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Sunday, January 31, 2010 7:27 PM

Pennsylvania Capital Ponders Bankruptcy

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Harrisburg City Controller Dan Miller Says Pennsylvania Capital Should Weigh Bankruptcy.

Harrisburg, Pennsylvania, the capital of the sixth-largest U.S. state by population, should skip a $2.2 million debt service payment due Feb. 1 and consider bankruptcy, City Controller Dan Miller said.

Harrisburg faces $68 million in payments this year in connection with a waste-to-energy incinerator and should weigh Chapter 9 protection from creditors or state oversight through a program known as Act 47, Miller said today. Chapter 9 bankruptcy allows municipalities to reorganize rather than liquidate.

The alternatives are to sell assets such as an historic downtown market; an island in the Susquehanna River that includes the city’s minor-league baseball stadium; and the city’s parking, sewer and water systems, according to a preliminary 2010 budget and an emergency financial plan submitted yesterday.

“What I’m suggesting is we stop paying the debt service until we have a plan or we decide which way to go, in bankruptcy or Act 47,” Miller, a former city council member who became controller this month, said in a telephone interview. “I think it could save our assets instead of selling them.”

Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances, recommended selling assets, raising city inspection and recreation fees, and reopening city labor contracts.

Harrisburg owes a total of $68 million in payments it guaranteed on bonds issued by the Harrisburg Authority for the incinerator and on a $35 million working capital loan for the project.

The city skipped more than $3.5 million in debt service and swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located, which has sued the city to recover its payments.

Harrisburg’s debt was downgraded to high-yield, high-risk junk status by Moody’s Investors Service in October. Moody’s lowered the city’s rating to Ba2 from Baa2, the second-lowest investment grade.
The first thing Harrisburg should do is fire Management Partners Inc. of Cincinnati, for poor advice. The only recommendation from Management Partners that made any sense was reopening city labor contracts.

Now is not the time to raises taxes or fees. That will only add pressure on businesses and private citizens. Islands can only be sold once, and selling property now would likely do nothing but cause the unions to delay negotiating labor contracts. Moreover, Management Partners Inc. misses making a recommendation to privatize city services.

Declaring bankruptcy is easily the best option. I commend Dan Miller for making it. But all will be wasted if Harrisburg misses the opportunity to renegotiate labor contracts (preferably void them outright), in bankruptcy court.

As soon as a couple major cities declare bankruptcy to end burdensome union contracts and ridiculous pension promises, the stigma will be off and more cities will do it. Indeed, there will be a mad rush to do so, if the first few instances work out as well as I suspect.

Cities and municipalities that get out from the grip of unions will have a huge competitive advantage over everyone else.

Go for it, Harrisburg.

Mike "Mish" Shedlock
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