A federal judge said Wednesday that Harrisburg, Pennsylvania, cannot file for bankruptcy to get out of its $300 million outstanding debt, paving the way for a state takeover of city finances.
U.S. Bankruptcy Court Judge Mary France said the city's Chapter 9 municipal bankruptcy filing was not authorized due to state law.
The city in October became one of the most-high-profile cities to opt for the little used Chapter 9 of the U.S. bankruptcy code as it tried to get out of a debt burden incurred as a result of an expensive overhaul of the city's incinerator.
The Pennsylvania capital's crisis has been a year in the making as the city of about 50,000 struggles to pay for critical services as well as roughly $300 million in debt incurred from an expensive revamp of its incinerator.
"Now we can focus the city on financial recovery. We want to bring the elements of government together," said Robert Philbin, spokesman for Mayor Linda Thompson, who was opposed to the filing.
Legislators who voted in favor of the bankruptcy in October said they were disappointed.
Pennsylvania Governor Tom Corbett signed a bill on Oct. 20 that allows for a takeover of the city's finances, and he named David Unkovic, a lawyer with ties to the city's biggest creditors, as receiver last week.
"While we respect (the judge's) opinions we will take some time after Thanksgiving to determine whether we want to file an appeal," said Brad Koplinski, a city councilman who voted for bankruptcy.
"We still believe that bankruptcy is the best option for the taxpayers of Harrisburg."
The filing was watched as a barometer for other municipalities seeking potentially to tap this option to deal with mounting debts. Only 26 states allow local governments to file for bankruptcy.
Mark Schwartz, a Philadelphia-based attorney who represents the city council members who voted in favor of a filing, said he is "leaning" toward filing an appeal, but has not decided yet.
State law was amended this year to prevent the city from seeking bankruptcy protection until July 1, 2012. That law sparked controversy, with council members saying it was specifically targeted at Harrisburg because it applied only to municipalities of a certain size.
A spokesperson for Corbett said the governor was "not surprised" by the ruling and is "moving forward with the receiver process to ensure Harrisburg is put back on sound fiscal footing as soon as possible."
Pennsylvania voted for a takeover of Harrisburg through its Act 47 process, which appoints a receiver and imposes financial conditions to restructure the city's finances.
Harrisburg's mayor and five of its seven city council members voted earlier in the month to sell the incinerator and lease several parking garages.
The City Council had rejected two rescue plans that involved the sale or lease of those assets.
"I wish I could propose a magic solution but I have to review matters of law," Judge France said prior to issuing her ruling.
Jefferson County, Alabama, earlier this month filed a $3 billion Chapter 9 petition, the largest U.S. municipal bankruptcy in history. (Reporting by Mark Shade in Harrisburg; additional reporting by Chip Barnett; Writing by David Gaffen; Editing by Dan Grebler)