The attorney representing the Harrisburg, Pa., City Council in its bankruptcy filing said his endgame is to pay bondholders in full.

“It’s not our intent to cram down on bondholders. I’m of the belief that bondholders are the last people that should be inconvenienced,” Mark Schwartz said in an interview about the financially distressed city. Harrisburg faces $310 million of debt related to an incinerator retrofit project and has skipped about $65 million in bond payments.

Pennsylvania’s capital faces a possible state takeover under legislation passed two months ago.

Major creditors include bond insurer Assured Guaranty Municipal Corp. of New York; Dauphin County, also a guarantor of the incinerator debt; Covanta Energy Corp., which issued a loan to Harrisburg to help finish the incinerator project; and Ambac Assurance Corp., the city’s general obligation debt insurer. The city is current on its GO payments.

“Bond insurers are not in my universe. They can certainly take a haircut,” said Schwartz, a former bond banker. “I don’t take this bankruptcy lightly. But we have to stay in bankruptcy to get to the numbers in a substantive way. Harrisburg has to be able to emerge, able to borrow and access the markets. It’s not right to give bondholders anything rather than 100 cents on the dollar.”

Mayor Linda Thompson, addressing the need to access the capital markets, said likewise. “We need capital and we need bonding to go forward,” she said in a recent interview following a Bloomberg municipal conference in New York.

Messages seeking comment were left with Assured Guaranty.

Schwartz said the city will still have long-term revenue needs, whatever recovery plan it adopts. “We can play games until we’re blue in the face, but at the end of the day, we need to create a new revenue stream,” he said. “Harrisburg has to be able to borrow and access the markets.”

He suggested a 1% sales tax, which, he said, based on “back-of-the-envelope” numbers, could raise about $18 million annually — about three-fourths of stranded debt left over, should the city sell the incinerator and lease revenue-producing parking garages. The sales tax, however, would need legislative approval.

“A 1% sales tax would take care of all the brain damage,” he said.

Schwartz also recommended initiating a “clawback” of money paid during the incinerator retrofit. “These guys made big bucks,” he said. “What did they know and what did they not know?”

Judge Mary France of the U.S. Bankruptcy Court for the Middle District of Pennsylvania in Harrisburg is expected to rule Nov. 23 on the validity of the bankruptcy filing, which the City Council authorized last month. Thompson, Gov. Tom Corbett, and major creditors have opposed the filing.

“Clearly, the creditors hope the bankruptcy will be gone, so that bondholders will be paid ahead of the police and fire,” Schwartz said.

Thompson is expected to soon offer the city’s budget to the council. Schwartz said requests this week by the mayor and council for creditors to forgive $100 million of debt are fruitless without budget numbers. “It’s like a floating crap game,” he said.

He added that if France upholds the bankruptcy filing, that would trump the state takeover bill. On Monday night, some council members and Thompson agreed to ask major stakeholders for $100 million in debt concessions. Under the takeover legislation, the 30-day grace period to adopt an alternative recovery plan ends at 5 p.m. on Monday.

Council member Brad Koplinski asked Thompson on Monday night why the budget submittal was late. “You’ll get it when I give it to you,” the mayor replied.

On Thursday, the state Department of Community and Economic Development released an action plan for Harrisburg to ensure the continuation of vital services.

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