Up in Flames: A Case Study of Harrisburg, PA–Part 1

The following is part 1 of a two part blog post. Watch for part 2 this Thursday, June 28th.

David M. Chapinski

Has it been a fiscal emergency or a grave discontinuity in government response?  I find Harrisburg Pennsylvania’s current state of affairs surrounding Chapter 9 Bankruptcy extremely perplexing.  A city seemingly at war with itself, I have been following their bankruptcy proceedings for the past month and have some observations.  Looking for a way to resolve a $300 million dollar debt is by no stretch of the imagination or circumstance an easy task.  Not only did a majority of the city’s council members go against their mayor’s beliefs begrudgingly, they went one step further in not telling Mayor Linda Thompson of their decision at the start of the month.

Transparency about money is not enough. The congressional budget office reported that the top 1 percent of earners had more than doubled their share of national wealth over the past three decades.

Together with the ‘political jockeying’ taking place for their city’s 2013 mayoral race, opposing mayoral candidate Dan Miller is fancying a ‘ground assault’ on Thompson saying she is paranoid, not well educated and phony. I think a major problem from the onset has been certain people in key positions (made a list up of these individuals) being fixated only on the problems filing Chapter 9 creates e.g. interest rates going up and bond ratings sinking.  I believe a failure/letdown in action by current city representatives does prove a point however.  Realistically you cannot be successful in pushing for change if you yourself do not understand the status quo.

Rep. Miller I believe represents somebody embodying the status quo after showing a way to get the city out of the Bankruptcy mess without the sale of assets or raising taxes, which was presented to Mayor Thompson and rejected earlier this year.  I had the privilege of reading through his Plan to Pay Off in the subsequent weeks to follow. My thoughts are Miller has had a lucid understanding from the get go that there are no silver bullets to avoiding chapter 9 bankruptcy when all you have left is a freeze and simply a squeeze. In other words, catalysts like Miller are allowing us to break away from living with the limitations of hundreds of millions of dollars of debt.

Specific bankruptcies, like Harrisburg, are the final actions of a process that began several years previously. They were the result of poor decision-making on the part of elected public officials. However, not every bad Muni deal ends in a bankruptcy. Many can be worked out. I should stress that in those cases the political officials realize that avoidance of bankruptcy is “less worse” than choosing what appears politically to be an easy way out; they are mistakes that were made either by the elected officials or others involved in the process.

Even though most of the 620 Chapter 9 cases have been small special tax district and entities that did not issue municipal bonds, I definitely see market perceptions being starkly different from the realities states like California, Pennsylvania and Alabama experience through deficits.  I believe that the problem of Infrastructure and who will pay for it is of paramount essence considering in 1980 on every $1 of highway construction spending, 72 cents Federal 28 cents State, were spent versus the 2-3 trillion dollars of Infrastructure Improvement still being needed over the next 5 years. But, then again, the truth to me in reflection ultimately still is that the lack of authorization statutes in half of the country’s states.  The result being that a great deal of municipalities lack even having an option for chapter 9, which, to me, is disturbing enough.

We saw increased federal intervention in the housing market beginning in the late 1990s. We also saw the removal of Federal Reserve reporting and accountability requirements for money growth from the Federal Reserve Act in 2000.  We saw the return of discretionary countercyclical fiscal policy in the form of tax rebate checks in 2001.  We saw monetary policy moving in a more activist direction with extraordinarily low interest rates for the economic conditions in 2003-5.  And then there was the interventionism that reached a new peak with the massive government bailouts of Detroit and Wall Street in 2008.  I feel watching out for unintended consequences like Municipal Bankruptcies perhaps involves an even riskier consequence stemming from the explosion, under democratic and republican administrators, in the number of people paying no income tax, in part because of refundable tax credits.

Last year a majority of Americans paid no income tax.  Also, partly because of the aftermath of the serious recession, transfer payments are at an all-time high as a share of personal income.  These are precursive trends for budget dynamics in a democracy.  We need both a panoptic base of economic activity and a larger fraction of the population financing government spending if we are to maintain a prosperous capitalist democracy.

Controlling spending with enforceable procedures takes us back to president Reagan twice negotiating large spending cuts in exchange for modest tax increases (after historic tax-rate reductions in 1981), but much of the spending control never gathered momentum.  The Gramm-Rudman-Hollings Act of 1985 required representations of gradual deficit decline to a balanced budget over several years. As one can imagine, the result was positively taken but with little deficit reduction.  So lawmakers revised and spread out to points of intent, but results were no better.

Here I thought of Winston Churchill’s famously saying, ‘no one pretends that democracy is perfect or all wise.’ Transparency about money is not enough. The congressional budget office reported that the top 1 percent of earners had more than doubled their share of national wealth over the past three decades. And yet republican candidates have been falling over themselves to invent tax proposals that look bound to pinch the poor and reward the rich even more. Recently, Bob Jindal cruised to re-election in Louisiana where voters give him high marks for streamlining government and tackling abuses.  This act alone tells me that people want change for the better by working with government to avoid Chapter 9 Municipal Bankruptcies.

Part 2 of this blog post will discuss “Chapter 9 of the Bankruptcy Code:  A solution in search of a problem?” and will appear this Thursday, June 28th. 

ASPA member David M Chapinski is a Ph.D. Candidate at Rutgers, the State University of New Jersey, Newark in the School of Public Affairs and Administration (SPAA). Email: [email protected] 

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