Political fighting in Harrisburg, Pa., scrapped Mayor Linda Thompson’s initiative to restructure debt of the region’s incinerator authority, meaning the city is no closer to resolving the problems that brought it to the verge of a general obligation default this month.

The mayor had hoped the City Council this week would approve using state money for a consultant she selected to help Harrisburg find ways to pay its share of debt service on $282 million of outstanding incinerator debt on which it has not been making payments.

The City Council Tuesday evening removed Scott Balice Strategies from resolutions authorizing $850,000 of state loans and grants to help craft a restructuring plan.

With no plan in place, the Harrisburg Authority will miss an Oct. 1 payment to Covanta Energy Inc., operator of the incinerator facility, towards an outstanding construction loan. Authority officials also anticipate missing a $1.2 million payment on Series 2002A bonds due Nov. 1. Dauphin County, which is co-guarantor on much of the incinerator debt, does not guarantee the Series 2002A bonds. Harrisburg is located in Dauphin County.

“I don’t think we have anything in the debt-service reserve for that one,” authority board chairman Marc Kurowski said in a phone interview. “I don’t think we’re contributing anything to that payment.”

Debt-service payments are due Dec. 1 on Series 2003D, E, and F bonds. The county guarantees payment on the Series 2003D and E and is expected to pay. It is not clear if the city can pay the Series 2003F payments, which are insured by Assured Guaranty Municipal Corp.

There is also $35 million of Series 2007C and Series 2007D zero-coupon bonds that will mature on Dec. 15.

Dauphin County guarantees the 2007 bonds and included the repayment in its budget. Assured Guaranty does not insure the Series 2007C and Series 2007D bonds.

The council’s vote Tuesday forces the city to go back and begin a new request for proposals process for an outside financial adviser and stipulates that the City Council must be fully involved in the selection of that firm.

Pennsylvania may allow its capital city to use state funds for a different financial consulting firm.

Gary Tuma, spokesman for Gov. ­Edward Rendell, said the state would probably allow Harrisburg to use the money if it chooses a different consultant to help with a debt restructuring plan and fix Harrisburg’s finances.

“The state would make the decision to provide the money based upon a new request,” Tuma said in an e-mail. “But if it were to be used simply for a different financial adviser whose work is consistent with the type performed by Scott Balice, we would probably agree to it.”

During Tuesday night’s meeting, Thompson urged the council, in vain, to approve funds for Scott Balice.

Some council members, however, complained that Thompson’s selection of the firm was not open and transparent. The dissenters want the entire City Council to participate in the selection and appointment of an outside financial consultant.

The council also approved a resolution to search for professional legal and financial advice on a possible Chapter 9 bankruptcy filing and entering into the state’s municipal distressed program, called Act 47.

Tuma said the Rendell administration would probably not support using the state loan and grant funds for such work.

“Should the city want to use the money for a different purpose, then it is unlikely we would approve,” Tuma said.

Rendell, earlier this month, helped the city avoid a default on its GO debt. The governor expedited $3.6 million of payments that the state would have paid Harrisburg later this year in order for the city to meet a $3.3 million GO payment due Sept. 15. Rendell also extended a $500,000 loan and $350,000 of grants to pay for financial advisory services from Scott Balice.

Councilman Brad Koplinski filed the resolution to have the council look for a bankruptcy attorney or other professionals. He said his preference is for the city to work out an agreement with bondholders and AGM, rather than a Chapter 9 filing.

Assured Guaranty and TD Bank NA, trustee of the incinerator bonds, earlier this month sued the city and the Harrisburg Authority, issuer of the debt.

Assured Guaranty and TD Bank are seeking a receiver for the incinerator debt and a court order that would force Harrisburg to meet its obligations.

After Tuesday night’s meeting, Koplinski told reporters that if Harrisburg cannot work out an agreement with stakeholders, it should be aware of the pros and cons of a Chapter 9 filing.

“If it comes to bankruptcy, it’s going to be bankruptcy with some pain, but a reasonable effort by all parties, including the judge, to work our situation out and give us a fresh start, or [without bankruptcy] absolutely devastating tax increases for our city,” Koplinski said.

The councilman said that J. Gregg Miller, of counsel at Pepper Hamilton LLP, would not be able to advise Harrisburg on bankruptcy as his firm represents TD Bank.

Miller last year represented Westfall Township in northeastern Pennsylvania in its Chapter 9 filing.

Koplinski said many interested law firms could be indirectly involved with the incinerator bonds.

The incinerator facility has not been generating sufficient revenue to pay the outstanding debt. Harrisburg did not include incinerator debt-service payments in its fiscal 2010 budget. Bondholders have been paid with debt-service reserve funds and payments from Dauphin County and Assured Guaranty.

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