PHILADELPHIA--(BUSINESS WIRE)--Twenty municipalities in Pennsylvania have filed for protection under the Financially Distressed Municipalities Act, which could lead to additional bankruptcy filings by municipalities this year, said Robert S. Hertzberg, an attorney with Pepper Hamilton LLP. Last year, Pepper Hamilton completed the first bankruptcy reorganization of a Pennsylvania municipality in the state’s history.

“Though bankruptcy laws have been in place since the 1930s, municipal bankruptcies have been quite rare, and, until recently, were considered a last resort,” says Hertzberg. “That could change dramatically in 2011. Never before have we seen so many municipalities being squeezed so hard by pension, post-retirement health care and unemployment costs.”

Federal Bankruptcy Code does not permit states to file for bankruptcy. Last week, former House Speaker Newt Gingrich said that cash-strapped states should be allowed to file for bankruptcy in order to renegotiate spiraling pension and benefits commitments to state workers.

Municipalities, however, do not face that restriction. Approximately half the states, including Pennsylvania, permit municipalities to file for bankruptcy. Passed in 1987, the Financially Distressed Municipalities Act (“PA Act 47”) empowers the Pennsylvania Department of Community and Economic Development (“DCED”) to declare certain municipalities as financially distressed. Financially distressed municipalities are able to renegotiate with creditors in order to reduce their debt with the assistance of the DCED.

The list of municipalities that have filed under Act 47 ranges from tiny Borough of Millbourne, Delaware County, to the City of Pittsburgh, Pennsylvania’s second largest city.

But, according to Pepper Hamilton attorney Leon Barson, who last year helped to lead the first municipality in Pennsylvania through bankruptcy reorganization, it is highly unlikely that Pittsburgh would be among those municipalities that could file for bankruptcy.

“The Pennsylvania Intergovernmental Cooperation Authority Act (the “PICA Act”) provides that, so long as either Philadelphia or Pittsburgh is receiving financial assistance from PICA, it is prohibited from filing Chapter 9; and if either of them is no longer an “assisted city,” it is still prohibited from filing Chapter 9 without the written approval of Pennsylvania’s Governor. The extra requirement makes it highly unlikely that Pittsburgh would be permitted to enter Chapter 9.”

The other municipalities that have filed under Act 47, however, do not face such a restriction. Eight of them have filed Act 47 Plans. The remaining 10 municipalities may not be able to negotiate viable Act 47 Plans and could end up in bankruptcy, Barson says.

“Filing for Chapter 9 should be a last resort for municipalities,” he continues. “The ideal option is to negotiate with creditors. If that fails, the second option is to go through a financially distressed municipality proceeding under Pennsylvania’s Act 47. If those options fail, or if there is an emergency, then Chapter 9 should be considered. An Act 47 plan must be consensual among creditors. If creditors will not agree, then a petition under Chapter 9 of the Bankruptcy Code is the only way to request Court assistance to compel creditors to accept a reasonable plan.”

Last year, Barson helped to lead Westfall Township, located in Pike County, PA, through a successful bankruptcy reorganization. The township was saddled with a $20 million debt due to a prior administration’s mistreatment of a developer. Without the resources to pay anywhere near that amount, the township filed for Chapter 9 and was able to negotiate a settlement of a much more feasible $6 million over 20 years without interest.

About Pepper Hamilton

Pepper Hamilton LLP (www.pepperlaw.com) is a multi-practice law firm with more than 500 lawyers nationally. The firm provides corporate, litigation and regulatory legal services to leading businesses, governmental entities, nonprofit organizations and individuals throughout the nation and the world. The firm was founded in 1890.