Harrisburg Awaits the 'Negotiation Dance'

The City Council votes by a narrow majority to file for bankruptcy. The mayor opposes the filing, as does the city solicitor. The state has a bankruptcy restriction in place — which opponents say is too loosely written — and will likely pass a bill next week bill authorizing a takeover of its capital city.

In short, Harrisburg, Pa., is one big muddle.

Chief Judge Mary France of the U.S. Bankruptcy Court for the Middle District of Pennsylvania in Harrisburg, who has the case, must sift through financial, legal and political entanglements, and the expected first-day motions challenging the filing, which occurred late Tuesday night after the council voted to authorize a Chapter 9 filing. A hearing date has yet to be set, according to court documents.

“We believe the bankruptcy filing is ultimately a step in the negotiation dance between the city on one hand and [stakeholders] on the other, with the resolution likely to favor bondholders, although the path may be long and uncertain,” said Alan Schankel, a managing director of Janney Capital Markets in Philadelphia.

Schankel referred to the city’s dispute with Assured Guaranty Municipal Corp., and Dauphin County, the guarantors of $310 million of bond debt related to a costly incinerator-retrofit

project. Many of the outstanding bonds issued for the incinerator project, coordinated through the Harrisburg Authority, are guaranteed by the county and insured by Assured Guaranty.

Alan Gover, a partner in the financial restructuring practice at White & Case, questions whether the case will remain in bankruptcy court. “The judge could seek mediation, or order a period of time for the parties to work things out,” he said.

Three times the City Council has turned down — all by 4 to 3 votes — a recovery plan proposed under the state’s Act 47 program for distressed communities, in which Harrisburg enrolled last December.

During that time the state passed a law prohibiting small-to-medium-sized cities in Act 47 from filing for bankruptcy under the threat of losing all state aid.

“We’ll have to sit and see how this shakes out. What usually happens in the long run is that the bondholders usually do well,” said William Mason, executive vice president of fixed-income trading at David Lerner Associates Inc.

Mason, who has worked in the municipal bond industry for 30 years, thinks Harrisburg’s council acted hastily in filing for bankruptcy. “In my opinion, they jumped the gun a little too soon,” he said. “They have a lot of other tools they can use.”

Mason, though, thinks the bond markets will be fine. “The municipal bond market has a history of safety,” he said.

Mayor Linda Thompson opposes bankruptcy, and said the council’s action is illegal. “Four members of the City Council have acted irresponsibly. I’m ashamed,” she said on Tuesday.

Thompson said she will not approve the hiring of an attorney to pursue bankruptcy at this time.

Acting city solicitor Jason Hess has also questioned the filing’s legitimacy.

The council, right before filing under Chapter 9, hired Philadelphia-area lawyer Mark Schwartz, who has said he would bill the council later. The four council members — Brad Koplinski, Wanda Williams, Eugenia Smith and Susan Brown-Wilson — favor bankruptcy as a means to force incinerator creditors to the table to make concessions of at least $100 million. They cited discussions in Jefferson County, Ala., between county commissioners and bondholders that resulted in creditors accepting less than they are owed on sewer-related debt.

“The travails of Jefferson County have certainly played a part in Harrisburg’s City Council’s decision to file,” Schankel said.

Bankruptcy documents also list Ambac Financial Group Inc. as a creditor for $70 million in general obligation-related debt. The zero-coupon bonds mature in March and September. Harrisburg made September’s payments — barely — and, after obtaining upfront money from the city’s parking authority, can make GO payments and meet payroll for the rest of the year.

The four council members and city Controller Dan Miller, a political ally who plans to challenge Thompson for the mayor’s seat in 2013, say the state takeover legislation, which the Senate will resume debating next week, is intended to protect bondholders at the expense of the city.

That bill would enable Gov. Tom Corbett to declare a state of fiscal emergency in Harrisburg and impose a three-member receivership panel.

“I’m sorry they have to pay but excuse me, that’s life,” Schwartz said of the bondholders.

Miller also said the bankruptcy restriction, which the General Assembly included in June as an amendment to the state’s fiscal code and which Corbett signed, was loosely written and could be vulnerable to a court challenge.

“It says you can’t file for bankruptcy, but later says if you do file for bankruptcy, you lose all your state aid. It drove me nuts,” Miller said. “Hell, they put that through in a week.”

The state and Dauphin County are expected to protest the filing. Court papers filed Thursday say that law firm Cozen O’Connor LP will represent the state.

Jonathan Henes, a restructuring partner at Kirkland & Ellis LLP in New York, cited the difficulties of trying to solve economic problems with political solutions.

“Chapter 9 provides the tools to allow restructuring to take place, provided there’s bold leadership. In Central Falls, Rhode Island, we’re seeing what happens when a number of leaders show resolve,” he said.

There, a singular receiver, Robert Flanders, stripped the mayor and City Council members of their powers and, unfettered, has confronted unions over pension benefits.

“The receiver there doesn’t have to run for office,” Henes noted.

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