Will the Chapter 9 Municipal Bankruptcy Prohibition Be Extended?

 

As the Pennsylvania State Budget nears closer to completion, the question for many of those engaged in and following the City of Harrisburg’s debt crisis is will the one year law banning the City from filing Chapter 9 Municipal Bankruptcy be renewed? Citizens, elected officials, parties inside, parties outside, and the City’s creditors are watching and waiting to see if the PA Legislature does what it did last June—slip in a moratorium on 3rd Class Cities filing for Chapter 9 Municipal Bankruptcy. It was passed as a solution to stopping the capital city from doing so.

Last year it happened quietly and quickly. Within a matter of days, the Fiscal Code (which must be passed with the Budget) had been adjusted to include Act 26, a law prohibiting 3rd Class cities like Harrisburg from filing for bankruptcy until the end of June 2012. That didn’t stop the majority of City Council from doing so on October 15, 2011. A little over a month later, the Federal Court dismissed the municipal bankruptcy petition despite arguments that the prohibition was unfairly put in place only for the City of Harrisburg, i.e. “special legislation.” The Judge didn’t determine it that way.

Now with the one year up, the same thing may happen again these days before a Budget is passed.

Harrisburg City Council has decried the extension of the bankruptcy prohibition and started a petition against it. In recent weeks both the Mayor and the new Receiver, William Lynch, have made public statements opposing the extension of the law declaring that the City of Harrisburg should be permitted to use Chapter 9 as a tool of leverage to negotiate with demanding, unrelenting creditors.

Word is, though, that Senator Jeff Piccola, who represents the district that includes the City of Harrisburg, has been wheedling to get the prohibition extended. He wants it back in the Fiscal Code to be passed with the Budget. He was the force behind last year’s action and is working to make it happen once more.

However, that’s only what vague and unspecific whispers out of the Capitol are indicating about what the lame duck is doing. Public statements from more than one statesman—Senate Majority Leader Dominic Pileggi, Governor Corbett, Representative Glen Grell—is only that yes, the issue is being discussed. No more details than that. Apparently, though, the issue is being discussed behind closed doors, out of the public’s earshot, only amongst a few. Public input is not solicited or desired.

On page 180 of the March 31, 2011 Cravath, Swaine, and Moore Report it states:

Accordingly, the threat of a chapter 9 filing and the power a bankruptcy filing can bring to bear on a recalcitrant creditor provides useful negotiating leverage that would not be present where the possibility of a chapter 9 filing has been removed from the table.

The threat of Chapter 9 Bankruptcy to provide useful leverage. That’s the point. This isn’t about filing for Chapter 9. It’s not about doing it, but using it. Expert opinion states it’s a tool the destitute City of Harrisburg needs against very strong and very powerful creditors.

Thus, the real question is, why would the State even think it a good idea to take such a significant weapon away from its capital city so desperately in need of an advantage?

 

Roxbury News write-ups/videos on the subject:

• Senator Pileggi: “It is an item being discussed.”
• Receiver Lynch: “I’m not in favor of any kind of prohibition on bankruptcy because it limits my abilities.”
• Governor Corbett: “It’s an item being discussed, yeah.”

today’s the day Harrisburg–“Harrisburg Officials on Bankruptcy in the City of Harrisburg”

Petition against the bankruptcy prohibition: Economic Justice for Harrisburg