Troubled Harrisburg now state's problem

A judge dismissed a bankruptcy filing by the Harrisburg City Council.

NEW YORK (CNNMoney) -- A federal judge Wednesday dismissed a bankruptcy petition filed by Harrisburg's City Council, saying that it violated state law.

The ruling now paves the way for the state to deal with Harrisburg's massive debt problem. A Pennsylvania court should decide by mid-December whether to approve Gov. Tom Corbett's candidate to serve as receiver for the troubled capital city.

The council, which has repeatedly tried to keep the state out of Harrisburg's affairs, had hoped to retain some control and force creditors to forgive some of the debt.

But federal bankruptcy Judge Mary France ruled the council's action was not authorized by state law, which prohibited the city from filing for bankruptcy. She also said the petition would not have been legal because it was not approved by the mayor.

The council voted in mid-October to file for Chapter 9 bankruptcy protection. The council's attorney, Mark Schwartz, said he would have to read the judge's order before he and city lawmakers decide whether to appeal.

Harrisburg's fate now lies in the hands of a state receiver. Corbett has nominated David Unkovic, a bond attorney who served until last week as chief counsel for the state Department of Community and Economic Development.

If approved, Unkovic would have until mid-January to come up with a plan to deal with the city's debts. The mayor and city council president will serve on the receiver's advisory board.

The financial turmoil in Harrisburg dates back 10 years, when the city decided to upgrade a trash incinerator. Harrisburg was counting on revenue from the project to cover the cost of financing it. Instead, it has left the city with $310 million in debt.

The situation at the state capital, with just under 50,000 residents, has grown more bleak over time. And that has set up a battle, with Mayor Linda Thompson and state officials on one side, and the city council on the other.

The mayor, who took office last year, has strongly opposed bankruptcy, calling it an option of last resort.

Thompson has turned to the state for help several times. A year ago the Pennsylvania state government gave the city $4.3 million to help stave off a bankruptcy threat at that time.

The mayor also petitioned the state last year to enter its distressed municipalities program, which prompted a state consultant to come up with a recovery plan. Under a state law approved earlier this year, distressed cities cannot file for bankruptcy or they risk losing state aid.

However, the city council rejected the state's plan this summer, as well as a similar proposal drawn up by the mayor. That proposal called for selling the incinerator and leasing the city's public parking lots.

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Thompson on Tuesday released a 2012 budget that calls for a property tax hike of roughly $50 to $100 for most Harrisburg residents, as well as a hiring freeze and cut in spending. Most city workers would also see their wages frozen.

The council must vote on the budget by Dec. 31.

The rejection of the bankruptcy filing allows Harrisburg to move forward, said Robert Philbin, the mayor's spokesman.

"Now the city can get focused on working with the receiver to get the city to financial solvency," Philbin said.