Bankruptcy Splits Harrisburg

State leaders and the mayor oppose the move, but the bankruptcy attorney -- representing the city council -- tells Governing the process will continue.
by | October 12, 2011

Harrisburg, Pa. filed for bankruptcy protection late Tuesday night (you can read the filing here). Since then, there have been some developments suggesting the process may get very complicated.

The local newspaper, Patriot-News, provides these insights on the situation:

  • The state legislature will continue to move forward with its city takeover plans when it reconvenes next week.
  • Dauphin County -- of which Harrisburg is the seat -- will likely try to persuade the bankruptcy judge to dismiss the city's bankruptcy petition. The county is one of the guarantors of Harrisburg's debt.
  • The city council may could a tough time convincing a judge it has negotiated in good faith with its creditors, and failure to do so may jeopardize its ability to secure bankruptcy protection
  • State and county leaders, as well as Harrisburg’s mayor, maintain the bankruptcy was prohibited by state law. 

But Mark Schwartz, the city council's bankruptcy attorney, says he may challenge the constitutionally of an amendment to the state fiscal code that critics are using to make that argument. Governing spoke Wednesday night with Schwartz, who maintains the bankruptcy filing was the right move. He explains why the city council made the controversial decision, and where Harrisburg will go from here. (This interview has been edited and condensed.)

You’ve been involved in some high-profile cases. How’d you wind up with this one?

I think people saw that I have some history with Harrisburg. I worked in the legislature there. I was a page when I was 16. I was the majority leader’s administrative assistant. I was a bond lawyer. I was an underwriter. I knew about Harrisburg’s debt situation.

In the late spring/early summer, I was contacted by some city council folks asking if I’d be interested in representing the city council in this matter. I think it was a slow process for there to be a majority that was really in favor of it. They got very tired of being humiliated and put in the corner. 
 
What’s the next step in the bankruptcy process?
There will be more filings, presumably, and there will be a hearing to determine whether this was properly filed. 
 
Why was bankruptcy preferable to a state takeover?
It’s a lot better. It stops the lawsuits. It stops the unfair priorities that certain creditors are trying to get, and a judge will make sure that at some point there is a plan that is something that works.
 
From a legal standpoint, takeover is unprecedented and illegal. The governor would have a conflict of interest. There is an office building that the city guarantees debt service on. Who’s the tenant? The state. What’s he going to do, negotiate with himself? The state has the biggest amount of tax-exempt property in the city. There are inherent conflicts.
 
(In Philadelphia, in 1991), the lawyers were very careful to make sure there was just an oversight authority. They had a revenue source. The revenues source was pledged to bonds. They extended the debt. And the problems took care of themselves. The (Pennsylvania Intergovernmental Cooperation Authority) could reject the city’s budget. It had to be notified of $1 million expenditures or more. It was not this level of intrusiveness where the governor steps into the shoes of the city.
 
It’s all about process instead of substance. You can’t go into bankruptcy, but we can put you into receivership? There’s no practical difference. The bankruptcy is concerned about dollars, not politics. 
 
Will the disagreement among city officials about the bankruptcy decision make the process more difficult?
You just plug along with what you do. The judge will get into the merits of this thing, get a plan, and get an audit of the Harrisburg Authority and see if there can be a claw back. 
 
What really bothers me is this isn’t about money. They (state officials) are not providing money. This is about process -- the bond insurer (Ambac) wanting to be paid ahead of other creditors. Why should they get paid ahead of policemen and firefighters? 
 
That legislation (prohibiting bankruptcy) is an embarrassment. The bottom line argument is Harrisburg applied for distressed status. It was accepted. There were certain remedies allowed, including bankruptcy. Once you pay the admission to the funhouse, they can’t take the exhibits away. They have a right to the remedies that were available at the time they filed. 
 
Will the bankruptcy affect Harrisburg's everyday residents?
No.
 
Are you doing anything to educate the public about what bankruptcy means for Harrisburg?
I think I have. That’s why I invited myself to meet with the Patriot-News editorial board last week. I said I’d be happy to meet with everyone on the council. I wrote to the governor’s counsel … I never heard from him.
 
Municipal bankruptcies can last years and years. Will this one?
I would hope not. I’m sure it will take less them time than the Act 47 process. There’s some municipalities that never emerged from that. It can be relatively expeditious. 
 
How much of your debt might a bankruptcy court wipe out?
I’m not in favor of just assuming bondholders are going to take a haircut, or the creditors will take a haircut. I think there are other options that have to be explored. 

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