By Edith Honan
NEW YORK (Reuters) - As Pennsylvania's deeply indebted capital of Harrisburg weighs the state's rescue plan, lawmakers are at odds over whether chapter 9 municipal bankruptcy should still be on the table.
A team of state-appointed advisors has recommended against bankruptcy, calling instead for the rescue plan that would sell an incinerator at the root of fiscal problems, renegotiate labor deals, cut jobs, sell other assets and sell new debt.
The Harrisburg City Council, which has until July 23 to adopt the rescue plan, requested on Wednesday that Mayor Linda Thompson prepare for bankruptcy as an option of last resort.
The Pennsylvania legislature is considering a bill that would create a management board with full power to implement the Act 47 rescue plan if the council does not approve it.
A bankruptcy filing could carry a stigma that might freeze Harrisburg, a city of 50,000, sitting about 100 miles west of Philadelphia, out of the municipal debt market.
It could have an impact far beyond the Keystone state. Investors in the $2.9 trillion U.S. municipal bond market have been rattled amid predictions of mass defaults and possible bankruptcies.
"It is clear from their public comments and reactions to the Act 47 plan that virtually every municipal official elected in the City of Harrisburg has taken an irresponsible position concerning the city's fiscal mess," State Senator Jeffrey Piccola, the bill's sponsor, said in a statement.
Last December, with Harrisburg 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 filings.
Thompson opposes the bankruptcy option. But she said in a statement on Thursday that Piccola "has to respect the publicly elected officials in this city."
"If we stay the course, and work together to maximize outcomes at every step of the plan, the city will face about five challenging years, and then we will turn the current debt into a gradual surplus for our citizens," Thompson said.
So far, forecasts of widespread collapse in U.S. municipal finances have not come true. Only a handful of cities and counties are in desperate trouble after the financial crisis and recession.
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.
(Reporting by Edith Honan; Editing by Andrew Hay)