When Cities Go Broke. A Conceptual Introduction to Municipal Bankruptcy in the U.S.


Today, each weekday morning between 7:00 and 9:30, Harrisburg seems to come to life as many, if not most, of its work force hurry from homes in the suburbs to jobs in the city.  Then about 3:30 in the afternoon the process reverses and by 6:00 in the evening life at the heart of the city appears to be suspended.  Harrisburg’s economic base no longer rests on manufacturing but on government administration and services, or lack thereof.

Bankruptcy provides the equivalent of a pause button for Harrisburg. It retains services and provides structure so you don't have a bunch of lawsuits. For many, bankruptcy might as well be a life sentence, especially to those diagnosed with serious health conditions. The average citizen will not put up with this kind of bubble happening to burst. Their home prices have plummeted, they have no jobs, a lot of people are simply getting fed up with being referred to as a bankrupt city, so that they have to resort to crime.  We should be asking from cities like Harrisburg to make the right decision, not destroy the property values in a city, which bankruptcy will do.  Stating the problem with Harrisburg from a financial perspective I believe we need to be examining timeliness of resource acquisition.  After all, when it comes to Harrisburg’s financial mess, it’s all about delay, stall, postpone.

Under a bankruptcy filing, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts.  The city of Harrisburg now has a workable financial recovery plan approved and directed by the court as well as a strong receiver and increased market momentum in terms of the incinerator sale and the leasing of parking operations. There is a difference between an illegal bankruptcy filing and a serious filing when it comes to affecting recovery methods. To put some history behind Harrisburg’s demise in perspective, during the depression of the 1930s, 4770 municipal units defaulted in the payment of interest or principal on some 10 percent of the then outstanding total of $15 billion of municipal bond issues.  With no legal procedures available to facilitate the adjustment of this debt, any adjustment of the debt could be effected only through a common law composition agreed to by all creditors.  With no possibility of compelling creditors to assent to such a composition, to attempt it was almost always a futile gesture.  Not anymore.  As of September, 2012, it seems that the bankruptcy endgame for Harrisburg will most likely be avoided, in my view, because all the negotiating parties, under strong leadership, are working hard and remain flexible and open to compromise to avoid the perception of irrational self-interest.

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In assessing the problem with municipal bankruptcy, the initial step in trying to avoid bankruptcy is to clearly and dispassionately assess the underlying problems that are pushing the municipality in that direction.  The degree of self-awareness and transparency among municipalities can vary widely, and for some, one of the main problems may be just getting a good handle on the real drivers of financial stability and solvency.  If a municipality cannot identify in clear terms the specific factors that are driving revenues down and/or expenses up, it has some serious work to do before walking into bankruptcy court.

I still believe that bankruptcy is a worse option but not the worst option for the city of Harrisburg and for the region of Dauphin County, Pennsylvania.  The worse option would be to allow every month go by, and have the debt get worse all the while attempting to float money from taxpayers who do not want to share in the pain.  Under Chapter 9, there are some assumptions people are making, they assume general obligation debt can be crammed down.  From our advisors, they’ve looked at it, and there are serious questions under the Pennsylvania Constitution if general obligation debt, in fact can be crammed down.  Moreover, cases of bankruptcy that haven out there have been quite costly and municipalities that have come out of it, it takes them a long time.  It hurts everything from their workforce to their credit rating to their ability to purchase from the future.  The other point I wish to make is that, even if you go to bankruptcy, a plan has to be there.  A plan doesn’t just appear out of the sky.  It goes back to the municipality involved to develop a plan.  So the plan is more often than not is going to be similar to the plans we’ve already seen out there with Orange County, California, leading to its Chapter 9 filing in 1994 or a large judgment rendered against the municipality such as hat experienced by Desert Hot Springs California, leading to its chapter 9 filing in 2001.

Fiscal stress related to ongoing structural deficits and lack of reserves is much more difficult to tackle because a financing will have little impact on soling the underlying structural problem:  in fact this tactic will likely make things worse by increasing the overall cost to the municipality.  In times like these, painful cuts in service levels, employee compensation and other expenses maybe required, as well as increased revenues through higher taxes or fees.  Yes, bankruptcy protection may be needed to avoid immediate sanctions for breaching contracts, which include labor agreements, missing debt service payments or failing to provide required levels of service.  However, I want put a face to a problem and offer this as a reminder of all that went wrong within a city like Harrisburg since the mid 1980s.

 The Guest Column is our readers' opportunity to write about a given issue or topic in an in-depth and educational manner.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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