It Begins: Harrisburg Files For Bankruptcy Protection

Tyler Durden's picture

We are confident the spinmasters will spin the first major domino in the muni crisis as bullish: after all it "removes uncertainty." Bloomberg reports that "The city of Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection following a vote by the City Council, according to a lawyer for the council.Mark D. Schwartz, a Bryn Mawr, Pennsylvania-based lawyer and a former public finance banker for Prudential Financial Inc., said he filed the documents by fax to a federal bankruptcy court last night. The filing couldn’t be confirmed with the U.S. Bankruptcy Court in Harrisburg.The state capital of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue. “This was a last resort,’’ Schwartz said in an interview after the council voted 4-3 to seek bankruptcy protection. “They’re at their wits’ end.’’While bankruptcy would mean the loss of state aid under a law passed in June, it would be preferable to a proposed recovery plan, said Councilwoman Susan Brown-Wilson." Well, at least Jefferson County will not have the dubious legacy of being the first muni to push everyone else over. And now that the precedent has been set (yes, Virginia, it can be done) watch as tens if not hundreds of other cash-strapped towns, cities, localities and other entities follow suit promptly to quite promptly.


“We’re not incompetent,” Brown-Wilson said. “We’re just not going to let you run us over with the train anymore,” she said, referring to state officials.


Jason Hess, the acting city attorney, told the council members before the vote that they didn’t follow procedure and their action wouldn’t be binding. The members went ahead anyway.


Preparing for bankruptcy is going to mire the city in litigation it can’t afford, said Councilwoman Patty Kim, who voted against it.


“The problem still exists that we still don’t have money, and we still haven’t moved one foot forward,” Kim said.

Harrisburg, the seat of Dauphin County, needs $310 million to make bond payments, restructure debt and repay the county and insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility. Schwartz said he expects Assured Guaranty will reduce the value of its debt.


“Why should they be first in line?” he said.


In an opinion article published yesterday in a local newspaper, the Patriot-News, the four council members who voted for bankruptcy said Assured Guaranty and bondholders should forgive at least $100 million of the debt.


They also said there should be a countywide sales tax of 1 percent to help pay off the debt. Schwartz, in the interview, said that could forestall asset sales.

As for the historic details of what is the biggest muni bankruptcy in a long time...

In a copy of the Chapter 9 petition provided by Schwartz, the city lists both assets and debt of $100 million to $500 million. According to the copy, the city has 49 or fewer creditors.

The Pennsylvania Senate is scheduled to take up legislation next week that would make Harrisburg the first municipality in the state to be placed in receivership.


The council in July and August rejected fiscal rescue blueprints from consultants hired by the state and Mayor Linda Thompson, triggering the legislative response.


The bill would let Republican Governor Tom Corbett declare a fiscal emergency in Harrisburg and name a receiver who would develop a recovery plan. The manager would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere. Unlike in Michigan, the receiver wouldn’t be able to change union contracts.

And now, spin time.

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papaswamp's picture

Bullish Bitchez!!! Rally time.

HoofHearted's picture

Damn Meredith Whitney...I bet they find some way that this is her fault. And if not, we know who scapegoat #1 is...

trav7777's picture

fuckin cities got to stop borrowing money...

Harlequin001's picture

Ok, so can someone explain to me how the Federal Government being the head of a bunch of bankrupt states, subsequently funded by a bunch of bankrupt Muni's is any different to Europe with its bunch of well, bankrupt states?

Oh regional Indian's picture

BINGO Harl E Quinn. It's the same game plan. Much easier, less planning and all that sort of thing.

Where "they" could, they set up a mess like India or the US, Large nation, myltiple states and a horrible definition/division between State and Federal/Central jurisdictions.

In Europe, they did it with the EU. The parallels are actually quite stunning world over. Good observation.


The Perversion of Language

Dr. Richard Head's picture

Harrisburg needs a Ben Bernanke. Printing money and taking on debt will solve this all dontcha know.

Sabibaby's picture

They should call it a Harrisburg note.

Dr. Richard Head's picture

You know the old saying, "Ain't worth a Harrisburg."

brew's picture

fire up the helicopter...

end da fed's picture

but when the housing market turns around...

Harlequin001's picture

Yes ORI, you could say we are all in deep shit...

It will be interesting to see how this all pans out in the end, whether centralised government can survive or if all multi state 'federations' devolve to individual states again...

That I believe would be a very dangerous situation to have...

Popo's picture

They're both totally bankrupt.

Europe puts on a better dog and pony show, pretending that there is some magical, heretofore unannounced policy that can somehow prevent defaults.    

In both cases the defaults are 100% inevitable.  

The only questions are:  

1)  Who specifically eats the shit sandwich?

2)  When does said shit sandwich get eaten?


And a follow up to question #2 is:  How much currency damage will be tolerated before a decision gets made on question #1?


falak pema's picture

the general thesis in 'hegemonical regulatory capture'; which is what an Oligarchy system is, as it feeds in the name of and at the expense of, those it is supposed to serve; is to delay the final countdown to Doomsday. In this actual case as far down the road as possible. Which will allow the Oligarchs to avoid taking haircuts, painful, in their own lives, or so they reason. The pot of gold at the end of rainbow they sell their people in this enterprise is : ...Mega growth is just around the corner. Through innovation and new developments we will absorb this huge deficit. As in the face of future world-wide growth it will appear puny in comparison once the growth engine starts churning...

We all know that debt has to be recognised or wiped out by growth, aka post WW2 Europe for USA and its mega debt of that age. There is no peaceful third  alternative in history...

This 'hope in growth' has always been the theory in all ages. Not always been historical experience. Tipping points in civilization are quite common. In fact, they are the norm.

Mr. Mandelbrot's picture

Why do these states/munis need to borrow so much money?  Because they like to pay their bus drivers six figure salaries (plus pensions, benefits, etc.) as the issue in the state of Wisconsin a few months ago revealed (six state bus drivers make six figure salaries).  Government at all levels needs to be chopped down at the knees . . .

Harlequin001's picture

and therein Mr Mandelbrot lies the solution; smaller government and balanced budgets...

and an intermediate return to gold as money to build a solid reliable basis of commerce upon which to build from.

r00t61's picture

Assuming that this isn't just a /sarc rhetorical question, the Federal Government can legally print up money whenever it wants to. 

States cannot.

Therefore, the Federal Government can never technically run out of money.  Of course, the value of that money could go to zero, but that's a story for a different day.

Compared to Europe, the ECB cannot issue a Eurobond, the way that the US government can issue a Treasury. The EU cannot also affect fiscal policy in any of its member states - read: raise taxes, whereas the US government can always raise current taxes and/or create new taxes that affect people in all of its states.

Confuchius's picture

Oh dispenser of useless "advice" : zerohedge needs to put trav7777 and its' passive-agressive icon in with Harrisburg's trash burner.


RKDS's picture

And from the area, there're a few issues that the media will conveniently forget to mention.


1.  The incinerator debacle is to blame for an overwhelming proportion of this current debt problem and lots of people now wringing their hands over it were complicit, including "da mayor" herself as head of city council for years and years before Reed was ousted.

2.  There were shady/illegal dealings in regards to financing said incinerator and every effort is being made to not investigate it further.  Those bond holders, many being NY banking interests, also don't want to be subject to the risks of investing and expect to collect every last cent they think they're entitled to in spite of aforemented inpropriety and the economy in general.

3.  Most of the so-called "plans" involve a fire sale of city assets with no write-down on the debt.  So, basically, Harrisburg owes say $500 million and they want to give away everything (the incinerator, parking garages, parking meters, City Island, etc) for an embarassingly low amount of money like $50 million.  Most of those assets generate revenue, by the way, revenue that won't be available to pay the remaining $450 million.  You tell me how the city digs out of massive debt with no revenue generating assets and half of the property tax-exempt due to state government offices and fraudulent charities (including da mayor's).


Communter tax of at least 3% is coming (to punish working people), massive property tax hikes are inevitable, and this may be the crisis that finally lets these clowns push the sales tax to 8% or beyond.  Bankruptcy will still hurt the city but at least the banks will have to share some the pain for once and the city might actually be able to recover a few years from now.

MachoMan's picture

ok...  so...  why does the city need revenue when it has no infrastructure/employees?  Why do taxes need to be increased from current levels to pay for non existant infrastructure?  Won't increased borrowing rates place a ceiling (ok, I'm trying not to laugh at this one) on the city's future expansionary prowess?

So through this bankruptcy, there won't be a cut of costs/staff?

I realize there is a minimum maintenance cost involved...  road maintenance, sanitation, police, fire, etc.  But I can't fathom that there is any point to filing for bk protection when you're just going to fall back into the same hole.

If the city sells its assets to non-charitable private parties, then by definition those assets won't be exempt from property tax...  if charities are fraudulently circumventing the tax code, then they need to enforce their collection regulations...  and WHY THE HELL DOES THE CITY NEED REVENUE GENERATING ASSETS?  The damn thing isn't a business...  it's a dead ass loss for tax payers, i.e. the "revenue generating assets" of every taxing authority.

It doesn't have to be a bad thing...  I'm sure many of the laid off public workers can join a nearby union and get back to half assing it.

RKDS's picture

Well, if you read some of the privatization plans, the revenue-generating assets (specifically the parking garages) that are to be given away STAY TAX EXEMPT as part of the giveaway.  So basically once the city pisses away the chump change they get up front, and they will, they're back in the same hole except they don't have the asset anymore.

The incinerator's almost in the same spot, except it supposedly generates its profit because other municipalities pay to burn their junk there (it's just not enough to keep up with the crooked financing).  When they give it away, the people of Harrisburg will be hit with the triple whammy of losing that little bit of profit, paying more for trash disposal, and being forced to pay, in perpetuity, for a facility that somebody else now owns.

I don't get why some parts of governemnt can't run a profit to cover other parts that don't, especially with how high pitched the shrieks get when any budget goes the slightest bit into the red.  It's precisely this kind of short-sighted stupidity that produces the "use it or lose it" budgeting that wastes millions of taxpayer dollars each year.

Harrisburg is run by idiots and taken advantage of by theives.  Between them, they'll make it impossible for the city to recover.  People and jobs are already fleeing what stands to be a 3rd world slum in short order.

MachoMan's picture

So you have to give tax exempt status to the purchaser of the assets in order to sell them?  This makes no sense to me...  unless they were getting the present value at a preferred discount rate of the future tax stream tacked on to the sales price...  and then, only if it would put them above water with creditors...

If you're going to give these types of concessions, it makes no fiduciary sense to give future tax revenues away when they could be expunged in bankruptcy...  if you want to buy shit in our city limits, then be prepared to pay our taxes...  if the taxes are too burdensome for you, please move some place else (and they will).

falak pema's picture

She has a strong head and I'm sure Teflon nipples so she can handle their shark bites. 

The Deleuzian's picture

That Vanity Fair piece really makes California's crumbled fall into the Pacific ocean plausible...

HelluvaEngineer's picture

This is so damn bullish it made me crap my pants.  Time to do a few lines and play ping pong with shares of NFLX all day, until I pass out in a drug induced coma around 4PM.

Bobbyrib's picture

Which major investment bank do you work for?

HamyWanger's picture

I wouldn't worry about it. This is an isolated event, far from being the harbinger of a muni armageddon that so many redneck silverbugs long for. 

In a week or two it will be forgotten, and the DOW will continue its route to its final destination: 18,000.

papaswamp's picture

Hamy!!! Where ya been? You mean transitory?

HelluvaEngineer's picture

At 18,000 does it just explode?

The Deleuzian's picture

Hamy, I don't know what you want?  A green or a red!  So I'll just keep going through more articles this morning!!!  Zero Hedge is the only blog I can really roll around the floor from laughing 5 minutes after I wake up!!!

Ruffcut's picture

"I'm broke bitchezz, BROKE!"

Cassandra Syndrome's picture

Nash Equilibrium Bitchez

wombats's picture

"trash-to-energy incinerator that doesn’t generate enough revenue. "

What happened?  Did they run out of paper fiat to burn?

Janice's picture

My question is who sold them the "trash -to-energy" incinerator? Why isn't that party strung up? Who voted & approved the crap, and why were they so ignorant that they didn't realize it wouldn't generate enough money? It's easy to recklessly spend taxpayer money, hard to get to back once the taxpayers are broke or left the jurisdiction. Screw the incompetent thugs.

tniutnia's picture

someone made a money on that deal....

Henry Chinaski's picture

Green industry is an oxymoron.  The planet won't be saved by the government throwing money at projects that no private investor would buy.    

mr1963's picture

We expect all your posts to be in the form of a poem Chinaski

prole's picture

"Doesn't generate enough revenue"

Hmm... I wonder if any feather-plucking Yankee can explain exactly what that means?

falak pema's picture

Rip van winkle...I'l wake you up in 20 years when they will have proved to all massively the contrary of what you just affirmed, as the economic mantra of the times.

Government seed money for future energy bend is a valid concept to kick-start a new trend. Then let innovation and economy of scale bring us down the curve in a peak cheap fossil fuel age. 

krispkritter's picture

Don't know who managed that. The one down here in Pinellas always seemed to generate funds. Aside from all the tree-hugging, green-clad nitwits protesting everything it barely makes the news normally. Old clip:

New_Meat's picture

Whitney comes through.

Mae Kadoodie's picture

Occupy Harrisburg?

cossack55's picture

Won't happen, the OWS folks target only those places that actually have some money.

j0nx's picture

Sounds bullish to me. The futes are already up 100+ on China/US trade war so I'm guessing we will be up 200 now with the imminent default of this municipality and many others soon to follow.

Volaille de Bresse's picture

Countdown to munibonds demolition in 10 9 8 7...

pepperspray's picture

But the guy on the radio hawking munis on his Saturday morning infomercial said Meredith was wrong.

JOYFUL's picture
stop this nonsense immediately: call David Kotok, & the Bond Girl,
they will straighten you, and the whole mess out, by using their army of "hundreds of municipal bond market professionals that understand these matters on a granular* level" ...tempest in  tea pot!

*could he have meant glandular level?!? Guy must have been having hot about bad timing!

mtremus's picture

I just saw some guy on CNBC  a few minutes ago saying "nows the time to buy mini's"

Simpley incredible!!!

HelluvaEngineer's picture

Yes, indeed.  Time to buy them from him.  Thanks.