Academic journal article Public Finance and Management

The Financial Crisis in Harrisburg, Pennsylvania

Academic journal article Public Finance and Management

The Financial Crisis in Harrisburg, Pennsylvania

Article excerpt

ABSTRACT

This article provides a comprehensive analysis of the Harrisburg, PA fiscal crisis and subsequent bankruptcy filing. While the "money burning" incinerator in Harrisburg was a major contributing factor to its overall financial crisis, there were other contributing factors. These include a mixture of political expediency, financial chicanery and malfeasance by public officials, demographic changes, economic decline of the city and the national economic environment during the Great Recession. The paper concludes by focusing on the lessons to be learned from the mistakes made by city officials and offers policy recommendations for other state and local governments to avoid future fiscal crises of this magnitude.

1. INTRODUCTION

Harrisburg, the capital of Pennsylvania, is not a large city by national standards; however it is currently the ninth most populous city in the state. In 1950, the population of Harrisburg was close to 90,000 people, but according to the latest 2011 census estimates, Harrisburg's population now stands at 49,673. While Harrisburg historically was known for the 1979 Three Mile Is- land accident which occurred on its border, near Middletown, Harrisburg, in recent years has unfortunately, become better known for its much publicized fiscal troubles, it's extremely high debt level (approximately $1.5 billion at the end of 2012) and its "money burning" incinerator. According to an official from the State Department of Community and Economic Development, the City ended 2012 with a $13 million budget deficit, $9 million of that being ac- crued from missed general obligation bond debt payments (Veronikis, 2013).

This article explores the factors that can lead to municipal bankruptcy in general and provides an objective and comprehensive analysis of the Harris- burg bankruptcy filing in 2011. First, we provide a review of the literature on municipal bankruptcy and seek to fill a large void in the knowledge of munic- ipal bankruptcy within the field of public finance. Second, we present a framework for understanding the unique nature and outcome of the crisis in Harrisburg by delving into the underlying structural causes of the problem. Fi- nally, we focus on the larger lessons to be learned from the mistakes made by city officials and offer policy recommendations for state and local govern- ments to avoid future fiscal calamities of this magnitude.

This research uses quantitative data collection and analysis in support of research into the factors that explain Harrisburg's bankruptcy filing. Based on a case study research design using comprehensive annual financial reports (CAFRs), Pennsylvania's Financially Distressed Municipalities Act (ACT 47) and other financial data, we conclude that there was no single cause or deci- sion completely responsible for the Harrisburg crisis. Rather, several causes and conditions collectively enabled and complicated the situation in Harris- burg including (1) Great Recession, (2) incinerator project, (3) Pennsylvania state policies regarding municipal oversight and bankruptcy filing, (4) declin- ing population and tax revenues, (5) fiscal mismanagement, and (6) political expedience. It is our hope that the Harrisburg experience will serve as a warn- ing to avert similar financial crises in other local governments.

2. BANKRUPTCY: AN HISTORICAL PERSPECTIVE

The Great Recession, which officially lasted from December 2007 to June 2009, had a severe impact on state and local government finances. Not only did tax revenues fall precipitously during the crisis but increased unemploy- ment also increased demand for public services (Jonas, 2012). Long term fis- cal outlooks for both state and local governments has also been adversely im- pacted due to the widening gap between promised pension and health care benefits and the availability of funds to make good on these promises (Jonas, 2012).

Following the last fiscal crisis of this magnitude, the Great Depression in 1937, Congress enacted a revised Federal Municipal Bankruptcy Act that permits municipalities but not states to file for Chapter 9 bankruptcy as a way to reorganize their finances (Brekke, 2010). …

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