On October 11, Harrisburg, PA filed for Chapter 9 bankruptcy, the first state capital to do so in several decades. Now, the city council must develop a plan for the city’s finances going forward. If the state does not approve the council’s plan by November 25th, Harrisburg’s finances could be turned over to a receiver and the city would not have a say in the budget process.
The state is engouraging Harrisburg to pay off its remaining debts primarily by raising property taxes, but the council has been reluctant to raise taxes on its residents, 29% of whom live in poverty. To limit the pain for city residents, Councilman Brad Koplinski supports bankruptcy:
“If the bankruptcy is allowed to proceed, I feel that unfortunately it’s the most beneficial option, because it will allow us to get the city out from under its debt,” Koplinski said at the meeting [held yesterday].
Today, the city’s debt totals about five times its yearly general-fund revenue, and lawmakers have few options to turn to for increased revenues. Vallejo, CA and Central Falls, RI also recently filed for Chapter 9 protection. In both cities, budget problems were driven in large part by increasing unfunded pension liabilities. In Harrisburg, however, the problem developed because the city borrowed $242 million to finance an incinerator that turned out not to be as profitable as expected.
Unfortunately for Harrisburg, even municipal bankruptcy is not a silver bullet for ailing city finances. The Vallejo case illustrates that while bankruptcy gives municipalities some bargaining power for negotiating pensions and can reduce the debt burden, filing for Chapter 9 will not eliminate past obligations. Harrisburg will likely emerge from bankruptcy with a heavy debt burden and nowhere to turn for increased revenue. In this case, bankruptcy may be the city’s best option, but other municipal lawmakers should look to the Vallejo example when promising lavish projects on borrowed money. There is no easy way out of municipal debt.