Forbidden to file for municipal bankruptcy by Gov. Corbett and bond-friendly lawmakers, Harrisburg debt crisis drags on in state court.
Harrisburg City Council appears ready to defy a Commonwealth Court judge’s order that it enact a 1 percent increase of the city’s earned income tax.
The stage now is set for a new round of court fights, foot dragging and non-cooperation with the Corbett Administration’s appointed receiver, a retired Air Force general.
The immediate battle, on its face, involves the earned income tax rate.
But the larger and continuing war between Harrisburg city council and the Corbett Administration concerns whether Harrisburg should be allowed to file for Chapter 9 bankruptcy to wipe out, or negotiate away, some of the massive debt crippling the capital city.
The Corbett Administration and Republican legislators in July extended a bankruptcy prohibition aimed at preventing cities such as Harrisburg enrolled in the state’s Act 47 fiscal recovery program from filing for municipal bankruptcy.
The prohibition against bankruptcy was the brainchild of retiring state Senator Jeffrey Piccola and lobbyists for the bondholders.
The bondholders want to be paid 100 cents on the dollar for all debts incurred by the city.
The bond interests include TD Bank, Bank of New York Mellon Trust Co., and Harrisburg incinerator bond insurer Assured Guaranty Municipal Corp.
City leaders say the blame for the growing impasse can be laid at the feet of Gov. Tom Corbett and bond-industry friendly state lawmakers, who are protecting the interests of the powerful bond dealers, and not city taxpayers.
After he resigned in late March, former Receiver David Unkovic said that Gov. Corbett, Corbett’s staff, GOP lawmakers, and lobbyists for bond dealers improperly pressured him not to allow Harrisburg to file for bankruptcy.
“I was extremely concerned,” Unkovic testified in state court on May 22. He said that “political and ethical crosswinds” prevented him from properly resolving Harrisburg’s debt mess.
Unkovic testified that he felt he had been “put in a box” not only by creditors who should be investigated, but by Gov. Tom Corbett and his staff.
Before his hasty resignation, Unkovic also called for federal and state criminal investigations of Harrisburg’s debt.
The day after Unkovic called for criminal investigations, Unkovic recounted, Gov. Corbett’s general counsel, Steve Aichele, told him he would soon be fired.
“I offered to resign, and Mr. Aichele proposed that I might no longer be able to remain on as receiver, but might stay on at DCED (Department of Community and Economic Development) and continue to work on Harrisburg matters behind the scenes,” Unkovic testified. “I came away from that meeting believing I would be removed as receiver and therefore decided to resign and leave state government at the same time.
Meanwhile, there are growing indications that federal criminal investigations of Harrisburg’s fiscal crisis are underway.
For his part, Sen. Piccola at the time of Receiver Unkovic’s ouster openly complained that Unkovic was not interested in paying in full the politically well-connected bondholders, but was merely stalling for time in order to move Harrisburg into bankruptcy court, where bondholders presumably would be forced to take a hair cut.
“My criticism of the former receiver was that he was intentionally delaying the process so that an Act 47 (fiscal recovery) plan couldn’t be implemented and so he could place the city into bankruptcy after July 1, 2012,” Piccolo told the Patriot-News in May.
Piccola and other GOP lawmakers responded this summer by passing new legislation prohibiting Harrisburg from filing for bankruptcy at least until November 30.
In July, Gov. Corbett without public comment signed the bankruptcy prohibition extension into law.
The state attorney Disciplinary Board, meanwhile, in early August accused Sen. Piccola of 14 counts of professional misconduct related to his private law practice.
The Disciplinary Board accused Sen. Piccola of misconduct “involving dishonesty, fraud, deceit and misrepresentation” in private estate legal work.
Piccola is set to retire from the state Senate at the end of this term. It is not known to what extent the growing Harrisburg bond mess or the disciplinary charges may have figured in Piccola’s retirement.
The increase in the earned income tax was sought by Unkovic’s replacement, Harrisburg Receiver William Lynch, as part of the broke city’s Act 47 recovery plan.
Lynch is a retired Air Force major general formerly in charge of Iraq War reconstruction. By most accounts, the Iraq War left Gen. Lynch unprepared for the mayhem in Harrisburg.
Under Lynch’s requested plan, the city’s earned income tax would be doubled. It would mean that city residents making $35,000 a year would pay an extra $350 in taxes
But City Council quickly defied Gen. Lynch’s marching orders.
Council President Wanda Williams, Councilman Brad Koplinsky, and other council members complained that bondholders should be forced into negotiations to lower the debt before taxes are raised.
Harrisburg currently owes somewhere between $1 and $2 billion in debt. (No one knows the exact amount owed by the city to its creditors.)
Council members also complain that they should not, and cannot, be ordered by Corbett’s receiver, or state courts, to vote against their consciences or their constituents’ wishes and interests
Receiver Lynch in July brought the deadlocked matter to Commonwealth Court.
Judge Bonnie Leadbetter on August 27 upheld Receiver Lynch on the tax increase, and gave city council 15 days to enact the tax.
But at a council meeting on August 28, a majority of City Council members indicated they were prepared to defy and appeal Judge Leadbetter’s order.
Nearly all matters involving insolvent Harrisburg — down to the smallest disagreements with Corbett’s appointed receiver — will apparently now drag out for months or years in state, and appellate courts.
It is not clear what court remedies Receiver Lynch or Judge Leadbetter can use to rectify problems that are clearly political and financial in nature.
What instead seems abundantly clear to almost everyone but Gov. Corbett and the bondholders is that this mess is in the wrong courtroom.
These matters clearly and rightly should be addressed in federal bankruptcy court.
Harrisburg should be allowed and encouraged to file for Chapter 9 bankruptcy protection to drive down its debt to the careless bondholders who gladly helped and guided the city into this quagmire.
