Market analysts: Hartford bankruptcy could have ‘contagion’ effect

Carol M. Highsmith / Library of Congress

The Hartford skyline

As the prospect of a Hartford bankruptcy looms large, an independent bond market analysis firm warned this week that it could have “a contagion” effect, lowering bond ratings and raising borrowing costs for other communities and the state as a whole.

“Should the city of Hartford actually default or be permitted to file for Chapter 9 bankruptcy, other Connecticut cities are likely to face somewhat higher borrowing costs going forward,” Municipal Market Analytics wrote in a briefing titled “Hartford and Connecticut Contagion.”

“Similarly, the state of Connecticut would reasonably see its own borrowing costs rise as investors rightly assume that a Hartford bankruptcy hastens the state’s ongoing economic contraction, further hinders the state budget’s ability to fully fund long-term pension costs and invites progressive ratings downgrades,” the briefing continued.

The Concord, Mass.-based research firm also wrote that a default by the capital city on a debt payment due at the end of October also could have ripple effects, but not as severe as those from a Chapter 9 filing.

“We share the concerns of Municipal Market Analytics of the potential fallout from a bankruptcy in Hartford, which is why we have proposed realistic and reasonable steps to aid the city through this difficult period, including the municipal restructuring grant — which would provide the city assistance while simultaneously guiding it through a process that includes review and accountability,” Chris McClure, spokesman for Gov. Dannel P. Malloy’s budget office, said Thursday.

Malloy and Democratic legislative leaders recommended including $46 million in emergency relief for distressed communities in the next state budget. The governor also has been pressing since February for a new Municipal Accountability Review Board to target cities and towns at risk of insolvency and intervene before problems become extreme.

“The financial health of Hartford has statewide consequences, and we need to treat the situation seriously,” McClure added.

“This report only serves to reinforce the urgent need and value of providing the increased state aid to Hartford that will allow it to achieve a balanced budget for the current fiscal year and avoid any insolvency,” the Connecticut Conference of Municipalities wrote in a statement.

“It is alarmingly noted that if Hartford’s financial condition is not improved, that will have a residual negative impact on other distressed urban centers (and distressed small communities) as well as the state government overall and their access to the credit markets,” CCM added. “That conclusion should motivate all parties to — as soon as possible — resolve the state budget impasse in a bipartisan manner that protects the interests of towns and cities and their property taxpayers, as well as the state government.

Hartford Mayor Luke Bronin warned Malloy during the first week of September that the city was at risk of insolvency within 60 days, absent the additional funding the city could receive under a new state budget.

Connecticut has gone 13 weeks into the new fiscal year without a budget, and as of Thursday state officials remained at an impasse over how to close massive projected deficits.

Analysts say state finances, unless adjusted, will run $1.6 billion in the red this fiscal year and $1.9 billion in deficit in 2018-19.

This debate is crucial for Hartford since Bronin says the capital city needs at least an additional $39.6 million in annual state funding to stave off insolvency.

On Thursday, Malloy vetoed a Republican-crafted budget that narrowly passed in the legislature — with eight Democratic votes — earlier this month. That plan would have increased aid to Hartford by only $7 million this fiscal year.

The capital city could be facing additional fiscal pressure very soon.

Absent a new state budget, two longstanding state grant programs that reimburse communities for a portion of the revenue they lose on tax-exempt properties hang in political limbo.

These PILOT (Payment in Lieu Of Taxes) grants are distributed on Sept. 30. And although it is unclear what Hartford might receive — or whether these programs would continue — in a new state budget, the capital city received $37.2 million in PILOT funds in late September 2016, according to the governor’s budget records.

The city not only has Connecticut’s highest commercial property tax rate — at 74.29 mills or $74.29 for every $1,000 of assessed property value — but Bronin says roughly 51 percent of its property value is exempt from taxation. That includes hospitals, universities, an airport, a trash-to-energy plant, and numerous state offices and facilities.

The Malloy administration also is required to release Education Cost Sharing grants to cities and towns in October. Absent a new budget, the governor has estimated ECS funding, in the aggregate, must be reduced by about 28 percent.

But it was unclear how that would affect Hartford, since Malloy also said he will weight those payments to give higher priority to Connecticut’s most impoverished school districts.

Bronin announced in early July that he had hired an international law firm specializing in financial restructuring, Greenberg Traurig LLP, to evaluate the capital city’s options as he nears a decision on whether to pursue bankruptcy.

And while state government is not staring at insolvency, Connecticut is struggling with massive unfunded liabilities in its retirement benefit programs. Annual contributions to these programs are projected to surge over the next decade-and-a-half and place considerable strain on state finances.

Wall Street has taken notice of this situation.

All four of the major credit ratings agencies — Fitch Ratings, S&P Global, Moody’s Investors Service and Kroll Bond Rating Agency — have downgraded the state’s general obligation bond rating at least once since May 2016.

The sale of general obligation bonds to investors is one of the principal means state government uses to finance municipal school construction, building programs at public colleges and universities, maintenance of state facilities and other capital projects.

The bonds are termed “general obligation” because the state pledges to repay them using resources from the General Fund within the state budget.

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