Harrisburg Incinerator
© AP Photo/Carolyn KasterThe Harrisburg Incinerator on South 19th Street.
The city of Harrisburg, Pa., filed for bankruptcy protection Wednesday, which supporters characterized as the only alternative to a state takeover that would force the city to use its most lucrative assets to pay off Wall Street creditors.

The bankruptcy filing was a hotly contested and emotional issue in Pennsylvania's capital city. It was strongly opposed by Mayor Linda D. Thompson (D), who has said that bankruptcy would leave an embarrassing mark on the city of 49,000 while crippling its future ability to borrow for municipal projects.

Thompson refused to sign the filing and then called the bankruptcy illegal after the papers were signed by a member of the City Council.

Harrisburg's bankruptcy filing comes as a growing number of municipalities across the country are struggling with mounting debt and a decline in revenue in the recession's aftermath.

Just last month, Alabama's Jefferson County narrowly avoided being dragged into bankruptcy from a failed sewer financing deal, although a final resolution has yet to be reached. Earlier this year, the tiny city of Central Falls, R.I., went into bankruptcy, clearing the way for deep cuts in the pensions of retired city police officers and firefighters.

If Harrisburg's bankruptcy filing stands, it would mark the largest municipal filing since Vallejo, Calif., did so in 2008. For years, Harrisburg has been struggling under a heavy debt burden, more than $300 million of which is connected to an incinerator project that turned into a financial debacle.

The city had suspended payment on the incinerator loans, but almost a quarter of its budget still goes to an assortment of debt payments, crowding out funding for basic city services.

Before voting to file for bankruptcy, a narrow majority of the City Council had voted twice to reject a state takeover plan. The council members said the plan would have brought only temporary debt relief while sparing creditors and forfeiting the city's fiscal future.

"We would have to sell our revenue-generating assets - parking garages and meters - to pay off our creditors, who we believe have not made a significant contribution to a global solution," said Brad Koplinski, the council member who introduced the bankruptcy measure.

Without those revenue sources, he added, "we would be structurally bankrupt and have to file for bankruptcy in three to five years anyway."

The mayor called on the council to rescind its action and added that she would continue working to implement a plan to lease the city's parking garages and meters and restructure its debt outside of bankruptcy.

Although more cities and towns have been feeling fiscal stress in recent years, municipal bankruptcies occur infrequently.

Since 1980, fewer than 300 of the nation's 19,000 municipal entities have filed for bankruptcy, experts said. The vast majority were small: special districts and other entities, such as housing development projects, that were unable to raise taxes on their own, according to James E. Spiotto, a Chicago lawyer who specializes in public finance.

But some analysts say that more bankruptcies could be on the horizon, making it far more expensive for local governments to borrow municipal bonds to finance roads, bridges, senior citizen homes, schools, mass transit lines and playgrounds.

In the past, the bond market's importance motivated local officials to do all they could - including raising taxes and cutting services and personnel - to make payments. If cities miss payments or show severe fiscal stress, their bond ratings are cut, significantly increasing borrowing costs and making it more difficult to balance their books.

Even when municipalities file for bankruptcy, bondholders frequently get paid in full, experts say, further discouraging filings.

But with taxpayers and politicians showing greater antipathy to Wall Street financiers, the dynamic might be slowly shifting.

"I am glad to see we are going to start using the leverage of bankruptcy to get a solution that works for the residents of Harrisburg," said Dan Miller, the city's comptroller who has long advocated for bankruptcy. "It can't be any worse than selling all our revenue-generating assets."

Similarly, Koplinski brushed aside concerns that the bankruptcy filing would permanently damage Harrisburg's ability to access financial markets to fund projects. The city is so deep in debt that it should not do any borrowing for the foreseeable future, he said.

In addition, Koplinski said, "as long as there are projects to create and bonds issues to offer, there will always be money managers and lawyers to come collect and put those deals together. If there is money to be made in Harrisburg, they are going to be back."