By Jon Hurdle

HARRISBURG, Pa. (MNI) – A federal bankruptcy judge Wednesday struck
down an attempt by Pennsylvania’s capital city to solve its financial
crisis by filing for Chapter 9 bankruptcy protection.

U.S. Bankruptcy Judge Mary France said the Harrisburg City Council
was not authorized to make the rare municipal bankruptcy filing as it
instructed its attorney to do Oct. 10.

“City council was not authorized to file the petition in October,”
France said in an oral ruling after a hearing on whether a majority of
the council had the legal right to seek a bankruptcy filing.

Harrisburg is overwhelmed by about $310 million in debt that has
been accumulated by a city trash incinerator because of successive
renovations and refinancings over several decades.

The debt crisis, compounded by Harrisburg’s recent difficulties
meeting its operating budget, has unnerved some municipal bond market
investors who fear a bankruptcy filing would trigger others by
struggling cities around the state and perhaps the country.

The city is the primary guarantor of the debt for the incinerator’s
owner, the Harrisburg Authority, which has been unable to make all its
bond payments.

Since December 2010, the state has been working on a financial
restructuring plan for the city, after declaring it “distressed” under
Pennsylvania’s Act 47. But a 4-3 majority of the city council has
repeatedly rejected rescue plans by the state and the mayor, which have
advocated asset sales and tax rises as ways of righting the city’s
perilous finances.

During a three-hour hearing before Judge France, attorneys for the
Commonwealth of Pennsylvania, Dauphin County, and Harrisburg Mayor Linda
Thompson argued that the city council did not have the authority to
instruct an attorney to file for bankruptcy.

Neal Colton, an attorney for the state, argued that allowing the
city to make a rare Chapter 9 bankruptcy filing would undermine the
confidence of financial markets and may hurt other Pennsylvania cities.

“We need to meet the expectations of the financial community,” he
said.

Clayton Davidson, an attorney for Dauphin County, which guarantees
some of the incinerator debt, urged the court to rule against any
bankruptcy filing because he argued bankruptcy would have bad effects
well beyond Harrisburg.

“For a municipality to file for bankruptcy, it’s a big, big deal,”
Davidson said. “It doesn’t happen very often in the U.S.”

Attorney Mark Schwartz, arguing for the majority of city council
members seeking a bankruptcy, acknowledged widespread interest in the
case, saying that he had been interviewed by the Middle East cable TV
station Al Jazeera about Harrisburg’s problems.

But he argued that the city council had the authority to file for
Chapter 9 municipal bankruptcy under Pennsylvania’s Act 47 law that
provides state assistance for “distressed” cities.

Mayor Linda Thompson, who has been at odds with the city council
majority over the debt crisis, could have vetoed the council’s
resolution to file for bankruptcy, but she didn’t do so, Schwartz said.

Neil Grover, an attorney for Debtwatch Harrisburg, a citizens’
group that backs bankruptcy, contested opponents’ claims that the
council’s resolution calling for the filing had not met due process
requirements.

“There is no requirement in the law that a resolution is
insufficient,” Grover said.

Brad Koplinski, one of the four council members advocating
bankruptcy, said after the judge’s ruling that a Chapter 9 filing would
have allowed bondholders as well as taxpayers to share the burden of a
financial restructuring.

“We still feel that bankruptcy is the best solution for the
taxpayer because it’s a global solution with shared pain for all
stakeholders,” he told reporters.

In its latest proposal to bondholders, the council faction called
for debt forgiveness totaling $100 million that would have been shared
by the bond insurer, Assured Guaranty, Dauphin County, and the
incinerator operator, Covanta. Assured Guaranty rejected the plan.

Schwartz, the council group’s attorney, said Harrisburg will now be
subject to asset sales managed by a receiver who has been appointed by
Pennsylvania Governor Tom Corbett.

“She is going to have this city bone-picked by the receiver,”
Schwartz said, referring to Mayor Thompson.

** Market News International – Philadelphia **

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