Harrisburg Pennsylvania files for bankruptcy. Is it the first of many cities to do so?

Harrisburg Pennsylvania, the state’s capital city, filed for chapter 9 municipal bankruptcy today.  According to an article in the Wall Street Journal the city council rejected a state backed plan which would have amounted to a state takeover of the city’s financial system.  apparently many on the city council preferred bankruptcy to surrendering sovereignty to the state.  Apparently the city council rejected the plan also because it would include selling and/or leasing many of the city’s assets.  This too would amount to a turn over of sovereignty to others outside the city and loss of control over the city.

I wrote in a previous blog that I believe it’s much better for a city to file for a chapter 9 municipal bankruptcy and keep its assets than to sell them.  Better to get rid of debt and keep the city’s assets intact for the people of the city.  Usually it is pensions of city workers that are the problem and they need to be re-negotiated after a bankruptcy.  The article points out though that there is also a problem with debt holders who demand payments and concessions that the city can’t make.  Bankruptcy, or the threat of it, can cause these obligations to be re-written down to a level that the city can afford and it can keep its assets to boot.

So I believe the city did the right thing by filing bankruptcy.  According to the article 48 cities have chosen to file for bankruptcy since 1980 and I believe that there will be many more during this recession.  Many cities, like my city of San Diego, have over-promised pension benefits to city employees because of the unfortunate and wrong practice of public service unions being able to collectively bargain.  This allows city unions to lobby officials for extraordinary benefits and the officials grant them because they get votes in return.  The taxpayer is then on the hook to pay.  Bankruptcy can break these contracts ans save the city’s budget from being busted, and the taxpayers from being over-taxed, and city assets from being sold off.

The city officials who voted for bankruptcy stated that not only they were forced by bondholders into the bankruptcy but they also could not raise taxes.  If they were forced to raise taxes to the extent necessary to pay this debt then the city would essentially be abandoned its people who could not afford the taxes.   Harrisburg already has a poverty rate of 29% so its citizens could ill afford to pay these taxes.

The city also has many government buildings in it and these buildings pay a reduced property tax rate which adds to the city’s problems.  In addition there is a $310 million trash incinerator that was meant to produce clean energy but now no one can pay for.  The city has the responsibility for the debt for the incinerator and the city can’t pay.  It sounds like another green energy debacle to me.

Many others are fighting the bankruptcy decision and the residents are divided.  It’s unclear whether the city is insolvent too.  But according to a USA Today article they listed $458 million in creditors and claims.  Many of these were related to legal actions that were filed against the city because of the incinerator.

It sounds to me that Harrisburg, like a lot of other US cities, is in exactly the same position that many of my clients are in.  They are broke, exhausted, tapped out, underemployed, and teetering on the brink of disaster.  It only takes one incident to throw them over the financial edge into bankruptcy.  One more bad (trash incinerator) deal will force them to file bankruptcy or default on their debts or lose control of their lives.

I therefore support the move as I believe in bankruptcy.  It can be a vehicle to wipe away debt and allow a city or a person to get a fresh start.

For more information please visit my website at: www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  If you or someone you know may need to file bankruptcy please get my FREE E-BOOK “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” by e-mailing me at farquharesq@yahoo.com.