HARRISBURG, Pa.— Brad Koplinski summed it up after Tuesday night’s tense Harrisburg City Council meeting, when a vote against a financial-recovery plan plunged this city into the great unknown.
“We’re in uncharted waters now,” Koplinski said in the tiny, crowded council chambers after he and three fellow council members led a 4-to-3 vote—which epitomizes the divide in Pennsylvania’s capital—against a blueprint aimed at cutting the city’s $300 million in debt related to a failed incinerator retrofit project.
State aid and the ability to pay bondholders hang in the balance. The city has a $3.3 million general-obligation bond payment due Sept. 15.
The plan, offered under the state’s Act 47 program for distressed communities and crafted by turnaround firm Novak Consulting Group of Cincinnati, said the city could run out of money in September. Novak's report called for the city to sell its troubled incinerator and its revenue-producing parking garages.
Council President Gloria Martin-Roberts, who favored the plan, was visibly angry. “We have a house divided,” she said. “I think we’re making a terrible mistake. A terrible mistake. I want the citizens who championed this no vote to remember this date. It's not going to be pretty in the city of Harrisburg.”
Harrisburg’s is the first rejection of an Act 47 plan.
"My first reaction is that I'm disappointed, but not surprised," said Alan Schankel, managing director and head of fixed income research and strategy for Janney Capital Markets in Philadelphia. "The council has been doing this all along, going four-three."
Mayor Linda Thompson, by state law, must propose her own plan within 14 days, or by Aug. 2. A public hearing would be held within 10 days after that. Thompson has said she favors much of the Act 47 plan, which she said would make the city solvent by 2013.
The council must vote on Thompson’s plan. Thompson, who said after the meeting her priority would be to calm creditors, needs to sway at least one council member to her side.
Further rejection means the state could withhold several million dollars in annual funding. The state could withhold future capital improvement funds, loans, entitlements or grants. It cannot withhold federal disaster funding, state pension fund disbursements or capital-improvement funding for projects already begun.
Bankruptcy remains possible, but a new law that amended the state’s fiscal code could limit that option. The law, aimed at small-to-medium sized, or “third class” cities such as Harrisburg, calls for a halt to state aid for any such municipality that files for bankruptcy.
“Obviously we’re very disappointed,” said Novak Consulting president and Act 47 plan coordinator Julia Novak. “We thought we had a plan that would have led them on a path to recovery. We wish them well.”
Koplinski, Wanda Williams, Susan Brown-Wilson and Eugenia Smith voted against the plan, saying it placed too much burden on city taxpayers, and still left the city in debt. They also said a commuter tax, which the Dauphin County court must approve, would be the best regional solution.
The Act 47 plan had no commuter tax provision. “We did analyze it, but the court would have had to approve it and we thought it would be too much of a burden on Harrisburg taxpayers,” Novak said.
While commuters who live outside the city would have to pay a 2.5% commuter tax, so too would Harrisburg residents, who now pay only 1%. Harrisburg’s population is about 49,000.
Martin-Roberts, Vice President Patty Kim and Kelly Summerford favored the Act 47 plan, as did the Harrisburg Regional Chamber and Dauphin County. “It’s our city, too,” said chamber president David Black, speaking on behalf of business leaders. “To those of you sitting on the fence, what does no look like?”
William Cluck, a local attorney and member of the Harrisburg Authority, also urged a yes vote. “The alternatives scare the hell out of me,” he said.
Bonds outstanding on the Harrisburg incinerator total $220 million. The city also owes a combined $75.5 million to Dauphin County, bond insurer Assured Guaranty Municipal Corp. of New York and the facility’s operator, the Harrisburg Authority. Dauphin County and Assured Guaranty have lawsuits pending against the city, while the Harrisburg Authority is conducting a forensic audit.
Koplinski chided the Act 47 team for not exploring all revenue options for Harrisburg, including commuter and county sales taxes, and for a plan that would still have left the city with $26 million of stranded debt. “When does it become $36 million or $46 million?’” he said. He also said the offer from neighboring Lancaster County to purchase the incinerator might be less than the quoted $124 million.
A commuter tax would bring in an estimated $20 million annually for the city, while Koplinski estimated that a county sales tax would generate roughly $37 million per year. “A commuter tax would spread out the burden,” he said. “The city and the taxpayers don’t want to be treated like a bunch of chumps.”
Kim opposed the commuter tax, saying it would hinder business growth and calling the extra 1.5% “a punch in the gut” for Harrisburg taxpayers. “I’ve been called a lot of names for supporting the Act 47 plan and that’s OK, it’s expected,” she said. “It’s one of the hardest decisions I’ve had to make. But we have no other options.”
Asked what would happen in the next month, Martin-Roberts said: “I can’t predict. I have no crystal ball. Where it’s going I don’t know. Don’t hold your breath.”
