Mayor claims Harrisburg, Pa.'s bankruptcy filing was invalid, illegal

By Jim Witters

Wilmington, Del., Oct. 13 - The mayor of the City of Harrisburg, Pa., said Thursday that the City Council's decision to hire outside counsel and file bankruptcy this week violated city ordinances and is invalid.

After a 4-3 vote on Oct. 11, the council hired attorney Mark D. Schwartz. On Oct. 12, Schwartz filed a Chapter 9 bankruptcy petition on behalf of Harrisburg in the U.S. Bankruptcy Court for the Middle District of Pennsylvania.

Council warned

Mayor Linda D. Thompson said the council was warned in a memorandum from acting city solicitor Jason Hess prior to the vote that the council's decision would carry "no force and effect" because procedures outlined in city ordinances were not followed. Specifically, city ordinances require resolutions to be approved by the solicitor's office before they are introduced for council consideration.

Likewise, city ordinances require solicitor review and approval of engagement letters with outside counsel, the mayor said.

"City Council decided to pass the resolutions over Mr. Hess's objection," Thompson said.

Hess did not return a phone message or e-mails.

No mayoral role

Schwartz said Oct. 13 that Hess and Thompson's interpretation of city ordinances is skewed. Furthermore, he said, Hess "cannot serve two masters," the council and the mayor.

"The one thing everyone can agree on is that she [the mayor] has no role in this," Schwartz said.

Act 47, Pennsylvania's Municipalities Financial Recovery Act, is the governing law in this case, and the act designates the governing body in such circumstances to be the city council, Schwartz said.

"The council is master of its own rules," he said. The council can waive the rule that requires review of resolutions by the solicitor.

Harrisburg applied for Act 47 status and received state approval, Schwartz said. One of the forms of relief available under the act is a petition for bankruptcy.

However, filing for bankruptcy does allow the state to cut funding to the city, he said.

Thompson forges ahead

Meanwhile, Thompson said she plans to proceed with financial reforms of her own, with the hope of taking a plan to the governor and the state Senate before a state Senate vote next week on a bill that would amend Act 47.

The amendment, SB1151, would permit the state to take over financially distressed cities and appoint a panel to oversee recovery. The measure passed the House in September.

Thompson has supported the plan as a way to remove four council members from the city's financial recovery process. The four repeatedly rejected the mayor's financial recovery plans, always on a 4-3 vote.

Schwartz said the bankruptcy court's automatic stay of legal proceedings would not affect the change in legislation, should it pass. But he said the changes are moot, because the city already is an approved participant in an Act 47 recovery plan.

Orderly process

"This [bankruptcy] case will impose discipline on the process. It will make the case about numbers, not about politics," Schwartz said.

The automatic stay resulting from the bankruptcy petition will save the city legal fees in the six pending cases brought by creditors. The case also will prevent those creditors from "getting their money ahead of the police and firefighters," he said.

The next step is to find out whether anyone is going to contest the case, Schwartz said.

Attorney Christopher E. Fisher filed a notice of appearance Oct. 13 in bankruptcy court, stating that he represents the mayor and the City of Harrisburg.

Fisher did not return a phone message or e-mails.

Incinerator bonds a factor

As previously reported, the city's financial woes include six legal actions related to $242 million of outstanding bonds guaranteed by the city for construction of an incinerator.

Incinerator owner Harrisburg Authority is unable to pay the bond issues. Payment on the bonds is $65 million past due, according to court documents.

Under the guaranties, the city said, it would be required to pay a combined $83 million of past-due payments and 2011 debt service.

The city suffered a $5.35 million budget deficit in 2010 and is projected to a have a $3 million deficit this year, without paying any guaranteed bond obligations.

Chapter 9 is specifically tailored for reorganization of municipalities, as well as counties, taxing districts, municipal utilities, and school districts, according to the federal court system website. The provision was used by Orange County, Calif., in 1994.

Harrisburg's Chapter 9 case number is 11-06938.

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