Pennsylvania's state capital considers filing for bankruptcy
Harrisburg, Pa., is debating whether to declare Chapter 9 bankruptcy. As cities struggle to balance their budgets, more may consider the option.
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“We think many municipalities will have budget pressures that will require cutting or raising revenues,” says Mr. Raphael.
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States and communities also have a lot of assets that can potentially be sold, points out Mark McMullen, a director at Moody's Economy.com, who follows state and local governments.
“These are not underwater homeowners or financial service companies,” he says. “They have a lot of infrastructure and land and valuable assets to cash in.”
In Harrisburg, for example, there are news reports that Mayor Linda Thompson is trying to work out a way to sell some assets. The controller, Daniel Miller, did not return several phone calls.
There are ramifications for the future of a community that declares bankruptcy. “It does adversely affect your credit rating going forward,” says Mr. McMullen. States need a good credit rating, because they need to borrow to finance capital projects, such as water treatment facilities, and to smooth out their income stream.
The largest example of a community declaring bankruptcy is Orange County, Calif., which filed for Chapter 9 in 1994. The last community to declare bankruptcy appears to be Prichard, Ala., which filed for Chapter 9 in October 2009. This was the second bankruptcy for the town, which also had sought protection from its creditors in 1999. The main reason it entered bankruptcy was to address debt from fighting lawsuits and to work out a way to pay retired municipal workers.
A year earlier, Vallejo, Calif., went bust. That city was hurt by declining real estate values after the housing bubble burst in 2007. Rafael says the city has used the bankruptcy to try to renegotiate some labor contracts. “They presented a plan in December, but it’s not approved yet,” he says.
In fact, even if a community felt as if it had no choice but to declare bankruptcy, it might not be able to do so. Half of the states require a municipality to seek state permission to file. That may not be easy to obtain. Instead, a state may set up a control board to monitor the finances of the community. Pennsylvania is one of the states that requires a municipality to seek permission to go bankrupt.
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