On Tuesday, October 19, 2010, Professor Juliet Moringiello
and Associate Professor Randle Pollard
hosted a Policy in the Pit event focused on Harrisburg’s Financial Crisis. They discussed how the city got into its financial trouble, possible resolutions, differences between a city bankruptcy and individual bankruptcy, and the impact it has on the city.
Professor Pollard, an expert in municipal finance, explained that a bond for the city is tax exempt. The bonds are federal subsidies that provide the city a cheaper way to borrow money. General obligation bonds are state and local government bonds in full faith credit. The city of Harrisburg used these bonds to finance an incinerator that has been one of the main reasons for the city’s financial crisis.
The City failed to pay a payment on the bond to its creditors on September 1st, 2010 so its guarantor, Dauphin County, stepped in. Currently, there is another payment due on December 1, 2010 that the city is not sure how it is going to pay.
Although a city declaring bankruptcy is rare, it is possible the city of Harrisburg may declare it. There have been only two major bond issuances in the last thirty years that have gone into default – one in Orange County, California and one in Jefferson County, Alabama. If Harrisburg goes into default and declares bankruptcy, then a lawsuit will ensue.
Professor Moringiello explained the differences between the individual bankruptcy and a city bankruptcy. First, the city of Harrisburg must file a petition for bankruptcy that the State must authorize. An individual does not need authorization to file for bankruptcy. Another issue is insolvency, where one cannot pay its debts as they become due. An individual does not need to be insolvent while the city must be insolvent to declare bankruptcy.
Before filing for bankruptcy, the city must have negotiated in good faith with the creditors to renegotiate a payment plan. The Judge assigned to the case then has powers to approve or disapprove the plan. Also, when a city declares bankruptcy there is no liquidation of assets.
Professor Pollard indicated that the city can come back similar to how corporate companies can come back after bankruptcy. He also discussed the stigmas that might be attached to the state of Pennsylvania because Harrisburg is the capital and how that could lead to a negative perception.