Pennsylvania’s House Wednesday passed a bill that would allow Gov. Tom Corbett to declare a state of fiscal emergency in the capital, Harrisburg, and appoint a receiver to run its finances.
Corbett has said he would sign the measure, which passed on a vote of 177 to 18, and was expected to do so Thursday, a spokesman said.
Federal court action could affect the attempted takeover. Last week, the City Council filed for Chapter 9 bankruptcy protection in an attempt to fight the takeover, though Mayor Linda Thompson has challenged the filing’s legality.
Bankruptcy Judge Mary France scheduled a Nov. 23 hearing on the filing’s validity. Opponents of the takeover bill also argue that it is an overreach.
Under the bill, which the House reconciled with a Senate version on Wednesday, Thompson and the City Council would have 30 days after Corbett’s signing to devise a recovery plan acceptable to state officials. If they cannot concur, Corbett would petition the appellate Commonwealth Court to appoint a receiver.
Thompson and the council president — now Gloria Martin-Roberts — would serve on a three-member advisory panel, though Martin-Roberts will retire at the end of the year. “I saw it coming, I sounded the alarm over and over again,” Thompson said of the takeover bill.
The City Council rejected three times, all by 4-to-3 votes, a financial recovery plan proposed under Pennsylvania’s Act 47 program for distressed communities.
The legislature “has changed the rules of how Act 47 works after Harrisburg entered the process. That is not right and it is un-American,” the four council members, Brad Koplinski, Eugenia Smith, Wanda Williams and Susan Brown-Wilson, said in a joint statement late Wednesday.
The bill also prohibits a commuter tax, a priority for co-sponsor Rep. Glen Grell, R-Hampden Township. Many of his Cumberland County constituents work in Harrisburg and oppose such a tax. Some city officials have argued for it.
“Certainly this was not something any of us savored doing, but it was a necessary step, unfortunately,” said Grell, co-sponsor with Sen. Jeffrey Piccola, R-Susquehanna Valley.
Harrisburg’s bond problems have generated national attention, given its status as a capital city. It is in debt for $310 million related to cost overruns to an incinerator retrofit project. According to bankruptcy documents, the city guaranteed about $242 million of debt related to the incinerator, and $65 million is overdue.
Jonathan Henes, a partner at Kirkland & Ellis LLP in New York, said state action is increasingly common regarding distressed communities. “What we’ve been seeing are a lot of states managing municipal problems by actually creating hurdles to file for Chapter 9,” Henes said.
Bankruptcy, while not always viable for municipalities, can be effective, Henes said. “By restricting bankruptcy, they’re taking away one of the city’s tools.”
He also cited measures in California to encourage mediation before a Chapter 9 filing and amendments to an emergency manager law in Michigan. The latter survived a lawsuit in federal court by Detroit’s two pension boards challenging parts of the measure, which give the governor and state treasurer unbridled power to appoint emergency managers.
“What Act 47 highlights is the weight the capital markets place on state oversight. The involvement of the state is a credit positive. That’s one of the reasons why the markets didn’t blink last week when Harrisburg filed,” said Tom Kozlik, a director and municipal credit analyst at Janney Capital Markets.
David Fiorenza, a professor at the Villanova School of Business and former chief financial officer of Radnor Township, Pa., said adopting Act 47 would have provided Harrisburg with such tools as management guidance.
“I would have liked to see the Act 47 proposal adopted for Harrisburg,” he said. “Chapter 9 does not address long-term issues such as economic development. You’re just putting on a band-aid.”