Pennsylvania’s capital city of Harrisburg should pursue negotiations with stakeholders to work out repayment of its outstanding debt before resorting to filing for bankruptcy.

That’s the advice from Cravath, Swaine, and Moore LLP in a 258-page report that analyzes the cash-strapped city’s options for meeting its fiscal challenges.

Harrisburg failed to make $63 million of debt service payments on bonds that it guaranteed to pay for an incinerator, including $16.8 million to replenish debt-service reserve funds, according to a debt report compiled by Alvarez & Marsal LLC and included in Cravath’s analysis. Cravath pegs the total outstanding incinerator debt at $242 million.

Investors have been paid, in full, from debt service reserve funds and payments from co-gaurantor Dauphin County and Assured Guaranty Municipal Corp., insurer of the bonds. The county and AGM are looking to recoup $42 million and $4 million, respectively, that they paid thus far to owners of the incinerator debt and have filed suit against the city and the Harrisburg Authority, issuer of the bonds.

Some officials have pushed for a bankruptcy filing to ease the city’s debt woes. Harrisburg also faces structural deficits and is in the state’s distressed municipalities program, called Act 47.

While the threat of a Chapter 9 filing can help the city persuade Dauphin County, AGM, and bond trustees to craft an alternative repayment plan, Harrisburg should try and forge a compromise with those parties before seeking Chapter 9, according to the Cravath report.

“An immediate move to Chapter 9 is unlikely to address the city’s financial problems successfully unless the city has first made a good-faith attempt to negotiate a consensual agreement,” the report said. “Therefore, whatever role Chapter 9 may have in the city’s future, the Act 47 process and attempts to negotiate a consensual agreement with stakeholders must take center stage for now.”

One strategy is for the city to enter its parking assets into a long-term lease agreement for an up-front payment and for Harrisburg to also sell its incinerator. The Lancaster County Solid Waste Management Authority last month announced that it would pay $45 million for the incinerator and would charge lower tipping fees in the future.

A parking concession agreement could net a profit of $111 million after parking revenue bonds are defeased. The proceeds, along with the $45 million, could pay off past-due debts and cut the outstanding incinerator bonds down to $150 million. The city could then refinance the $150 million over 15 years at a rate of 4.2%, Alvarez & Marsal said. But the city would still need to find nearly $15 million annually to cover debt-service costs on the remaining bonds, as it would no longer have incinerator revenue to help pay down the debt.

An alternative plan that does not include selling the incinerator would leave $195.5 million of its bonds outstanding to be refinanced over 15 years at a rate of 4.2%. Harrisburg would then have $6 million of debt-service costs each year that is must address even after applying incinerator revenue towards the debt.

Other fiscal initiatives for Harrisburg include additional spending cuts in the city’s operations, improved tax collections, increasing property and/or income taxes, imposing a commuter tax, and refinancing outstanding city general obligation debt and water revenue debt for savings, according to the Cravath report.

Cravath Swaine and Alvarez & Marsal are both advising the City Council on a pro-bono basis. Cravath represents the New York City Off-Track Betting Corp. in its Chapter 9 filing.

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