April 27 (Bloomberg) -- Harrisburg, Pennsylvania, which has missed $6 million in debt payments since Jan. 1, should consider seeking Chapter 9 bankruptcy protection, City Controller Dan Miller told a three-hour special committee hearing.
Miller, the first of four people to testify last night in an “informational session” on insolvency convened by Gloria Martin-Roberts, council president, said bankruptcy may offer Harrisburg relief from $68 million in debt-service payments this year tied to a waste-to-energy incinerator project. Martin- Roberts opposes a bankruptcy filing.
Harrisburg, the capital of Pennsylvania, the sixth-most populous U.S. state, has guaranteed payments on $282 million in bonds on the incinerator, run by the Harrisburg Authority. The payments on the bonds and on a working-capital loan this year add up to four times the amount the city collects in property taxes each year, budget documents show.
“It’s not good,” Miller said at the start of the hearing before a silent audience of about 20 that included city officials and union members. “Nobody wants to do it, but it’s there for a reason,” he said. “Maybe for the purpose of helping cities that are in the situation we are in now.”
The city this month skipped a $637,500 payment due on a loan to Fairfield, New Jersey-based Covanta Holding Corp., operator of the incinerator.
On April 23, the Harrisburg Authority told the city that it won’t make a $425,282 payment due May 1 on a $17 million bond issue the city has guaranteed, said Robert Kroboth, interim finance manager. Kroboth said it isn’t likely that the city will honor its guarantee, meaning the payment will fall to the bond’s insurer, Hamilton, Bermuda-based Assured Guaranty Municipal Corp.
“When the trustee informs us we need to make the payment, we do,” Betsy Castenir, a spokeswoman for Assured, said yesterday. She said the firm hasn’t gotten a notice from the trustee regarding the May 1 payment.
The city has been negotiating with other groups involved in the incinerator project, seeking a 90-day relief period from debt payments. The other groups include Dauphin County, which has guaranteed a portion of the debt, Assured Guaranty, and the Harrisburg Authority. A formal “forbearance agreement” may be presented to the council within two weeks, Martin-Roberts, the council president, said after the hearing.
Alternatives to Consider
Council members should consider asset sales and tax increases before heading to bankruptcy court, said Fred Reddig, the executive director of the state’s office of Local Government Services. He suggested following steps recommended in a recovery plan prepared by Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances as part of a state municipal support program.
Only one community in the state, Westfall Township in northeastern Pennsylvania’s Pike County, has filed for Chapter 9 protection, and the option might not be available to Harrisburg, said Gregg Miller, a partner with the Philadelphia-based Pepper Hamilton law firm. Miller represented Westfall, which entered bankruptcy last year after it was assessed with a $20 million legal judgment. The amount is about 20 times its annual budget.
“It’s difficult to get into Chapter 9,” Miller said. He said Harrisburg would have to present a proposed debt relief plan to its creditors and get an endorsement from the state before it could seek bankruptcy.
“You have to meet with the state Department of Economic and Community Development and convince them you are deserving of Chapter 9 protection,” Miller said.
Martin-Roberts said she is opposed to bankruptcy for the city of 47,000, and convened the hearing to make sure council members have a common base of information to consider.
“There are those of us who feel bankruptcy shouldn’t be considered an option,” Martin-Roberts said in an interview last week. Patty Kim, another member of the seven-member council, also said at the hearing that she opposes bankruptcy.
Susan Brown-Wilson, the head of the council’s Budget and Finance Committee, said she supports a bankruptcy filing because the state oversight process is too time-consuming, and would require a tax increase that Harrisburg can’t afford.
“Bankruptcy might be the best option,” she said. “This city is so indebted there’s really no way out.”
Council member Eugenia Smith said she was relieved to hear several of the witnesses say that the city has time to consider its options. “I don’t want to rush into anything.”
Moody’s Investors Service in February downgraded Harrisburg’s general-obligation bond rating three levels to B2, five steps below investment grade, from Ba2.
--Editors: Ted Bunker, Mark Tannenbaum