mark Schwartz, a Philadelphia-based attorney who represents the city council members who voted in favor of a filing, said he is "leaning" toward appeal, but has not decided yet.
Pennsylvania voted for a takeover of Harrisburg through its Act 47 process, which appoints a receiver and imposes financial conditions to restructure the city's finances.
Harrisburg's mayor and five of its seven city council members voted earlier in the month to sell the incinerator and lease several parking garages.
Les Ford, a resident who runs a community watchdog group and was in favor of bankruptcy, predicted the city would end up in court regardless of the state's efforts.
The state's "process was flawed and their product was flawed. They were not honest brokers," said Ford, who runs Debt Watch Harrisburg. "We will be back here next year. The city is functionally bankrupt. We have to go through hoops to convince the governor and the mayor and the county that we are bankrupt."
Spiotto said that in 1994, federal bankruptcy laws were amended to say that municipal bankruptcy for a local government had to be "specifically" authorized instead of the general authorization previously required.
Since then, questionable authorization has been the major reason courts have rejected muni bankruptcies.
Spiotto also noted that courts have rejected 82 of the 261 Chapter 9 filings, including Harrisburg's, made since 1980.
"Chapter 9 is always a last resort, a drastic resort," Spiotto said, adding that the court ruling hopefully will allow a receiver to work with Harrisburg to find a solution.
(Reporting by Mark Shade in Harrisburg; additional reporting by Chip Barnett in New York and Karen Pierog in Chicago; Writing by David Gaffen; Editing by Dan Grebler)
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