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In 2009, Thompson announced she would run against Reed. She subsequently won the Democratic nomination and was elected mayor, largely riding on the coattails of Barack Obama to a narrow 800-vote victory. Yet the political dysfunction remained, and the effort to sell city assets went nowhere. In 2010, the city and authority failed to make payments on the then-$288 million of debt, which forced its other guarantors, Dauphin County and bond insurer Assured Guaranty Municipal Corp., to make millions of dollars in payments on its behalf. Dauphin County commissioners, furious about Harrisburg’s failure to craft a solution to the crisis, authorized Assured Guaranty Municipal to file a lawsuit against the city. They did, along with Covanta, and bond trustees TD Bank and M&T Bank Corp. (MTB). On September 15, 2010, the city averted general obligation bond default when the state accelerated $3.6 million in funds earmarked for pensions and fire protection to cover that payment.
It didn’t matter. In June of 2011, the city council voted 4-3 to prepare for bankruptcy even as it continued to take testimony from consultants regarding Act 47, a Pennsylvania “distressed cities” program which called for the sale of municipal assets, dismissals and changing workers’ contracts. In September, the House chamber of the state legislature voted 185-9 to approve a bill allowing for a state takeover of any municipality which fails to adopt Act 47. The state Senate votes on October 17th, where it is expected to pass, and after which Republican Governor Tom Corbett is expected to sign it. It would allow the governor to maintain vital city services and appoint a “receiver,” subject to Commonwealth Court approval. Upon approval, the receiver would be given broad powers to implement necessary reforms.
In an effort to maintain control over their own city, Harrisburg declared bankruptcy to avoid that takeover. “This is the only option,” said Council member Brad Koplinski, one of the four who voted for the measure and who faces reelection in four weeks. “The taxpayers and the city have been pushed against the wall by the bondholders and the state and to some extent by the administration. We know it’s not popular,” he added. “We felt it was the best thing to do.” City council lawyer Schwartz agreed. Calling the pending bill “a political grab” he contended that it was nothing more than an attempt to insulate the bond insurers form their losses. “You got paid your premiums, OK?” he contended. “So pay your losses. This was a great lucrative game.”
Mayor Thompson strongly disagreed, calling the filing “shameful” and blaming “petty politics” for the decision. She insisted the problem would be better solved by an overall debt-reduction plan requiring concessions from lenders, labor unions, contractors–and taxpayers. She might get concessions from the first three, but in a city of 49,500 people–29 percent of whom live below the official poverty rate–raising taxes may be highly problematic.
It may also be moot. A spokeswoman for Republican Gov. Tom Corbett, elected in 2010, indicated he has no intention of backing down. “From our perspective, [declaring bankruptcy] is an illegal action,” she said. “It won’t stand.” A spokesman for Mayor Thompson, Robert Philbin, agreed. “There are procedural matters the solicitor objects to, as far as how the resolution was handled, and the quote-unquote hiring of counsel,” said Philbin. “The solicitor also says only the mayor, in conjunction with the solicitor, can file for bankruptcy on behalf of the City of Harrisburg.”
The bigger picture? The municipal bond market itself, which contains $2.9 trillion in investor assets. George Rusnak, national director of fixed income for Wells Fargo Private Bank, calls Harrisburg’s declaration of bankruptcy an “isolated event,” while other analysts are confident that any “contagion,” while possible, would not stretch beyond the state’s borders. Municipal bankruptcies are indeed relatively rare, with only a few dozen filed in the last thirty years. Yet so was the failure of major banks until Bear Stearns and Lehman Brothers collapsed in 2008.
As for Harrisburg itself, the confusion surrounding the current dilemma was best expressed by resident Stanley Gruen. “The choice is fiscal suicide or a state takeover. I don’t know which is better,” he said. That odious choice, has been engendered by the outstanding debt of an incinerator which by itself, divided by the total population, comes to over $6200 for every man women and child in the city. A city with a 29 percent poverty rate. Perhaps the first topic of conversation that needs to be addressed in Harrisburg–along with countless other cities and towns around the nation–is what constitutes anything remotely resembling fiscally responsible governance.
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