What Happens to Nonprofits When a City Goes Bankrupt? Harrisburg Nonprofits Are About to Find Out

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October 20, 2011; Source: Stateline | Pittsburgh, Pennsylvania has long been a financial basket case—and, as NPQ Newswire readers know, it tried to bail itself out with all kinds of taxes-that-dare-not-be-called-taxes levied on tax-exempt nonprofit property owners. Pittsburgh’s biggest financial challenge is funding its pension obligations. The city has temporarily forestalled a complete collapse by shifting parking revenues into the city’s retirement fund.

Harrisburg wasn’t so lucky. The telling blow to Harrisburg’s fortunes wasn’t the usual pension fund mess, but a garbage incinerator. Built in 1972 to burn garbage, produce steam, and eventually generate electricity, the incinerator did not age gracefully and is now in need of renovations. Shut down by the federal government in 2003 due to Clean Air Act violations, the incinerator had already incurred $100 million in debt, so the city financed another $125 million for the incinerator to “retrofit” it to conform to stricter regs.

Apparently, the project was a total bomb, with everyone pointing fingers of accusation every which way. The result was a crippling $310-million debt burden for the City of Harrisburg. After trying a couple of bailout strategies with the state, Harrisburg announced it was bankrupt.

So: What is going to happen in Harrisburg as the state makes plans to put a receiver in place for the city? How will bankruptcy and reorganization affect the city’s grants and contracts with nonprofit service delivery organizations that try to address the needs of this troubled city of 50,000? JPMorgan Chase CEO Jamie Dimon thinks that several more cities will likely fall in behind Harrisburg with bankruptcy filings of their own, and he predicts that states will be unable to provide much help given their own fiscal predicaments.

The line-up of cities possibly becoming the next Harrisburg include Pontiac, Highland Park, Detroit, and Hamtramck, Michigan; Central Falls, Rhode Island; Reading, Pennsylvania; Camden, New Jersey; Paterson, New Jersey; Bell, California; Joliet, Illinois; Gary, Indiana; and Jefferson County (Birmingham), Alabama. Did we leave off one that you know about?

The list of cities that have already declared bankruptcy or got closet to doing so is shorter, but includes Vallejo, California; Prichard, Alabama; and Bridgeport, Connecticut; though Bridgeport withdrew its bankruptcy declaration after the fact. Has your nonprofit had to suffer through a municipal bankruptcy? What did it do to you funding and your programs? And if your city is on the list of future possible bankruptcies, what are you anticipating will happen to your nonprofit if the city actually does file?—Rick Cohen