By Edith Honan
NEW YORK (Reuters) - The Pennsylvania state capital of Harrisburg has two weeks to agree on a new plan to pay off its debt or else it faces the loss of state aid and eventual insolvency, a consultant said on Wednesday.
Harrisburg is one of a handful of U.S. cities and counties that are facing fiscal collapse in the wake of the recession.
In addition to Harrisburg, Alabama's Jefferson County -- which includes the city of Birmingham -- and the Rhode Island city of Central Falls are all at the brink of Chapter 9 municipal bankruptcy filings, which could have ripple effects throughout the U.S. municipal bond market.
The Harrisburg City Council on Tuesday rejected a rescue plan prepared by the Novak Consulting Group and endorsed by the state. The proposal included the sale of a deeply indebted incinerator at the center of its fiscal woes, along with job cuts, renegotiation of labor agreements and the sale or lease of a parking garage.
Mayor Linda Thompson now has two weeks to offer a new plan, which must be approved by the City Council and the Pennsylvania Department of Community and Economic Development.
"As we've predicted, the city will run out of cash by September, period," the consulting group's president Julia Novak told Reuters in a telephone interview.
Governor Tom Corbett last month signed a law that would cancel state aid to Harrisburg if the city failed to accept a rescue plan.
Harrisburg, a city of 50,000 about 100 miles west of Philadelphia with an average household income of $35,000, also faces seven creditor lawsuits, which Novak said represents "seven opportunities to get a judgment" against the city.
The city's creditors had agreed to drop the cases if the city accepted the plan, she added.
Councilman Brad Koplinski said the plan did not offer a "global and complete solution" to Harrisburg's problems, and he said Novak's team "did not fully pursue all of the avenues, particularly regarding a sales tax option."
But Novak said the sales tax was taken off the table both because funds would not materialize for 18 months and because it would require the support of both the state and the county -- something she termed as "very unpredictable."
"From my perspective, a sales tax, as nice as it sounds, was completely impractical," said Novak.
She also dismissed a commuter tax -- another idea that has been floated in recent days saying it could raise costs for Harrisburg households by as much as $500 per year.
"There seems to be this belief that the commuter tax is paid by other people," said Novak.
Last December, with Harrisburg facing the prospect of bond defaults, deep service cuts or worse, Pennsylvania officials put the city under its so-called Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 bankruptcy filings.
At the center of Harrisburg's troubles is a financing scheme to fund its state-of-the-art trash-burning plant, which left the city with roughly $300 million of debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and surrounding Dauphin County guarantee much of that debt.
A bankruptcy filing, an expensive option that could freeze the city and surrounding areas out of the municipal bond market, has been opposed by Corbett and the state legislature.