Federal Judge Says Pennsylvania's Capital Can't File For Bankruptcy

November 18, 2011: David Unkovic answers a question during a news conference. (AP)

HARRISBURG, Pa. – A federal bankruptcy judge on Wednesday dismissed the petition by the City Council of Pennsylvania's debt-choked capital of Harrisburg, saying it had been legally barred by state law from seeking bankruptcy protection and, in any case, had no authority to file it.

Federal bankruptcy Judge Mary D. France issued the ruling after hearing more than two hours of arguments by lawyers as to whether the bankruptcy petition, filed last month by a divided City Council, satisfied various legal issues and could move forward despite the objections of the city's mayor, Pennsylvania Gov. Tom Corbett, Dauphin County, bond insurers and others.

A City Council member said the group will decide whether or not to appeal. In the meantime, the Corbett administration is moving to take over many of the city's financial operations in a bid to force it to pay down about $300 million in debt tied to the city's ill-starred trash incinerator.

"The fight from our view is far from over," said Neil Grover, a lawyer who co-founded the taxpayers' group Debt Watch Harrisburg and argued in support of the bankruptcy petition. "This is the kind of issue that goes to the Supreme Court."

If Harrisburg is forced to pay down the entire debt, the cash-poor city will be just a shell, he said.

The City Council voted last month to file the Chapter 9 petition in a bid to thwart the state takeover and force concessions from creditors. Mayor Linda Thompson, who had opposed the filing, and City Council had been unable to come up with a debt repayment plan, sparking an unprecedented takeover by state government as the city fell tens of millions of dollars behind on debt payments and lawsuits piled up.

France early in Wednesday's hearing dismissed many of the arguments made by a lawyer for City Council, but focused debate on two key areas.

While admitting that she typically doesn't consider matters of state and constitutional law, France had questioned Wednesday whether a four-month-old state law designed to temporarily prohibit a bankruptcy filing by Harrisburg had met state constitutional standards that demand transparency in the passage of legislation.

In the end, she said it did.

She also questioned whether a divided Harrisburg City Council indeed had the authority to go over the mayor's head and file for bankruptcy. After the arguments, she said it didn't.

The Susquehanna River city of 50,000 is saddled with about $300 million in debt tied to its nearly 40-year-old trash incinerator. Beset by environmental problems and fines for years, U.S. Environmental Protection Agency shut it down in 2003 with about $100 million in debt already piled on it, some of which had gone to finance other city projects.

Faced with the decision to abandon it and clean up the site, or finance an overhaul, City Council voted for the latter in hopes that it would one day emerge as a profitable investment. But the renovation went awry, and ended up being far more expensive. Meanwhile, Harrisburg city residents now pay among the highest trash-disposal rates in the nation, while the facility can't generate nearly enough money to pay the debt.