Pennsylvania's Capital City Files for Bankruptcy

Seeking to stave off a state takeover of its beleaguered budget, the city of Harrisburg, Pa., filed for a rare Chapter 9 municipal bankruptcy on Wednesday.

Harrisburg, the Pennsylvania capital that previously defaulted on its debt, cited a “continued erosion of its finances,” in a resolution that was passed late Tuesday approving the bankruptcy.

According to Bloomberg News, Harrisburg listed liabilities of $500 million, compared with assets of $100 million. A clerk at the U.S. Bankruptcy Court for the Middle District of Pennsylvania confirmed receiving a physical copy of the filing.

The resolution to authorize the Chapter 9 filing passed by a narrow 4-3 vote, Kirk Petroski, the acting city clerk of Harrisburg, told FOX Business. The resolution said bankruptcy will provide the city with “the necessary protection from its creditors while it develops and negotiates a plan for adjusting its debts.”

However, acting city attorney Jason Hess said the measure wouldn’t be binding because the city council didn’t follow procedure, Bloomberg News reported.

The city's fiscal troubles have been triggered by an overhaul of the budget and a trash-to-energy incinerator that didn’t increase revenue by as much as expected, Bloomberg reported. The move comes as the state had been mulling a takeover of the city’s finances and forcing the installation of a fiscal rescue plan.

Chapter 9 filings by municipalities are very rare. According to Alan Gover, a partner at White & Case who has advised municipalities on restructuring options, there have been just 35 such filings since 1981.

"The reason is that Chapter 9 cannot do for municipalities what Chapter 11 can do for troubled businesses -- smoothly downsize and if necessary redo the balance sheet by converting debt to equity," Gover said in an email. "The business of municipal government is providing basic civil services that cannot be easily eliminated without serious repercussions...Unless the citizens want to become a company town by privatizing all their public assets, the bargaining table will serve them better than the courtroom."

Some council members who voted against the Harrisburg bill expressed concern about whether or not the city can afford the costly legal expenses it could entail.

In a letter to the council, Schwartz said he generally charges $525 an hour, but will reduce his rate to $300 an hour for this matter. However, he said he is requiring a $20,000 retainer for fees and expenses.