By Jon Hurdle

PHILADELPHIA (MNI) – Holders of municipal bonds backed by the
financially distressed City of Harrisburg are more likely to recoup
their investments now that state officials have stepped in to take
control of city finances, a person familiar with the negotiations said
on Tuesday.

Pennsylvania Governor Tom Corbett on Monday declared a “fiscal
emergency” for the state capital, four days after the state legislature
approved a law allowing the state to take over the city’s finances and
the running of essential services such as police and fire protection.

Corbett’s declaration follows the City Council’s rejection of a
fiscal recovery plan proposed by the state which is overseeing city
finances after declaring the state capital “distressed” under
Pennsylvania’s Act 47, a state law designed to help cities restructure
their finances.

“City Council’s failure to enact a recovery plan in order to deal
with the city’s distressed finances has led me to declare a fiscal
emergency,” the Republican governor said in a statement. “This action
ensures that vital services will continue and public safety will be
protected.”

The state’s seizure of control of the city’s finances after more
than a year of stalemate between the Council, the Mayor and state and
county officials increases the chances that bondholders will be repaid,
according to the source who spoke on condition of anonymity.

“There is a higher likelihood that the Act 47 plan will go
forward,” the source said.

Harrisburg’s long-running financial crisis has caused jitters among
some municipal bond investors, who fear it may portend a rash of
defaults among other U.S. cities struggling to maintain services as
revenue falls in an environment of sluggish economic growth.

But some analysts argue that Harrisburg’s problems reflect the
unusual challenge of an over-indebted city incinerator more than an
inability to provide regular services.

Underlying the city’s severe financial problems is the
trash-to-energy incinerator that has accumulated about $310 million in
debt after repeated renovations and refinancings since it was built in
the 1960s.

The incinerator’s owner, the Harrisburg Authority, has been unable
to meet all its obligations, leaving the City of Harrisburg, as the
principal guarantor of the debt, liable for the payments, some of which
it has been unable to make, prompting the fiscal emergency declaration.

The city is already struggling to meet its $58 million operating
budget for the current fiscal year because of falling revenue in the
economic downturn. The crisis has also forced it to default on some
general-obligation bond payments.

The City Council has twice rejected the recovery plan from the
state’s Department of Community and Economic Development, and last week
filed for Chapter 9 bankruptcy protection, a rarity for U.S. cities.

The legality of the bankruptcy filing has been challenged by the
mayor, the county and the state which together will seek an injunction
to stop the filing at a bankruptcy court hearing on Nov. 23, according
to Bob Philbin, a spokesman for Harrisburg Mayor Linda Thompson.

The state’s DCED, which is overseeing the Act 47 process, will now
draw up an emergency action plan to coordinate vital services and ensure
public safety. Meanwhile, the council has 30 days to agree a recovery
plan that is acceptable to the DCED. If it does not, the state can
appoint a receiver which would have the power to enact a recovery plan,
that could include the sale of city assets.

Thompson, who for more than a year has been at odds with a majority
of the seven-member City Council over how to rescue city finances,
issued a statement saying she would move forward with financial recovery
under the state plan, and will call a public meeting to begin the
process.

“This is council’s last chance to get to the table and be part of
the process or get out of the way when the state receiver steps in,”
Thompson said. “Hopefully, we can pull together for the good of our
citizens and stop the so-called takeover of our city’s recovery
process.”

Brad Koplinski, one of the four Council members who voted for the
Chapter 9 filing, and has consistently opposed the mayor’s rescue plans,
did not immediately respond to a request for comment.

** Market News International Philadelphia **

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