Pennsylvania offers rescue plan for Harrisburg

HARRISBURG, Pennsylvania (Reuters) – Pennsylvania offered a rescue plan to its deeply indebted capital of Harrisburg on Monday, with recommendations for a wage freeze, a possible property tax hike and the sale of the incinerator at the root the city’s fiscal problems.

The city of 50,000, about 100 miles west of Philadelphia, has been pushed to the brink of financial disaster as it struggles under the triple burden of nearly $300 million of incinerator debt, rising costs and political squabbling.

The state stopped short of recommending bankruptcy — a move that likely would have rattled the $2.9 trillion municipal bond market, where investors have been spooked since last year amid predictions of mass defaults and possible bankruptcies.

“It’s as if we’ve invited you to dinner but all we’re offering you is peas and liver,” Julia Novak, the president of the Novak Consulting Group, said in presenting the plan to the City Council. “But it is the right diet.”

The plan calls for the city to sell the incinerator and its parking facility, renegotiate its labor agreements and assume $26 million in new borrowing, Novak said.

If no action is taken, Harrisburg — which is due to run out of cash in the fourth quarter of this year and has a $3.4 million budget gap — faces a $6 million deficit by the end of 2013, and it will be unable to manage its debt, said Novak.

The City Council has until July 23 to adopt the plan.

Last December, with the city facing the prospect of bond defaults, deep service cuts, or worse, Pennsylvania officials put Harrisburg under its Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 bankruptcy filing.

While no public comments were allowed at the Monday meeting, Novak spoke before a packed audience, many of them grumbling with frustration as she outlined the plan. Some expressed disbelief at the city’s dire financial situation.

“It never dawned on me when I purchased my house to run a financial statement on the city,” said Walter Gallant, 63, who moved to Harrisburg from Baltimore, Maryland two years ago.

WASTE-TO-ENERGY PLAN GONE BAD

At the root of Harrisburg’s troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning plant that left the city with roughly $300 million in debt.

The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt.

The problems date back to 2003, when the authority embarked on an ambitious project to transform its polluting, 1969-vintage incinerator into a clean-burning waste-to-energy plant that also harvested ferrous metals, generating much-needed revenues. But cost overruns and lower-than-expected revenues left the city scrambling to service the complex web of bonds and interest-rate swaps related to the facility.

Harrisburg is not the first Pennsylvania city to need an Act 47 rescue plan. Both Philadelphia and Pittsburgh have gone through the process, as have smaller cities such as Scranton and Reading. Novak said it takes an average of 11 years for a city to go through the Act 47 turnaround process.

Analyst Paul Brennan of Nuveen said Pennsylvania had a “really good track record” of turning around troubled city finances to avoid bankruptcy.

“I think (Harrisburg) is a little bit of a one-off, and that’s typically the case in these state and local bankruptcies. It’s usually some catastrophic event, if you will, that pushes them over the cliff,” Brennan said.

The municipal bond market, where states, counties, cities and towns borrow money to pay for roads, schools, bridges and hospitals, is generally considered a safe investment with a lower default rate than corporate bonds.

But in the wake of the 2007-2009 recession, which created budget emergencies in most states, a handful of cities and counties have teetered toward economic collapse.

Two years ago, Vallejo, California, filed for bankruptcy. The tiny Rhode Island city of Central Falls has effectively been run by a state-appointed receiver since last July. New York’s Nassau County has been under state oversight since 2000 and in January the state seized greater oversight powers.

And Alabama’s Jefferson County is struggling to ward off what could become the largest municipal bankruptcy in U.S. history as it owes $3.2 billion on its sewer bonds.

Ahead of the release of the Harrisburg report, experts said it was unlikely bondholders would be placed at risk.

“Normally, states and local governments do anything they can to make sure the bondholders get paid — not because of some fondness for bond debt but because of their interest in being able to have the access to the market to make the local decisions locally,” said Jim Spiotto, a municipal bankruptcy specialist.