PhillyDeals: Harrisburg presses fight for bankruptcy

Cash-strapped Harrisburg's City Council is fighting a threatened state takeover by asking for protection from its creditors under rarely used Chapter 9 of the U.S. bankruptcy code.

"The city is insolvent" because it faces $83 million in bond payments for a troubled trash incinerator, plus a deficit in its operating budget, lawyer Mark Schwartz wrote in the city's petition to the federal bankruptcy court in Harrisburg.

The city's move is an attempt to pressure bond insurers Assured Guaranty Municipal Corp. and Ambac Financial Group Inc. and other creditors into paying as much as $100 million of the city's $300 million-plus in outstanding debt, after deeply indebted Jefferson County, Alabama, won similar concessions, analyst Matt Fabian told clients of his Connecticut firm, Municipal Market Advisors.

Gov. Corbett's office questioned council's power to file for bankruptcy. "It's in violation of the law," spokeswoman Kelli Roberts told my colleague Angela Couloumbis, citing a provision in the state fiscal code, passed in the summer, that stops distressed cities from seeking Chapter 9.

In a statement, State Sen. Jeffrey Piccola (R., Dauphin), who represents the city and suburbs, also called the move illegal.

But the state's punishment for defiant towns like Harrisburg won't likely block the city from pursuing its case, Alan Schankel, managing director at Janney Capital Markets in Philadelphia, told me.

"The penalty is a loss of state aid. That's not much of a penalty" for a city in bankruptcy, he added.

"State law is clear" in allowing Harrisburg's council to declare bankruptcy and seek its own solution to years of heavy borrowing that had been encouraged by state officials of both parties, Schwartz told me.

Pennsylvania already oversees budgets for Philadelphia, Pittsburgh, Chester, and other cities, and Harrisburg had previously requested the state's fiscal guidance. But a majority on the council rejected the state's proposals for possible sale of city parks and parking areas and staff cuts as painful and insufficient to solve the city's problems.

Instead, city officials suggested measures like a new 1 percent income tax on workers, including commuters. State employees who live in Harrisburg's suburbs - Piccola's constituents - object to such a tax.