The City of Harrisburg, Pennsylvania—the state's capital—filed for bankruptcy under Chapter 9 of the United States Bankruptcy Code on Wednesday October 12, 2011, indicating that it owed fewer than 50 creditors more than $545 million.
The city's guaranty of bonds issued in relation to the Harrisburg Materials, Energy, Recycling and Recovery Facilities—an incinerator owned and operated by The Harrisburg Authority—and six separate lawsuits related to the incinerator, caused the City Council to declare bankruptcy and seek the restructuring of its debts. The Council voted 4-3 to authorize the filing. The petition was filed in the United States Bankruptcy Court for the Middle District of Pennsylvania as case number 11-06938-MDF.
The Statement of Qualifications filed with the bankruptcy petition asserts that the total amount guaranteed by the city was $242 million, with the amount past due subject to the guaranty totaling $65 million. The city's annual budget is only $60 million.
Chapter 9 municipal bankruptcies are rare and certain states, including Pennsylvania, place restrictions on a municipality's ability to declare bankruptcy. This is significant in this case since Harrisburg Mayor Linda Thompson opposed the filing, and the decision to file bankruptcy was only carried by one vote. Additionally, there may be a dispute about whether the city was authorized to commence the Chapter 9 bankruptcy proceedings. In 1987, the Commonwealth of Pennsylvania passed the Financial Distressed Municipalities Act, commonly referred to as "Act 47." Act 47 placed restrictions and conditions on the ability of a municipality to declare bankruptcy. "There may be a dispute as to whether the city met the conditions of that statute. It remains to be seen as to whether any creditor or representative of the state will seek to have the case dismissed," stated Alexander M. Laughlin, a partner in Wiley Rein's Bankruptcy and Financial Restructuring group.
The filing of the Chapter 9 bankruptcy petition, which allows for the adjustment of debtors by a municipality, will stop the pending litigation while the city attempts to reorganize. The filing is likely to force a confrontation between the city's workers, especially its firefighters and police officers, but it may permit the city to renegotiate those labor contracts and restructure its obligations to its retirees. The Chapter 9 bankruptcy filing may also allow the city to seek the sale of the incinerator and extract itself from what is commonly viewed retrospectively as a failure and business blunder.