Much to the chagrin of state lawmakers and the local business community, the Harrisburg City Council on Tuesday vote to file for Chapter 9 municipal bankruptcy protection.
The majority of the council and city Controller Dan Miller, a bankruptcy advocate, said federal bankruptcy court now is the only place where real negotiations to solve the city's debt problem can happen.
"Right now, no debt is forgiven," Miller said. "(In bankruptcy court), Harrisburg has real leverage to make a good deal."
The council's vote to seek bankruptcy protection is illegal, state Sen. Jeffrey Piccola, R-Dauphin County, said in a statement today.
"It's illegal under Pennsylvania law which prohibits third-class cities from filing for bankruptcy," he said. "Rather than wasting precious time on illegal filings and engaging expensive attorneys, the majority of (the) City Council should be about working with the mayor and the commonwealth to resolve this crisis via the Act 47 process."
Piccola is referring to Senate Bill 907, an amendment to the state's fiscal code that passed in June as part of the 2011-12 budget process. That amendment adds the risk of losing state funding if a municipality files for bankruptcy protection.
The Senate next week is expected to take up Senate Bill 1151, which was proposed by Piccola and includes a recently approved amendment by Cumberland County Republican Rep. Glen Grell.
The bill is designed to give the state the power to put third-class cities in receivership for failing to act on Act 47 recovery plan. The governor has said he will sign the takeover legislation.
"I anticipate successful adoption of the bill moving us closer, unfortunately because of the reckless behavior of the majority of (the) City Council, to state receivership," Piccola said.
The majority members of council argued the proposed recovery plans crafted by a state-appointed Act 47 team and Mayor Linda Thompson would not do enough to solve the city's ballooning debt while protecting creditors. The primary concern was that receivership would lead to a full-scale sale of city assets, resulting in the loss of future revenue.
Through bankruptcy, Miller said, the city should be able to hold onto its assets, including the parking system and troubled incinerator. The incinerator debt is roughly $310 million, primarily due to a failed 2004 retrofit.
The four council members who voted for bankruptcy — Brad Koplinski, Eugenia Smith, Wanda Williams and Susan Brown-Wilson — want bond insurer Assured Guaranty Municipal Corp., a primary backer of the city's of incinerator debt, to forgive at least $100 million of the debt.
They also want other revenue tools back on the table, including a commuter tax and a 1 percent county sales tax. Raising the city's earned-income tax to 2 percent from 1 percent would generate about $22 million annually between city residents and nonresidents who work in Harrisburg, Miller said.
That money could be used to pay down the city's debt service, he said.
Miller said he believes the commuter tax is more likely than a sales tax, which would require action by the General Assembly and the governor.
If approved, SB 1151 would take the commuter tax off the table for distressed third-class municipalities.
"I still can't understand what the majority of (the) council and Dan Miller believe the end game looks like in bankruptcy," said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Economic Development Corp. "Chapter 9 requires a plan and cannot force debt reduction, as I understand it. I think it is a bad thing for neighboring municipalities, and (it) doesn't instill confidence in the business community."
The council's action is nothing more than a "delay tactic to avoid making the tough decisions necessary to resolve the city's debt crisis," Dauphin County commissioners said in a statement.
"Based on our initial review, the filing by (the) City Council is not properly authorized under the law," the commissioners said.
The mayor is planning a 2:30 p.m. news conference to discuss the legality of the bankruptcy action, spokesman Robert Philbin said.