It’s Either Bankruptcy or State Takeover in Pennsylvania’s Capital City

It’s Either Bankruptcy or State Takeover in Pennsylvania’s Capital City
October 21, 2011

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

With the Harrisburg, Pa., City Council recently voting to have the city file for bankruptcy, Harrisburg’s mayor saying the filing is illegal, and the Pennsylvania governor approving a state takeover of the city's finances, one thing is clear: No matter how things shake out in Pennsylvania’s state capital, city officials have made some bad decisions.

As if owing hundreds of millions of dollars on a trash incinerator that does not come close to paying for itself is not enough, there’s this: millions of dollars spent over a decade by this small mid-Atlantic city to buy artifacts for a Wild West museum that will never be built.

But this is small potatoes compared to the incinerator fiasco that has driven the city to bankruptcy, or state takeover, depending on how things end up.

Lousy Contracts, Poor Management

“I was thoroughly surprised at the lack of well-written contracts and inability to monitor contracts or use performance bonds,” said Beverly Cigler, professor of public policy and administration at Penn State-Harrisburg. “I was disappointed, but not surprised, at the failure to have appropriate checks on the former mayor's visionary economic development projects but sloppy use of loans, borrowing, etc.”

Her reference was to Mayor Stephen Reed, who held office from 1981 to 2010.

The City Council’s 4-3 vote to file for bankruptcy was an attempt to head off an agreement worked out by Rep. Glen Grell (R-Cumberland) and Sen. Jeffrey Piccola (R-Dauphin/York) that allows the state to impose an immediate recovery plan on the city. Gov. Tom Corbett (R) signed it into law Oct. 20.

The deal allows Gov. Tom Corbett (R) to declare a state of fiscal emergency in Harrisburg and to direct the secretary of the Department of Community and Economic Development to develop an emergency plan to provide for vital and necessary services, including police and emergency, water and sewer, trash pickup, and other services.

“Sen. Piccola and I have the same goal in mind, to break the political stalemate and get the City of Harrisburg on the road to financial recovery,” Grell said in a statement. “The city, and for that matter the entire region, cannot afford to have more delay. Harrisburg’s fiscal condition impacts us all.”

Question of Legality

Mayor Linda Thompson and state government officials argue the City Council lacks the authority to file for bankruptcy. A court hearing has been scheduled for Nov. 23 to determine the legality of the city's and state government's moves.

Harrisburg had been operating a waste incinerator for approximately 40 years when, in 2003, after the federal government ordered it shut down because of pollution problems, the city borrowed $125 million to refurbish it. It was closed in 2005 and reopened in 2008 as a waste-to-energy facility. Combined with other borrowing the city has done over the years, total debt now tops $300 million. Despite charging some of the highest waste-disposal rates in the nation, Harrisburg still brings in too little money to pay it back.

The city did not require the contractor who was hired to refurbish the plant to post a performance bond, and also allowed the contractor to be project manager. That contractor went bankrupt before finishing the work. The city hired another contractor to finish the work and had to borrow millions more dollars to do it. A third boiler was never installed, leaving the facility operating below capacity and losing money.

Problems Beyond Incinerator

“There’s been a long history of bad decisions and management related to the incinerator and other things,” said Nate Benefield, director of policy analysis for the Harrisburg-based Commonwealth Foundation for Public Policy Alternatives. “The incinerator was supposed be hugely profitable. The city owes $300 million on it. If it’s sold, they would get just a fraction of that.”

The city has also had several tourism-related economic development failures, Benefield said.

“The city spent millions of dollars to create a Wild West museum that was never done. They’re auctioning off those Wild West artifacts and are going to lose money on that. They’ve also spent money on a Civil War museum, but Harrisburg is an hour from Gettysburg, where Civil War buffs want to go.”

Pennsylvania has used a fiscal distress law, known as Act 47, that requires s state-appointed consultant to work with local officials on a fiscal plan, and tried to use it for Harrisburg.

Rescue Plan Rejected

Last summer city and state officials tried to hammer out an Act 47 plan that would have had the city sell some assets and cut spending. The state also amended Act 47 to block "third-class" cities such as Harrisburg from filing for bankruptcy before July 2012. The City Council rejected the plan and moved to impose a 2 percent income tax on people who work in the city and live outside its boundaries. Income taxes also would have increased on city residents. The state rejected that idea.

Such tax increases “would be the worst possible solution to the city’s mess,” said Benefield. “This is a small city. It’s easy to move an office a few blocks and be out of the city.”

Cigler said neither bankruptcy nor a state takeover as proposed by the Grell-Piccola legislation is warranted until all other options are exhausted.

“I think the courts must resolve whether the council can declare for bankruptcy without Act 47, whether the council's recent filing on bankruptcy without mayoral action is proper procedure, and whether the state's recent change to the fiscal code for third-class cities is constitutional in denying the bankruptcy option before July 2012,” she said. “There are questions regarding constitutionaity with a state takeover. If the state can enforce the Act 47 process and positive changes don't occur, then filing for bankruptcy would be justified. Act 47, however, provides state guidance but not a takeover.”

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)