Harrisburg, PA, the state capital, declared bankruptcy yesterday

the Harrisburg incinerator project

Years ago, Harrisburg, a town of under 50,000 in population, decided to borrow heavily to build a gigantic trash incinerator.  The contraption was supposed to turn a big profit for the municipality by generating energy it could sell.  The project was a big roll of the dice for a small town.

The incinerator quickly needed an expensive overhaul and it never worked as planned.  That left Harrisburg, as guarantor of over $300 million in municipal bond financing, at least nominally on the hook for loans it can’t possibly repay (the entire town budget, including transfer payments from the state, is around $60,000). What were they thinking?

The bonds are insured, however, and as Harrisburg has fallen behind on payments, the insurance company has been taking up the slack.

why Chapter 9 bankruptcy?

Why the Chapter 9 filing, then?  The state legislature apparently decided that Harrisburg hasn’t taken enough austerity measures.  So it was preparing to take control away from the town fathers and cut town services to get more money for debt repayment.  But as government bodies do, the legislature decided it needed a rest and recessed for a few days in the middle of  considering the enabling bill.  That gave the Harrisburg Town Council time to vote, 4 to 3, to enter bankruptcy.

legal questions

Legal issues abound.  For example. the town’s attorney says the council vote isn’t binding because town rules require him to review council measures before a vote, and he didn’t get to do so.  The state legislature already has a law on the books telling Harrisburg it can’t enter Chapter 9.  Is that law constitutional?

equity investment implications

I wrote about this topic in more detail late last year, when former brokerage house bank analyst Meredith Whitney predicted massive municipal bankruptcies in 2011.  Virtually nothing so far, though.

Two points to remember:

states, which have lots more debt than towns, can’t declare bankruptcy

–in some states, municipalities aren’t allowed to declare bankruptcy; in others, state government permission is required first.  We’ll eventually learn whether Pennsylvania is one of the latter sort.

Also, the Harrisburg situation has been clear for years.  While the actual filing may be news, the town’s predicament isn’t.

thinking about pensions?

It’s not clear to me that the Harrisburg town council actually has a plan for what it wants to do in Chapter 9, other than just to foil the state’s effort to take over the town.  In Chapter 9, the town can try to renegotiate the incinerator project debt.  But it can also open the issue of municipal employee pensions that it is committed to but can’t afford.

There’s no indication yet that it wants to do the latter.  But if it does and is successful we can imagine a rash of follow-on Chapter 9 filings by other financially strapped Pennsylvania cities and towns.

That could have a counterintuitive positive economic effect, since it would reduce the need to lay off current employees to get the money to pay retirees.  The monthly BLS Employment Situation reports clearly show that the biggest negative factor in the current labor situation in the US is the constant stream of state and local government layoffs.


I think the Harrisburg situation is one to watch out of the corner of your eye, but one that–in my view–holds no big plusses or minuses for equity investors.

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