Pennsylvania Wednesday announced that its cash-strapped capital city, Harrisburg, will be placed in its program for financially distressed municipalities.

The city as a result will work with an outside financial adviser to craft a fiscal recovery plan.

Austin Burke, secretary of the Department of Community and Economic Affairs, said Harrisburg met two criteria for placement within the Act 47 program — the city has failed to meet its debt obligations, and outstanding claims surpass 30% of the city's budget with no ability to renegotiate.

"This determination will bring objectivity and financial expertise to a city that desperately needs a path to fiscal recovery," Burke said in a statement. "Taxpayers, creditors, and investors will take comfort in knowing that Harrisburg is headed in the right direction. We hope this renewed confidence triggers solutions to help the city meet its pending obligations."

Burke will appoint a recovery plan coordinator for Harrisburg within 30 days. The outside consultant will then have 90 days to develop a financial stabilization plan with Mayor Linda Thompson, the City Council, and the DCEA.

"This is an important first step on the city's road to fiscal recovery," Thompson said in a statement. "There will be difficult choices to be made by the city's leaders as we craft a comprehensive, long-term recovery plan. But we have an opportunity to become the model for comeback cities, and it is my intention to seize that opportunity."

Not everyone is keen on Harrisburg entering into Act 47. The City Council on Nov. 9 selected Cravath, Swaine and Moore LLP to advise it on a potential bankruptcy filing and on Act 47. The law firm is working with the council on a pro bono basis.

City Councilman Brad Koplinski, who has pushed to review a potential bankruptcy filing, said Harrisburg's inclusion into Act 47 can be a tool for the city as it will include an appraisal of city assets. The council has not ruled out a Chapter 9 filing.

"Our attorneys are reviewing all of the necessary documents and doing what needs to be done to give council a recommendation by March 31 of 2011 as to whether Chapter 9 is a good and necessary option to address the seriousness of the city's debt," Koplinski wrote in an e-mail. "I don't believe that Act 47 and Chapter 9 are exclusive of each other and can work together if it comes to that."

Harrisburg, which does not carry underlying credit ratings, has $282 million of outstanding incinerator debt that it has not made payments on in 2010. Thompson's fiscal 2011 budget proposal does not include incinerator debt-service payments. The Harrisburg Authority sold the bonds but the facility has not been able to meet principal and interest payments. Dauphin County, co-guarantor of the bonds, and Assured Guaranty Municipal Corp. have been making payments to bondholders.

Matt Fabian, managing director of Municipal Market Advisors, said the state's Act 47 approval is good news for Harrisburg and its bondholders.

"You'll have more people working on a solution for the city and it will take some burden off of city management, which has struggled with developing a strategy to fix things," Fabian said. "And it doesn't impair bondholders, so I think it's a positive for the market and the city."

Thompson has implemented spending cuts and layoffs to help balance the 2010 budget. Her administration mistakenly failed to include $4.3 million of general obligation debt-service costs in its fiscal 2011 budget proposal. Thompson last week suggested selling land underneath parking garages to help fill that shortfall.

The DCED projects that Harrisburg's cash-flow deficit will reach $19.2 million in 2015. Gov. Edward Rendell in September helped the capital city meet a GO debt-service payment by expediting state payments to Harrisburg. In addition, the city is facing lawsuits from TD Bank NA, trustee of the incinerator bonds, and Assured Guaranty.

"The city faces a magnitude of financial pressures," Burke said. "Without remedies afforded to the city through Act 47, Harrisburg would not be able to provide for the health, safety and welfare of its citizens — a fundamental policy objective of Act 47."

Thompson filed an Act 47 application in early October. Along with having outside financial guidance, the program allows local governments to implement new revenue streams, such as a commuter tax, in order to raise new revenue for the city's coffers.

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