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Harrisburg blundering closer to bankruptcy

Pa.'s capital defaults on two debts amid political infighting.

HARRISBURG - Only a few years ago, it seemed unthinkable that Pennsylvania's capital city could be teetering on the brink of bankruptcy.

A renaissance of restaurants and shops was gently transforming its downtown, and after years of neglect, Harrisburg had become a surprising and unexpected destination in central Pennsylvania.

Now that newfound image has faded like the morning mists on the Susquehanna River. Harrisburg is reaping the fruits of a string of bad spending decisions and a catfight among the city's political leaders - a mix that with each passing day seems more likely to land the city in the definition of municipal embarrassment: bankruptcy court.

"I've always been concerned about the stigma of bankruptcy," said City Councilman Brad Koplinski, "but it has to be fully and truly considered now. I can tell you it's something I'm prepared to do, and most of my colleagues are prepared to do."

At the heart of the city's financial problems is the massive debt it began piling onto its aging and inefficient incinerator, beginning in the 1990s.

This year, Harrisburg leaders acknowledged they could not make roughly $68 million in debt payments - owed by the authority that runs the plant and backed by the city - that were due.

Since then, officials have scrambled to negotiate a solution that could stave off a declaration of bankruptcy. But those efforts have bogged down amid infighting - between the new mayor and the city controller, and the mayor and members of City Council.

Last week, the city announced it would skip a $3.3 million payment on a general-obligation bond this month.

That amount is small potatoes compared with the separate debt for the ill-starred incinerator project. But it looms large in another way: General-obligation bonds are the seemingly durable, reliable bonds that municipalities strive to ensure are paid on time. Failure to do so put Harrisburg's fiscal woes on public display and reignited bankruptcy talk.

The announcement had municipal-bond-market analysts shaking their heads, warning that the city was endangering its ability to borrow in the future, and predicting a long and tricky road to recovery.

"It is not a good sign when the state of Pennsylvania's capital city is on the edge of bankruptcy," said Matt Fabian, a managing director at Municipal Market Advisors, a research firm in Westport, Conn. "The bond markets will take notice of that - and they won't lend money."

Fabian and others said Harrisburg was not the only municipality defaulting on loans made on bad investments, such as the incinerator. Bad judgments, coupled with the worst recession in decades, have left a number of towns and cities in desperate financial straits.

Take Buena Vista, Va., which put its City Hall and police station up as collateral in 2005 to build a municipal golf course. Now that Buena Vista, too, has decided to default on its debt payments, its bond insurer could try to foreclose on the big house itself: City Hall.

Buena Vista (population 6,200) has this in common with Harrisburg: Bad decisions have come home to roost.

"The city has no one to blame but itself," said Harrisburg Controller Dan Miller, who has advocated exploring municipal bankruptcy. "This payment has nothing to do with the incinerator. . . . This was preventable."

It wouldn't be the first blunder.

Former Mayor Stephen Reed was derided for secretly spending millions in public dollars on a Gatling gun, a Wells Fargo stagecoach, and other curios for a city-owned Wild West museum that was never built.

Those expenditures garnered headlines and gave the city a black eye.

Linda Thompson, Reed's successor, has repeatedly said bankruptcy was a last resort.

"This is not something that you do lightly," said her spokesman, Chuck Ardo. "There are implications . . . and it doesn't guarantee financial relief. I don't think people understand that."

If Harrisburg files for bankruptcy, analysts say, it risks ceding control over key financial decisions to a bankruptcy judge, who could order a laundry list of austerity measures. That could result in selling off assets - such as parking garages - or raising taxes in a city where almost 25 percent of the 49,000 residents live below the poverty line.

And when it comes to taxes, being the state capital is no advantage. Government property, from City Hall to the Capitol dome, is tax exempt. That means tax hikes hit property owners harder. Plus, while Gov. Rendell has sent financial advisers to help the city, he has said the state would not bail out Harrisburg.

John Mousseau, managing director of Cumberland Advisors Inc. in Vineland, N.J., put it this way in a note Friday to investors: "Seeking Chapter 9 bankruptcy is extremely complicated, legally, and it is costly. It points to woes that go beyond the problems with just the incinerator, and it certainly limits solutions to the incinerator debt problems."

The City Council apparently disagrees. Last week, one member announced the formation of an ad hoc committee to search for a lawyer to advise the council on bankruptcy.

"The fractious political system in Harrisburg is certainly not helping to resolve the situation," said Fabian, of Municipal Market Advisors.

The bad blood has even sparked a spat between the mayor and other officials over how to pay for the soul band scheduled to perform this weekend at the city's annual Kipona festival. The band: War.

Fabian said city officials needed to mend their differences and focus on a solution - because now, he said, Harrisburg has not one but two bond insurers after it to make good on its payments.

And bond insurers, Fabian warned, do not suffer municipal fools gladly.

"These are not common investors," he said Friday in an interview. "These are very tough guys. You don't want one of them on your case, let alone two."