By Edith Honan
HARRISBURG, Pennsylvania (Reuters) - Pennsylvania offered a rescue plan to its deeply indebted capital of Harrisburg on Monday, with recommendations for a wage freeze, a possible property tax hike and the sale of the incinerator at the root the city's fiscal problems.
The city of 50,000, located about 100 miles west of Philadelphia, has been pushed to the brink of disaster as it struggles under the triple burden of $300 million of debt from the incinerator, rising costs and political squabbling.
The state stopped short of recommending bankruptcy -- a move that likely would have rattled the $2.9 trillion municipal bond market, where investors have been spooked since last year amid predictions of mass defaults and possible bankruptcies.
The recommendations will be formally presented to the City Council at a public meeting later on Monday.
Last December, with the city facing the prospect of bond defaults, deep service cuts, or worse, Pennsylvania officials put Harrisburg under its Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 bankruptcy filings.
Ahead of the release of the Harrisburg report, experts said it was unlikely bondholders would be placed at risk.
"Normally, states and local governments do anything they can to make sure the bondholders get paid -- not because of some fondness for bond debt but because of their interest in being able to have the access to the market to make the local decisions locally," said Jim Spiotto, a municipal bankruptcy specialist.
Paul Brennan of Nuveen pointed to Pennsylvania's "really good track record" of helping to turn around much larger cities, including Pittsburgh and Philadelphia.
At the root of Harrisburg's troubles is a financing scheme to fund its state-of-the-art trash-burning plant that left the city with roughly $300 million 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.
In 2003, the federal government called for the plant to be shut down as it was releasing dioxin, which is linked to cancer and birth defects. In response, the Harrisburg Authority revamped the incinerator, borrowing heavily to pay for it.
"I think (Harrisburg) is a little bit of a one-off, and that's typically the case in these state and local bankruptcies. It's usually some catastrophic event, if you will, that pushes them over the cliff," Brennan said.
The U.S. municipal bond market, where states, counties, cities and towns borrow money to pay for roads, schools, bridges and hospitals, is generally considered a safe investment with a lower default rate than corporate bonds.
But in the wake of the 2007-2009 recession, which created budget emergencies in most U.S. states, a handful of cities and counties have teetered toward economic collapse.
Two years ago, Vallejo, California, filed for bankruptcy. The tiny Rhode Island city of Central Falls has effectively been run by a state-appointed receiver since last July. New York's Nassau County has been under state oversight since 2000 and in January the state seized greater oversight powers.
And Alabama's Jefferson County is struggling to ward off what would be the largest municipal bankruptcy in U.S. history as it owes $3.2 billion on its sewer bonds.
(Additional reporting by Lisa Lambert; Editing by Leslie Adler)