By Ryan C. Wood
The latest municipality to file a municipal bankruptcy case under Chapter 9 of the Bankruptcy Code is the City of Harrisburg, Pennsylvania. The City of Harrisburg filed their petition for relief on October 11, 2011, bankruptcy case number 11-06938 in the Middle District of Pennsylvania. According to court records the scope of the City of Harrisburg’s bankruptcy case is much larger than another recent municipal bankruptcy, the City of Central Falls.
The City of Harrisburg cites past due payments of a staggering $83 million. This is primarily due to their failure to pay the guaranteed incinerator bond debt that is due. Like any cities throughout United States the City of Harrisburg has issued bonds to fund infrastructure improvements. Many cities must meet certain guidelines for the services they provide the public. Many cities issue bonds to fund waste treatment plants, waste disposal and other services necessary to meet the public’s needs. The City of Harrisburg had a $5.35 million deficit in 2010 and has projected a $3.0 million deficit for 2011 without adding in the cost of any of their guaranteed bond obligations. It is no surprise that small municipalities are feeling having trouble meeting their obligations when many states also have budget deficits not to mention the enormous federal budget deficit. Like many Americans struggling with mortgage debt and credit card debt municipalities are turning to the powerful tools available under the Bankruptcy Code to obtain relief.
On October 14, 2011, the Commonwealth of Pennsylvania, the State of Pennsylvania, filed a motion seeking the dismissal of the City of Harrisburg’s bankruptcy case arguing that the City of Harrisburg does not qualify to be a debtor under the Bankruptcy Code. Pennsylvania passed a state law, Act 26 of 2011, 72 P.S. §1601-D.1 (2011), arguably prohibiting a city such as the City of Harrisburg from filing a petition under Chapter 9 of the Bankruptcy Code. The Pennsylvania state law includes a section providing that if a municipality such as the City of Harrisburg were to file a petition under Chapter 9, all state funding to the filing municipality will be suspended. Whether the City of Harrisburg will be allowed to continue to seek reorganization of their debts under Chapter 9 of the Bankruptcy Code now remains to be determined. The Bankruptcy Code is part of Title 11 of the United States Code, federal law. The question of whether a state may enact laws to circumvent and prevent a municipality from receiving the benefits of bankruptcy is in question.
At issue is the Tenth Amendment of the United States Constitution. The Tenth Amendment provides that powers not granted to the federal government nor prohibited to the states by the Constitution are reserved, respectively, to the states or the people. The age old power struggle between the rights of states to govern themselves versus the power of the federal government is not new. This issue may find its way the United State Supreme Court.
For more information about Chapter 9 bankruptcy you may contact our bankruptcy attorneys or bankruptcy lawyers.