Gov. Tom Corbett and the PA General Assembly look set to bulldoze the cash-strapped city of Harrisburg's latest attempt to declare bankruptcy (which would make it easier to stiff bond investors who own the city's way-too-large pile of debt), with a law extending the ban on a Harrisburg Chapter 9 federal bankruptcy filing, until November.
But Harrisburg officials may have created enough doubt in the state's strategy to delay or derail it, writes veteran muni bond-watcher Matt Fabian in his Municipal Market Advisors newsletter.
Corbett's goal for the extension is "to give the new [state-appointed city financial] receiver, William Lynch, an opportunity to advance asset sales and private creditor negotiations," according to Fabian..
But City Council and the city controller and treasurer oppose the state's plan to sell off the city incinerator, garages, and other assets in order to pay incinerator bondholders because, as previous receiver David Unkovic noted before he felt obliged to resign, asset sales won't make Harrisburg solvent; it'll just leave the city broke and in debt, while making it easier for everyone who arranged the questionable incinerator deals to avoid responsibility for sticking city residents and taxpayers in a deep hole. (See links to audits here.)
City officials would prefer to file for federal bankruptcy protection, trim the millions owed for questionable projects, and possibly expose the politicians and brokers who drove the city deep in debt to clawbacks or legal action.
So: Why are state officials so desperate to keep the city out of bankruptcy?
Choose one: 1) Harrisburg defaults might make investors wary of other troubled Pennsylvania borrowers and force them to pay higher rates. 2) Bankruptcy could lead to legal action against important members of the bipartisan political gang that runs this Commowealth.
Corbett can probably get the bankruptcy ban extended; he has the votes in the General Asesmbly, and past support from state courts.
But another law might not be enough to force city asset sales, writes Fabian: City council has sued in federal court alleging the state-appointed receiver position now held by Gen. Lynch is a "violation of due process" and the sales should be stopped.
Under this growing cloud: "Although the Governor has stated this plan will continue to advance, we assume it will be difficult for third parties to negotiate with an official - the receiver - who may be removed and whose actions may be invalidated by a Federal judge at any time."