Capital Crisis II
On Point with Chris Papst
On Tuesday, October 11, Pennsylvania's capital city filed for bankruptcy. Never before had a state capital took such desperate measures to address its financial woes. And the action was not quietly accepted. As soon as city council filed the papers, the state hired a lawyer to appeal the process. So did the city's mayor. Now the stage is set for a court battle which will determine the future of municipal bankruptcy in not only the commonwealth, but the country. Some say it's historic. Others feel it's just ridiculous.
Harrisburg's money troubles began in earnest about a decade ago when the EPA shut down the city's ailing trash-to-steam incinerator. At that point, the capital city had a decision to make; does it take out a huge loan to repair the facility or doesn't it? On November 5, 2003, despite overwhelming opposition from the community, city council voted 6-1 to accept a $125 million loan to fix the incinerator.
Following some bad luck and a few unfortunate business decisions, that initial $125 million of debt has now turned into $310 million, which is six times the city's annual budget of roughly $50 million. As a result, the city has missed bond payments and currently finds itself involved in six lawsuits. Its financial outlook is beyond grim.
The city sought help from the commonwealth. But city council, the mayor and the state coordinators couldn't come to an agreement on how to best solve the city's problems. So, Harrisburg City Council voted 4-3 to file for Chapter 9 bankruptcy. I was sitting in council chamber when the vote was called.
No one knew this vote was happening. The rules were suddenly suspended and council added the measure to the agenda. Yet, the move itself was not surprising. It had been long rumored that bankruptcy was council's ultimate objective.
“We know this isn't a popular thing to do,” said Council member, Brad Koplinski, who voted for bankruptcy. “We understand that, but we truly believe this is the right thing to do. I believe this is the only thing that will work.”
“I know there will be a lot of backlash because of this,” said fellow yes-vote, Susan Brown-Wilson. “But you know what? If it's about making sure the people of Harrisburg get their justification and their just day in court, then I say let's do it.”
Councilwoman, Patty Kim, voted with the minority. “Those attorneys from our creditors are going to sue us out the wazoo before we get into bankruptcy court. That is not a good plan for residents.”
Earlier this year, the state passed a law restricting Harrisburg's ability to file for bankruptcy. State lawmakers didn't want the capital city tarnished with a bankrupt reputation. The lawyer council hired will challenge the constitutionality of the law.
As if its financial collapse wasn't bad enough, the city will now be stretched into three directions. Council will further pursue bankruptcy; the mayor will continue to implement her recovery plan that council rejected; and, the state will attempt to take over the city. It's an unprecedented situation with a highly uncertain outcome.
When I wrote on this topic back in August, I stated that this situation was not getting the national attention it deserved (although it is now). Marred in an endless recession, cash-strapped municipalities all around the country are watching closely. If city council's lawyer can triumph over the state and successfully rewrite the city's debt contracts, other troubled municipalities will be encouraged to follow suit. The results could be a disastrous run on municipal bond insurers.
Is this historic or ridiculous? I'm not sure, yet. But there is no middle ground. What is happening is extreme. And the outcome is destined to be, as well.
Chris Papst is a two-time Emmy Award winning journalist for CBS-21.
