One city is a capital in a large state often considered a battleground in presidential elections. The other occupies a blighted square mile in the nation’s smallest state.

While disparate, they share the municipal-distress spotlight, struggling to ward off bankruptcy. Rating-agency roundtables and law-firm webcast panelists mention them in the same sentence.

One major factor binds Harrisburg, Pa., and Central Falls, R.I. Their states recently took preemptive moves hoping either to ward off a bankruptcy filing by the cities or, in Rhode Island’s case, to avert “contagion,” or a domino effect, of downgrades statewide, or even that of the state itself.

“Harrisburg and Central Falls are happening at the same time, and in both cases, their states passed legislation almost on the fly to shore up the situation and help the cities work it through,” said Alan Schankel, head of fixed-income research and strategy for Janney Capital Markets.

Bond and legal experts cite pushback by states. “You have a possible contagion issue, an image issue, and a political issue, to name a few,” Stephen Murphy, a Standard & Poor’s managing director, said of Harrisburg.

The contagion, though, hasn’t yet affected Dauphin County, which includes Harrisburg. Standard & Poor’s in March revised its outlook for the county’s general obligation bonds to stable from negative, while affirming its AA long-term rating.

Harrisburg, meanwhile, has a $3.3 million GO payment due Sept. 15, the very month it could run out of money, adding a sense of urgency in Pennsylvania’s capital city. Bond insurer Assured Guaranty Municipal Corp. has a lawsuit pending against Harrisburg after covering for a $450,000 bond payment to holders of Series 2002A bonds on the trash burner that the city missed in April 2010.

David Narefsky, a partner at law firm Mayer Brown LLP in Chicago, called the moves “an understandable reaction by state governments to treat bankruptcy as truly a last resort.”

Pennsylvania’s new law bans small-to-mid-sized municipalities enrolled in Act 47 for distressed communities from filing for Chapter 9 bankruptcy protection under the threat of massive loss of state aid. Harrisburg’s population is around 49,000.

Rhode Island passed a measure requiring cities and towns filing for bankruptcy to guarantee that lenders get first rights to property taxes and general revenue. Lawmakers worried about Central Falls’ problems spreading — contagion has become a handy buzzword — have pushed for the legislation.

Pushback has also surfaced in other ways.

In Harrisburg last Tuesday, the City Council rejected, by a 4-to-3 vote, a financial recovery plan proposed by an Act 47 panel that recommended the city sell its troubled trash incinerator and revenue-producing parking garages. The city owes $300 million, including obligations to bondholders, regional authorities and Dauphin County, due to a costly incinerator retrofit project.

The rejection of the Act 47 plan clearly left Mayor Linda Thompson on the spot. Thompson, elected after the incinerator fiasco brought down predecessor Stephen Reed, strongly supported the Act 47 plan. Thompson herself must now propose her own plan, novel enough to win over at least one Act 47 opponent on the City Council.

Even one council member who voted for the proposal was lukewarm toward a Thompson plan. “I don’t want to wait for another plan, especially from the mayor,” said council Vice President Patty Kim.

Thompson stood firm afterward. “This city will get back to solvency. I am optimistic. I agree with 75% of the plan, and the leveraging of assets will remain in [my] plan,” she said at a news conference after the council vote.

Brad Koplinski, who cast a key no vote, pointed to those Pennsylvania communities still lingering in Act 47. “It’s like the Hotel California,” he said. “You can never leave — a roach motel.”

For example, Aliquippa, outside Pittsburgh, has been under Act 47 since 1987, the first year of the program. In 2007, 20 years in, Aliquippa submitted a revision.

According to statistics from Pennsylvania’s Department of Economic and Community Development, which oversees the program, 26 communities have enrolled in the program since its inception in 1987. Six have had their distressed designations rescinded.

In Central Falls, meanwhile, state-appointed receiver and former Rhode Island Supreme Court Justice Robert Flanders spent one morning last week at the local high school, listening to angry retired firefighters and police officers who may have their pensions cut by up to 50%. Flanders has sent out informational packets to 141 retirees in this 19,000-population community, asking for pension cuts to save it from bankruptcy.

After Flanders presented his plan, one retiree got a standing ovation when he said, “We’d rather take our chances with Judge Votolato,” in reference to Arthur Votolato, the U.S. bankruptcy court judge in Providence.

Central Falls faces $80 million of unfunded pension benefits and an estimated $25 million in deficits over the next five years.

“I don’t know much about Harrisburg or Vallejo,” Flanders said in a telephone interview, referring to a northern California city in a messy, two-and-a-half-year Chapter 9 bankruptcy proceeding. “But in general, it appears that municipalities are suffering from the same plight. Pension benefits and other expenses are creating too much risk for what they can afford. Cities and towns are not being run in the way they should. A combination of factors has caused these problems.”

“An interesting commonality is that both had outside activities that affected their finances,” said Janney’s Schankel. “In Harrisburg you have what’s been called the 'incinerator from hell,’ and while I know less about Central Falls, I do know they had problems with a jail.”

The Donald W. Wyatt Detention Facility in Central Falls, like Harrisburg’s incinerator, has become an albatross.

In December 2008, the U.S. Immigration and Customs Enforcement agency withdrew all of its 152 immigrant detainees from the lockup after a Chinese national died there in custody. The Central Falls Detention Corp., which runs Wyatt, was supposed to pay the city $500,000 annually in lieu of taxes, but hasn’t done so in the past two budget years. The facility had been getting $100 per prisoner per day from the federal government.

Likewise, Harrisburg misjudged regional interest in its trash burner, which sits four miles southeast of downtown.

“I’ve always firmly believed in local governments sticking to their knitting,” Schankel said.

Financial distress has hit affluent areas, too. Nassau County, in New York City’s Long Island suburbs, has a state-run overseer. The Nassau County Interim Finance Authority two weeks ago delivered a harsh rebuke to local officials, saying their latest multi-year budget proposal update “indicates that the county is moving in the wrong direction.”

The county has an estimated budget gap of $120 million for fiscal 2011, down from $176 million, and NIFA worries it could widen to $225 million next year.

Nassau County will hold a referendum next Monday. Voters will be asked to approve a $400 million bond issue to replace Nassau Veterans Memorial Coliseum, home to the National Hockey League’s New York Islanders since 1972, and build a minor league baseball field nearby.

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