Harrisburg’s bankruptcy filing: origins and implications

Posted by The Govistics Team in Blog

In recent weeks, the Govistics team at CGR noticed that “Harrisburg City, Dauphin, PA” was consistently the most popular search item on our database. We got a better idea as to why that might have been the case when we learned that City Council made a 4-3 decision on October 12 to file for bankruptcy protection. Chapter 9 bankruptcy filings are named for the section of federal law that covers insolvent municipalities.

Harrisburg’s financial problems have been blamed in large part on the city’s trash-burning incinerator, which now carries a debt burden of $310 million – a figure five times the size of the Pennsylvania capitol’s general-fund budget. The city started to accumulate its astronomical debt after the facility, constructed in 1972, violated environmental regulations in the 1980s and 1990s. Back in 2003, City Council voted to borrow $125 million for a retrofit, assuming that the power generated by a bigger and more efficient facility would pay off incurred debt; but according to a 2010 piece by the New York Times:

“[…] the incinerator burned through the money faster than the trash, leaving Harrisburg residents feeling like they were living through a sequel to the 1986 movie ‘The Money Pit.’ There were contractor troubles, delays, cost overruns and squabbles. The city borrowed tens of millions more, shoveling good money after bad into the job.”

The Harrisburg Resource Recovery Facility, as it is known, is managed by private operator Covanta Energy and is capable of processing 800 tons-per-day of solid waste, generating up to 21.8 megawatts of renewable energy. The energy is sold to wholesale electricity company PJM Interconnect. The facility also sells steam to the local steam district.

When the city issued the retrofitting bond in 2003 (the facility reopened in 2006), it agreed to guarantee much of the debt. Thus, Harrisburg taxpayers would be on the hook for the $310 million if bankruptcy was not on the table. Immediate measures taken by the city to address the problem were not long-term solutions, as noted by the Washington Post when the news of the filing broke:

“The city had suspended payment on the incinerator loans, but almost a quarter of its budget still goes to an assortment of debt payments, crowding out funding for basic city services.”

According to the Chapter 9 petition, the guaranteed debt amounts to approximately $242 million, with $65 million overdue. As noted in Bloomberg Businessweek, the city will need $310 million to make bond payments, restructure debt, repay the county, and repay a Bermuda-based insurer.

What can Govistics show us in regards to Harrisburg finances?

Well, for one example, take a look at this trend line depicting a huge slide in revenue as of 2008 (the most recent year for which  U.S. Census of Governments data are available – this is the way Govistics can compare local/state government and school district finances like apples-to-apples):

In fiscal year 2008, city leaders were looking at a -$180 million drop in income. After drilling down into the various revenue categories, it appeared that the biggest decline that year was under the “Insurance” umbrella:

More specifically, revenue from premiums, assessments, or contributions collected from employers and employees for social insurance programs operated by the public sector and any earnings on the assets. A $288 million hole existed in this category in 2008.

Looking at expenditures, it seems that city leaders attempted to rein in spending, especially in recent years:

But spending on items such as public safety, social services (see below), and public education all significantly outpaced the rate of inflation.

It goes without saying that, when faced with declining revenue and mounting costs associated with programs that were difficult to pare down, the city opted to avoid paying down its debts in favor of keeping other line items afloat.

Why is this significant? With a population of 49,500, Harrisburg would be the largest city since Vallejo, California in 2008 to file for bankruptcy protection. As examined by the Wall Street Journal, there have been 48 bankruptcies from cities, towns, and counties since 1980.

“‘To the extent there was a stigma associated with municipal bankruptcy, that is rapidly declining,’ said David Skeel, a law professor at the University of Pennsylvania.”

But even though proponents of the filing believe bankruptcy is the only option, it does carry the threat of turning Pennsylvania’s state capitol into a “ghost town.” If the filing goes through, the city would have to sell off all of its revenue-producing assets and raise taxes on cash-strapped residents. The poverty rate in Harrisburg currently stands at 29 percent.

Observers are expecting that the Commonwealth of Pennsylvania will legally prevent the city from filing for Chapter 9 and step in with a revamped state-backed fiscal recovery effort. The city has to prove to a judge that it is fiscally insolvent, which some critics say will be a difficult process.

Update (10/18/11, 5:00 p.m.):  Observers were right. The Pennsylvania State Senate on Tuesday gave the go-ahead to a state takeover of Harrisburg’s finances. Harrisburg Mayor Linda Thompson and many state officials are against the bankruptcy filing, calling it “illegal” in the eyes of state law. Governor Tom Corbett is now empowered to declare a state of fiscal emergency in Harrisburg and petition for the appointment of a receiver who will be in charge of formulating and implementing a long-term recovery plan. Read more from Reuters.

A nighttime view of the Pennsylvania State Capitol building in Harrisburg

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