(Reuters)— Pennsylvania Governor Tom Corbett signed legislation on Thursday that allows for the takeover of the state's capital city of Harrisburg, setting up a legal confrontation between the state and the city.
The bill paves the way for the governor to declare a state of fiscal emergency that leads to a recovery plan for Harrisburg, which filed for bankruptcy last week.
Harrisburg, a city of about 50,000, is struggling to pay for essential services as well as about $300 million in debt that funded an incinerator project that failed to generate expected cash.
The Harrisburg City Council voted 4-3 on October 11 to file for a Chapter 9 municipal bankruptcy as a way of resolving a massive debt crisis brought on by the funding of an incinerator that hasn't generated enough cash.
The action immediately generated conflict between the City Council and the mayor, Linda Thompson, the state legislature, and the governor, who dispute the legality of the Council's action in filing for bankruptcy.
A U.S. bankruptcy judge set a November 23 hearing date on the legality of the bankruptcy.
Mark Schwartz, a lawyer hired by the City Council to handle the Chapter 9 bankruptcy case, called the governor's signing of the takeover act "absolutely perverse."
"It's too little, too late," he said in a telephone interview on Thursday, dismissing the new law as "clearly unconstitutional."
Schwartz added that the legislation really didn't do anything since the governor "must now get approval from the bankruptcy court" to take over the city.
Governor Corbett signed the bill in a private ceremony, according to the governor's spokeswoman, Kelli Roberts.
"The bill signed into law today will help to enforce Act 47 when municipalities fail to adopt a fiscal recovery plan, making it clear that if there is a failure to act, the state will intervene," Corbett said in a statement.
Under the law, the governor can declare a fiscal emergency after it is determined the city is insolvent or near insolvency, unable to provide vital services and has not adopted a fiscal recovery plan.
"I remain a strong proponent for municipal governments tackling their own problems and coming together to develop a fiscal recovery plan when necessary," Corbett said. "But when that fails to happen, the state has to take action to ensure public safety."
When a fiscal emergency is declared, the State Department of Community and Economic Development Secretary is granted powers to develop an Emergency Action Plan to coordinate essential services. These services include pension and debt payments.
The governor can then petition the state court for the city to be placed into receivership. The receiver will have 30 days to develop a fiscal recovery plan that is submitted to the court. Once approved, the receiver can implement the plan to take control of the municipality's finances relating to the plan.
Throughout the process, if the city adopts and implements an acceptable fiscal recovery plan, a takeover is averted.
Mayor Thompson said the city will comply with the law. Thompson opposed the bankruptcy filing.
The mayor said in a statement that she will use the current financial recovery plan as the starting point for any discussions, saying implementation of some version of the plan is preferable to entering into receivership or bankruptcy.
"If we don't attempt to solve our own problems, the alternatives will be far worse," Thompson said.
A legislative panel estimated the cost of placing Harrisburg into receivership would be between $2.15 million and $2.55 million in the first year. The costs would be about $1 million for the state and between $1.15 million to $1.55 million for Harrisburg.
"This is all process and no money," Schwartz said. "There's not 10 cents for Harrisburg."
The troubled incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt.
Twenty years ago, there was a similar conflict between Bridgeport, Connecticut, and its state government when the city chose to file for bankruptcy to deal with sinking revenue and escalating demand for services fueled by a recession.
Connecticut objected to the move and a judge subsequently ruled Bridgeport was not insolvent and therefore did not meet technical requirements for filing under Chapter 9.