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Pa. control may limit Harrisburg election's impact

Marc Levy, Associated Press

HARRISBURG, Pa. (AP) -- Pennsylvania's debt-laden capital city will have a new mayor next year, but he could have little role in sorting out the pressing financial problems that dragged Harrisburg to the brink of bankruptcy after an unprecedented takeover by the state.

Following a tumultuous three years-plus in office, Mayor Linda Thompson lost Tuesday's Democratic Party primary election in the heavily Democratic city. She was defeated by Eric Papenfuse, who will face independent Nevin Mindlin in the November general election. The winner will take over in January.

For now, a state-appointed receiver, William Lynch, is in control and is working to resolve nearly $350 million in debt tied to Harrisburg's municipal trash incinerator and a persistent gap in its operating budget that he has estimated would be $7 million on anticipated spending of about $58 million for the year.

A spokesman for Lynch suggested that the receiver and his crew of lawyers, municipal finance advisers and auditors will stay focused on the debt and budget plans regardless of who is in office.

"Even though we want to work with all our elected officials, no matter the result of the election, we really want to stay focused on the implementation of the recovery plan and continue negotiations on the structure of the deals," said the spokesman, Cory Angell.

Harrisburg's stretched finances reflects a history of bad decision-making as well as a city devastated by the loss of its heavy manufacturing core. Around half its property is tax-exempt and nearly one-third of its 50,000 residents live in poverty, more than twice the national rate of 14 percent, census figures show.

For now, Lynch has big and complicated tasks before him. He is seeking to sell the incinerator, lease the city's parking lots, spaces and garages and privatize its city-owned trash and recycling collection and disposal services.

In addition, he is seeking contract concessions from unionized employees and Harrisburg's biggest creditor, bond insurer Assured Guaranty Municipal Corp. of New York.

The focus of the city's next mayor will really be on a longer-term plan for the city, after Lynch's work is done, said Juliet Moringiello, a Widener University law professor who studies bankruptcy.

"After the existing creditors are dealt with, how will the city of Harrisburg be financially viable given its small tax base?" Moringiello said. "That's probably what the (next mayor's) more important focus is."

Papenfuse agreed. Both Thompson and Papenfuse support the state's efforts to seek federal bankruptcy protection only as a last resort, and Papenfuse said he believes that Lynch is close to a deal with creditors.

"If the concessions don't happen and there is no deal, then I think also the receiver will move the city into bankruptcy before the end of the year," Papenfuse said.

Talk by some city officials of seeking bankruptcy protection, including a failed 2011 bankruptcy petition by a divided City Council, and Lynch's efforts to get Assured Guaranty to reduce the debt have drawn close attention from the nation's $2.7 trillion municipal bond market.

Already, Harrisburg is skipping millions of dollars in general obligation bond payments. Matt Fabian, managing director of the Concord, Mass.-based municipal bond research firm Municipal Market Advisors, said it would be unprecedented in the municipal bond market for investors or a bond insurer to lose money on a general obligation-style bond.

Fabian lumped in Harrisburg with four other financially troubled governments that are being closely watched — Detroit; Jefferson County, Ala.; and Stockton and San Bernardino, both in California.

Thompson took office in 2010, becoming the city's first female and first black mayor. However, Thompson, the former city council president, was unable to get an agreement with the City Council on how to repay the incinerator debt and, after nine months in office, she asked for the state's help in sorting out its dire financial situation by applying to the state's distressed city program.

But City Council rejected the state's plans, and an ongoing stalemate prompted the Republican-controlled state Legislature a year later to approve a law authorizing the takeover.