By David Gaffen
NEW YORK (Reuters) - One day after Pennsylvania's state capital filed for bankruptcy, the city lawyer handling the case defended against allegations the move was illegal.
Harrisburg is one of a handful of municipalities that has flirted with bankruptcy in the wake of the Great Recession that devastated budgets in state and local communities. Some say it could become a touchstone for whether other cities will follow this path to extract concessions from creditors and others.
In an interview with Reuters Insider on Thursday, Mark Schwartz, an attorney for the city council, said the Chapter 9 filing was "absolutely" legal, rejecting charges from the mayor and the surrounding county that the council did not have the authority to take such a step.
The Pennsylvania capital's crisis has been a year in the making. The city of about 50,000 is hampered by $300 million in debt incurred from an expensive revamp of its incinerator and is struggling to fund key city services.
On Thursday, Charles Zwally, special council for Dauphin County, where Harrisburg is located, said the county is weighing its options.
"We're reviewing it now and we're advising the county...We don't believe that they are authorized to file," he said.
The barriers for municipalities to file bankruptcy are high. Less than half of U.S. states authorize a city or county to undertake such a move, and such cases have been dismissed in the past.
In 1991, Bridgeport, Connecticut filed but the case was dismissed as the city could not prove it was unable to pay its debts.
In a press conference Wednesday, Mayor Linda Thompson said she was "ashamed of the behavior" of the council, and said the 4-3 vote to authorize bankruptcy was not legal.
Bond insurer Assured Guaranty also questioned the legality of the filing, which the Harrisburg City Council approved in a 4-3 vote late on Tuesday.
Schwartz rejected that assessment.
"I've had 40 years of involvement with respect to representing and dealing with elected bodies," Schwartz said.
"The council basically utilized that remedy, which was bankruptcy, and filed for it."
Thompson said Wednesday that the mayor and the city solicitor must sign off on all hiring of outside counsel and the city solicitor must approve all ordinances and resolutions considered by the council, which was not done in this case, she said.
The county is one of the most high-profile cities to use Chapter 9 of the U.S. bankruptcy code, most notably invoked nearly 20 years ago by Orange County, California.
There have been only 629 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, according to James Spiotto, a municipal bankruptcy expert at the law firm Chapman and Cutler.
The move likely sets up a protracted legal battle between several entities, including the county, state, city and bondholders.
Pennsylvania Governor Tom Corbett has said the city would be better off if it agreed to a rescue plan under the state's Act 47 program for distressed cities -- which has seen Philadelphia and other cities through crises. His office opposes the bankruptcy.
"The governor and the bond insurer and the creditors are all jostling for, they're still pushing their lawsuits which basically should be stayed by this proceeding," said Schwartz.
"What they're pushing for is, it's all about who's first in line. The creditors want to get paid before police and fire. And that's just wrong."
At the root of Harrisburg's troubles is a financing scheme used to fund a state-of-the-art revamp of its trash-burning plant that left the city deeply in debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt.
Last December, with Harrisburg facing the prospect of bond defaults, deep service cuts, or worse, Pennsylvania officials put the city under its so-called Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 municipal bankruptcy filings.
In July, the Harrisburg City Council rejected a state-approved rescue plan, which called on the city to renegotiate labor deals, cut jobs, and sell or lease the city's major assets -- its parking garages and the incinerator. A month later, the council rejected a similar plan.
(Reporting by Edith Honan; Editing by Andrea Ricci)