Harrisburg asks to enter state program for distressed municipalities

HARRISBURG - Unable to emerge from the depths of its financial problems, Pennsylvania's capital city seeks to enter a state program for distressed municipalities that would give it access to loans, grants, and long-term financial planning.

Standing next to Gov. Rendell on Friday, Harrisburg Mayor Linda Thompson announced she was requesting protection for Harrisburg under the state's distressed-city program, otherwise known as Act 47, to avoid the looming cash shortfall that threatens the city's ability to cover its payroll.

Thompson said she hoped the request would help her persuade banks to lend the city about $7 million so she can meet this month's payroll - due in 12 days - as well as other obligations over the next six months.

"This was a gut-wrenching and agonizing decision," she said, "but in the end, it's the only decision I could make if the capital city was to keep functioning."

For several months, Harrisburg city officials have been contemplating filing for bankruptcy, creating waves of concern in the financial markets. Filing for bankruptcy would have jeopardized the city's access to the credit market and put its fate in the hands of a bankruptcy judge.

At the heart of Harrisburg's financial problems is the massive debt incurred by a city authority to retrofit and maintain its aging and inefficient incinerator, beginning in the 1990s.

This year, Harrisburg leaders acknowledged they could not make roughly $68 million in debt payments. The city, which backed that debt, was also in danger of missing a payment on general-obligation bonds, generally more reliable securities that municipalities strive to ensure are paid on time.

In applying for distressed-city status Friday, Harrisburg officials said they expected to default on payments that were due Friday, as well as on three other payments before the end of the year. They did not explain in the application which payments those were.

As a result, officials have been scrambling to negotiate a solution that could stave off a declaration of bankruptcy.

Under Act 47, the state would pay for a team of financial experts to help the city craft a recovery plan. Harrisburg would also have access to loans and grants from the state to implement that plan, said Fred Reddig, executive director of Pennsylvania's Department of Community and Economic Development unit overseeing the Act 47 program.

If the city does not follow through - or refuses to execute the plan - the state could withhold all financial assistance, Rendell said Friday.

"And no city can survive without state funding," he pointed out.

Reddig said that since Act 47's inception in 1987, 25 municipalities had been designated distressed, including Reading and Pittsburgh.

Though he called Act 47 "a safety net against bankruptcy," Reddig acknowledged that it did not preclude such a situation.

The financial team that is brought in to help the city with a financial plan could still end up recommending filing for bankruptcy protection.

For her part, Thompson has resisted filing for bankruptcy, saying it would be only a last resort.

She said Friday she hoped Harrisburg's application would boost its credibility in the financial markets.

Matt Fabian, a managing director at Municipal Market Advisors, a research firm in Westport, Conn., said there was "far less stigma associated" with Act 47 protection, especially as other Pennsylvania cities had entered the program and managed to get back on financial track.

"The good thing about Act 47 is, if the city fails to adopt a financial plan, then they can lose state aid," Fabian said. "That creates a real stick to ensure the city follows the straight and narrow."