October 19, 2017

Bankruptcy a plausible option, as Hartford's fiscal crisis peaks

Matt Pilon
Matt Pilon
From left to right: Moderator Jay Williams of the Hartford Foundation for Public Giving, Central Falls Mayor James Diossa, and Kevyn Orr and Don Graves, who helped orchestrate Detroit's bankruptcy.

Three men with intricate knowledge of municipal bankruptcy told a Hartford audience Thursday morning that a Chapter 9 bankruptcy would be painful, but that it could set the Capital City on a path to a better future.

The process should Hartford seek it is best done with communication between major stakeholders, from creditors to businesses to residents and even surrounding towns, they said.

"[Bankruptcy] is a tool in the toolbox of managers and others to restructure an inexorable situation," said Kevyn Orr, an attorney who helped orchestrate Detroit's 2013 bankruptcy as the appointed emergency manager.

Orr said he is "really astounded" by how Detroit's central business district has recovered and grown in the four years since he left his job there.

Don Graves, senior director at Key Bank and a former Obama administration official who worked with Orr to provide federal assistance to Detroit during its bankruptcy, said Hartford shouldn't wait if its situation is truly unsustainable, as Mayor Luke Bronin has argued.

"Now is your chance," Graves said. "If you don't do it now it's going to be really ugly and much harder in another five, 10 or 20 years."

Hartford is likely to default on its financial obligations by November, Moody's Investors Service said Thursday. Meanwhile, legislative leaders said they had a tentative plan in place that could help the city avert bankruptcy, but lawmakers this week were still pursuing a budget they could pass and Gov. Dannel Malloy would sign.

James Diossa, mayor of Central Falls, Rhode Island which emerged from bankruptcy in 2012 said it's crucial that business people stick by their city.

"It's easy to just get out of Hartford and move your business somewhere else, but it's so important that you stay committed," Diossa said. "If you stay committed, other businesses interested in Hartford will see that."

The forum was hosted by the MetroHartford Alliance, which has supported Bronin in his approach to the city's struggles.

All three panelists on Thursday commended Bronin for bringing Hartford's financial troubles to the forefront.

"When you're in the mayor's office behind that desk, the world looks very different," Diossa said. "It's not easy."

There are plenty of downsides to bankruptcy, from potential impacts on employees and retirees to the black eye the city could suffer in public perception.

Diossa recalled listening to retirees in tears about their pensions being slashed by 50 percent in Central Falls, where an $80 million funding shortfall was too much to overcome during bankruptcy.

"That was very painful to watch," he said.

Indeed, pensions could be on the table in a bankruptcy, Orr said, but there's a catch. Vested benefits within systems that are well funded stand a better chance of not being cut.

"Pensions are typically backstopped by assets in the pension fund," Orr said.

Hartford, as of July 2016, had funded its pension plan at nearly 75 percent, according to actuarial reports from the City Treasurer's office.

There could also be negative impacts on surrounding communities' credit ratings, if Hartford were to file for bankruptcy.

"What we're really talking about is contagion," Orr said. "In the short term, there's a risk."

He said a swifter bankruptcy would yield better results.

"You want to get in and out as quickly as possible," he said.

That should mean that stakeholders who agree to settlements with the city earlier should get more favorable terms than those who hold out.

"That's just the deal," he said.

Short-term warning

Meantime, Moody's Investor Service predicted Thursday that the city of Hartford will likely default on its debt as early as November, but that projection doesn't take into account this week's latest budget developments.

Hartford currently has approximately $604 million in general obligation and lease debt, Moody's analyst Nicholas Lehman said. The city has requested an additional $40 million from the state of Connecticut to help balance its fiscal 2018 budget and maintain a positive cash flow, he said.

In the state's "tense" political climate, the availability of short- and long-term support is "highly unknown," Lehman said. In addition, Hartford was included Wednesday in a top 10 list of most distressed small cities, according to an index put out by the Washington, D.C.-based Economic Innovation Group.

Under the latest budget plan lawmakers are crafting, Hartford would receive aid from the state of Connecticut, though details about what and how much remain veiled. Lawmakers on Wednesday said they had achieved the framework of a bipartisan budget deal, but were circumspect about the specifics.

And on Monday, Gov. Dannel P. Malloy issued a budget revision of his own, providing additional funding for Hartford.

In the meantime, Moody's latest analysis reaffirms the precariousness of Hartford's situation, with Lehman suggesting Hartford will default soon, declare Chapter 9 bankruptcy, or do both without additional concessions from the state, bondholders, and labor unions.

Moody's analysis also projects annual operating deficits for Hartford ranging from $60 million to $80 million every year through 2036. The city's high fixed costs are largely driving these deficits as they represent nearly a quarter of the fiscal year 2018 budget, Lehman said.

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