This piece first published May 11, 2017, Debtwire Municipals
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Connecticut lawmakers will ultimately determine if the City of Hartford will file for bankruptcy, as the city lobbies for USD 40m in aid to help close a multi-year budget gap, multiple sources say.
The city and state both face substantial budget gaps. Hartford fell USD 15m short in FY17, and expects to be USD 50m short in FY18 on the USD 629m proposed spending plan. Connecticut faces a USD 400m FY17 budget hole, and USD 1.4bn deficit in FY18. The state and city’s fiscal years begin 1 July.
While Hartford lobbies lawmakers for aid, officials began meeting with bankruptcy attorneys this week to assess options, including filing for Chapter 9 bankruptcy protection, Mayor Luke Bronin (D) said in an interview with Debtwire Municipals.
“We’ve started initial conversations with potential counsel,” Bronin said. “We’re looking at all options to ensure we can get the city on a sustainable fiscal path; of course, the first, best option is a new partnership with the state, and we are working hard to build the statewide coalition to ensure the city is fiscally sound and strong without going down any of these other paths.”
The state is operating under “extreme duress,” said Ben Barnes, secretary of Connecticut’s Office of Policy and Management.
“There are structural problems with the level of aid to Hartford and other poor communities,” Barnes said. “Hartford cannot pay its bills with the amount of state aid (it receives) and the mayor has made a good case for why the state should step up and pay more. I’m hoping we can find a way to do that, even with difficult decisions at the state level.”
Hartford argues it deserves additional state aid as Connecticut has not provided adequate compensation for state-owned—and tax exempt—property within the city. Hartford’s total property valuation is USD 12.16bn, but nearly half of that—USD 5.4bn, or 44.6%—is tax exempt, as reported.
Hartford’s large amount of tax-exempt property, combined with the highest property taxes in Connecticut, and structural imbalance, is a “bad combination in a poor city,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.
“The state has to make tough decisions; do they want their state capital to file?” Cure said. “It happened in Harrisburg, and Trenton was in a lot of trouble until the state intervened, so it’s not unheard of. Revenues are down in the state and a lot of cities are dependent on state aid…but I’m not sure if Hartford is really considering filing or if it’s a way to motivate the state to focus on them more.”
City council members have different takes on meeting with bankruptcy counsel. City Council President Thomas J. Clarke (D) said the move is “premature” given the market impact, but Councilman John Gale (D) said the move is sensible, in order to understand all possible options.
Despite Connecticut’s financial problems, it does have the capacity to provide aid to Hartford, Barnes said.
However, lawmakers must approve the assistance, and without a budget agreement by 30 June, it could lead to cash flow problems for Hartford, he said.
“I don’t think the state has problems that can’t be solved, people will come together and compromise,” Barnes said. “They’ll make difficult decisions, decisions unbelievably hard to make, and find solutions to budget problems.
Maybe not on 30 June, but it will be done very soon. There’s no reason to have a protracted paralysis on the budget in Connecticut.”
Without state aid, Hartford will face cash flow problems in October or November, and possibly before, Clarke said.
Meanwhile, three large local insurance providers—Aetna, The Hartford and Travelers—pledged USD 10m a year for five years to the city if the state provided USD 40m in aid to the city; enough to close the USD 50m FY18 gap.
Considering the many moving parts, it’s “impossible” to answer whether or not Governor Dannel Malloy (D)—who announced last month he would not seek reelection next year—would sign off on a Hartford bankruptcy, Barnes said.
Despite the city’s many issues, bankruptcy doesn’t necessarily solve the city’s structural issues, Gale said. However, it is a viable plan B if necessary, he said.
“It’s a very imperfect tool at this point; our long-term problem in Hartford is more a function of the tax base not having grown sufficiently, our grand list having stalled, and residential real estate property values not growing at the same rate as the suburbs,” Gale said.
Hartford has USD 683.17m in debt outstanding, and USD 20m in tax anticipation notes (TANs) outstanding. About USD 510m is insured, and USD 170m, and the city’s recent TANs, is not insured, according to a Debtwire Municipals review of the city’s outstanding debt.
Hartford owes USD 66.1m in debt service in FY18, in addition to the principal and interest on the TANs.
Bronin said he did not anticipate difficulty making the TAN payment, but declined to say if the city would be able to make all debt service payments in FY18, instead saying his focus is working with the legislature to ensure receipt of the state aid.
Of the four insurers with exposure to the city, Assured Guaranty leads the pack, insuring about USD 330m. Build America Mutual’s exposure totals about USD 106m, Ambac has about USD 45m in exposure and MBIA insures about USD 27m in Hartford debt. The insured debt all carries a general obligation (GO) pledge.
Hartford is rated Ba2/negative by Moody’s Investors Service (October 2016) and BBB/negative by S&P Global Ratings (September 2016).
A USD 3.21m tranche of 4% City of Hartford Series 2013 GO bonds due 2029 last traded in odd lots at 75.787 to yield 7.124% on 10 May.
by Maria Amante