No Contagion Seen From Harrisburg Bankruptcy

Update from 12:32 p.m. EDT with comments from Taylor Retirement Services founder Matthew Taylor

NEW YORK ( TheStreet) -- The Harrisburg, Pa., city council voted to file for Chapter 9 bankruptcy, a decision catalyzed by an incinerator program that put the city deep into debt.

The 4-3 council decision called for Harrisburg to file for bankruptcy as soon as possible, and it also voted to hire lawyer Mark Schwartz to oppose a state government takeover, according to Harrisburg's The Patriot-News.

"This really is our only option out there," Councilman Brad Koplinski said. "I believe this is the only thing that will work."

The city must make $310 million in bond repayments, restructure its debt and repay Dauphin County and insurer Assured Guaranty Municipal, which both made payments that the city missed on its incinerator project, according to Bloomberg.

But could this be a warning for what may come from other U.S. cities? Bob Andres, chief investment officer at Merion Wealth Partners, doesn't think so.

"I don't think it's going to have an impact nationally," Andres tells TheStreet. "I think it's an internal situation that has been festering for years."

Harrisburg Controller Dan Miller told CNBC on Wednesday that the city had fought the debt problem for years and that he felt the state of Pennsylvania had tried to "railroad" the city's citizens.

"It's unfortunate that it came to this," Miller said.

Andres said Harrisburg's bankruptcy is a one-off situation that will not be contagion, because he believes it was an obvious case in which city officials didn't know what they were doing.

The Pennsylvania legislature passed a bill in June which said bankruptcy would result in the loss of state aid, and added an amendment to the bill in September that permitted a state takeover of Harrisburg.

The four council members who voted for bankruptcy said that Assured Guaranty and bondholders should forgive some $100 million of the debt, and they also said that they wanted a 1% county sales tax in order to pay off the debt.

"Bondholders have gotten away with murder," Andres said. "You're taking a level of risk, so why should you be protected?"

Matthew Taylor, founder of Taylor Retirement Services in Harrisburg, said the incinerator was cause for much more than Harrisburg's debt.

As debts mounted, Taylor, whose company handles retirement investments in the city, said Harrisburg increased tax rates to some of the highest levels in the region. He said taxes increased throughout the decades because of other circumstances, but that the incinerator was the straw that broke the camel's back.

The incinerator began operations in 1972 and the city agreed to long-term, fixed waste management contracts with surrounding municipalities. Problems began to occur when operating costs shot up in the 1980s, Taylor said. But with the fixed contracts, Harrisburg couldn't get out of its deals and the incinerator began to lose money.

The facility continued to lose money until the 1990s when the city forced the incinerator to shut down because of Environmental Protection Agency violations. The action was a stroke of luck for the city. When the incinerator reopened, Harrisburg was able to restructure its contracts with surrounding municipalities and reverse the fixed rates and long-term contracts.

But even a change in the 1990s couldn't curb the debt that had already accrued.

"My hope is the city will go bankrupt, that's not good news for the creditors, but at least the city might become solvent to move forward," Taylor told TheStreet. "It's been a high-stakes, expensive game of chicken."

Worst of all, Taylor argued, is that people have moved to surrounding towns because of Harrisburg's high taxes.

"The numbers... are so large that a lot of folks here -- it doesn't really register, it doesn't really sink in, it doesn't really make sense," Taylor said.

-- Written by Joe Deaux in New York.

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