Pa. capital city tries to avoid layoffs as debt woes deepen amid feud between council, mayor

Pa. capital city’s debt mounts amid political feud

HARRISBURG, Pa. — Pennsylvania’s financially troubled capital city is trying to avoid painful budget cuts while city leaders feud over how to deal with a staggering debt that is threatening to drag the city into bankruptcy.

With Harrisburg’s newly elected mayor and city council at odds, the city is taking the rare step of skipping a $3.3 million general obligation bond payment due Sept. 15 as an alternative to laying off city employees, firefighters and police officers.

The city already has skipped millions of dollars in payments on bonds it backed for the costly and poorly managed renovation of a trash incinerator, including a $2.2 million installment due Sept. 1.

Now several city council members say they are seriously considering a municipal bankruptcy filing — something opposed by Mayor Linda Thompson.

Thompson hasn’t put forward a far-reaching plan to deal with the debt, despite repeated promises to do so, and council rejected her proposal to increase taxes to fill the budget gap amid flagging tax collections.

“A bloc on city council has opposed every initiative this mayor has made since her election … putting the city on the road to where it is now,” said Thompson’s spokesman, Chuck Ardo.

Council members describe a vacuum of leadership in the city and a mayor who rarely appears before them or is unwilling to consider their views in trying forge a compromise. When the mayor does talk to individual council members, “it’s not a give-and-take discussion,” said council member Brad Koplinski.

Proponents of a bankruptcy filing say it would force creditors to forgive some of the incinerator debt. Meanwhile, the Susquehanna River city of 47,000, where the poverty rate among families is three times the national average, could face lawsuits from creditors seeking a court order for the city to raise taxes and pay its debts.

A massive tax increase, said Koplinski, could devastate the city.

“It’s impossible, it would be unsustainable to keep people here,” he said.

In 2003, the city decided to renovate its aging and inefficient trash incinerator — but the project quickly went awry and costs ballooned, leaving the city on the hook for $280 million-plus debt.

Last year, the Thompson-led council rejected a proposal by her predecessor to lease the city’s parking lots, spaces and garages for 75 years to a private company in exchange for a $215 million up-front payment.

Gov. Ed Rendell has declined to bail out Harrisburg, and has endorsed the idea of the sale or lease of major city assets, such as the parking garages and an island in the Susquehanna that is home to a soccer field and a minor league baseball park.

As if the stakes aren’t high enough now, in December the city will owe another $60-million-plus in payments on incinerator debt — an amount not included in its annual operating budget, which is only slightly larger in size.

Last week’s decision to skip the city’s general obligation bond payment drew rapt attention from the nation’s financial sector, since municipalities have historically taken great pains to make timely payments on bonds for roads, buildings and other civic projects.

Such a default would make it harder for the city to borrow — although city officials say Harrisburg’s creditworthiness is already badly damaged.

Normally, the default rate on municipal bonds is rock-bottom, creating a safe haven for tax-averse investors, and the recession isn’t changing that yet, despite many municipalities facing deficits similar to Harrisburg’s.

Fewer than 20 rating-worthy municipal bond issuers out of about 25,000 have defaulted, said Matt Fabian, managing director of Concord, Mass.-based Municipal Market Advisors, a municipal bond research firm.

Still, it wouldn’t take many defaults in the $2.8 trillion municipal bond market to possibly drive up the cost of borrowing for all municipalities, Fabian and others say.

“In places like Harrisburg, where maybe the city’s management doesn’t understand what it means not to pay, you could have a problem,” Fabian said. “If this culture (of making payments) changes, then maybe you could have an increase in defaults.”