By Hilary Russ
(Reuters) - In Harrisburg, Pennsylvania's cash-hungry capital city, local political battles are waged much as they are across the United States: with big personalities and bare-knuckled verbal brawls.
But unlike most cities, Harrisburg's financial troubles have thrust it into the national spotlight, most recently with a slap from the U.S. Securities and Exchange Commission for fraud. Financing for a single incinerator has been driving the city toward insolvency since 2009.
The $3.7 trillion U.S. municipal bond market will be watching on Tuesday when Harrisburg, a poster child for mismanaged public finances, holds its Democratic Party primary for mayor. There is no Republican mayoral primary.
Whoever leads the city of nearly 50,000 will play a role in how Harrisburg struggles to shrink a mountain of debt while maintaining basic services and paying - or not paying - bondholders.
The mayor must be "willing to work through the problems and get to the next step. In order to do that, you need a certain amount of charisma, a certain amount of cooperation, and a fair margin of public support," said John Hallacy, head of municipal research at Bank of America Merrill Lynch. "Given the severity of the situation, that's a lot to ask for."
The ghosts of a questionable 2007 bond deal haunt Harrisburg, which is at least $340 million in debt - some reports put the figure at $370 million - thanks largely to the municipal bonds it guaranteed to finance upgrades to its problematic waste-to-energy trash incinerator.
Harrisburg also faces a cumulative deficit of at least $13 million, including more than $9 million of debt service payments that went unpaid in March and September, according to a March 28 status update from William Lynch, the state-appointed receiver.
CONTROVERSIAL MAYOR FACES RIVALS
Two candidates hope to unseat Mayor Linda Thompson, an outspoken and controversial first-term Democrat. The victor in Harrisburg's Democratic primary is also expected to win November's general election, although at least one challenger, Independent Nevin Mindlin, will run in the fall.
Thompson is African-American and has a strong base of support in Harrisburg's black community, which makes up 52 percent of the city's population.
But beyond her base, "she's got very fragile relationships with almost every constituent group you could imagine," said Terry Madonna, director of Franklin & Marshall College's Center for Politics and Public Affairs, who has conducted polls of Pennsylvania politics for more than a decade.
Receiver Lynch, the only person with the power to send Harrisburg into bankruptcy, has so far said he sees that option as a last resort. But even the threat of bankruptcy can be enough to bring different sides to the bargaining table.
Lynch attempted to negotiate borrowing money through a tax anticipation note during late 2012 and early 2013, but financial institutions still "have concerns" about Harrisburg's credit worthiness, he said in his March update.
None of Wall Street's three big credit rating agencies currently rate the city of Harrisburg's debt.
The mayor must work with Harrisburg's state-appointed overseer, the City Council and a host of other players to push ahead a court-approved recovery plan. The plan includes the sale and lease of city assets, but so far no deals have been finalized.
The mayor also helps negotiate with police, fire and public employee unions on labor contracts that, if altered, could save the city money on health care and other costs.
BOND DEAL HAUNTS POLITICIANS
One of Thompson's two top rivals, independent bookstore owner Eric Papenfuse, hopes that the 2007 bond deal will haunt both Thompson and challenger City Comptroller Dan Miller.
Thompson and Miller were on the City Council when it approved the bond financing, and both got there because of support from former Mayor Steve Reed who had served 28 years.
Miller was the only City Council member to vote against the bond financing.
It was during Reed's administration that the incinerator deals were cut and, later, that some of the more troublesome financial disclosure problems occurred, leading to the SEC's fraud charge earlier this month. The city paid no penalty in the settlement and no individuals were named.
Thompson has made a number of problematic statements since taking office in January 2010. She once referred to Miller - Harrisburg's first openly gay elected official - as a "homosexual, evil little man," according to local media reports. In subsequent stories, she did not deny the comment.
She also lost several close staffers during her first year in office. Five of them told the central Pennsylvania newspaper The Patriot-News that she created a toxic, abusive atmosphere.
Papenfuse is no stranger to local politics. In February 2007, the City Council appointed him to the board of the Harrisburg Authority, which owns the incinerator. Papenfuse opposed additional funding for the incinerator upgrades and later quit the board.
Thompson and Papenfuse have said they do not want the city to file for Chapter 9 municipal bankruptcy. Miller, however, believes bankruptcy is inevitable, and that it should be done before the city's assets are sold off.
The only poll of the race so far, published on May 13, found Thompson, with 13 percent of the vote, losing to Miller and Papenfuse, who would be tied at 30 percent each. Some 23 percent were undecided. Fifty-seven percent of those polled strongly disapproved of Thompson's performance on the job.
The poll, conducted by Susquehanna Polling and Research for the local ABC News station, surveyed 300 Harrisburg Democrats by telephone and has a margin of error of 5.6 percent.
(Reporting by Hilary Russ; Editing by Tiziana Barghini and Leslie Gevirtz)