After Hartford Mayor Luke Bronin had warned Thursday that the capital of the wealthiest state in the US could be broke in as little as two months, city officials scheduled a conference call with bondholders to begin restructuring talks, according to Bloomberg.
As we noted earlier, Hartford’s financial troubles have been compounded by a broader crisis in the state government. But the city’s yearslong descent into insolvency has been hastened by corrupt and incompetent political leaders, fleeing middle-class residents – and now the hollowing out of the insurance industry that once provided a crucial tax buffer. Last year, insurance giant Aetna announced that it intended to move its headquarters to New York City, though it would leave thousands of employees to continue working in Hartford, the decision was still a financial – as well as a reputational – blow.
According to Bloomberg, city officials, who’re being advised by law firm Greenberg Traurig, will try to convince creditors that restructuring is necessary to guarantee the city’s fiscal stability. Of course, to wrangle better terms from its creditors, it helps to have leverage. And in a recent column, the Hartford Courant’s Dan Haar reveals one “shocking” strategy reportedly being contemplated by city officials: Asking that the state withhold aid unless the city’s creditors agree to concessions.
This would be tantamount to “strong-arming” creditors by removing the backstop of state funds, which could backfire on the city in several ways, Haar said.
“And there’s much more friction: Bronin’s letter, co-signed by the city council president and treasurer, also contains a shocking new suggestion — that the state help the city strong-arm bondholders by making new money contingent on Wall Street givebacks. Bronin hired a New York law firm to renegotiate Hartford’s costly bond debt, and now it appears he is asking the state to help that effort.
That could backfire on both the city and the state in much the same way that then-Attorney General Richard Blumenthal’s lawsuit against the Atlantic Coast Conference led to the blackballing of UConn. To this day, the university remains banished to a second-tier athletic league. No one likes to be strong-armed, and the last time I checked, Wall Street bond houses are not peopled by pushovers.”
So, how might bond holders retaliate if Hartford mayor Luke Bronin embraces this aggressive strategy. Well, they could not show up to market next time Hartford tries to sell a batch of general obligation bonds. After both Moody’s and S&P cut the city’s credit rating to junk in June, they could interpret a rift with bondholders as another potential obstacle for the city.
“If the state took that posture with regard to full faith and credit general obligation debt, it could potentially jeopardize the evaluation of its own credit,” said Howard D. Sitzer, senior analyst at CreditSights in New York, which launched bond coverage of Hartford last month.
Still, the suggested ploy to squeeze money from bond investors makes a broader point: There is more Hartford, and Connecticut, could and must do before a bankruptcy judge would accept a filing and bring all the parties to an unhappy table.”
Of course, Hartford has a handful of options that could – if not solve its fiscal problems – at least help it kick the can down the road, the goal of every sane politician with aspirations of running for higher office. Bronin probably Harbors such ambitions. One such option would be a state takeover. In theory, this would bring fresh cost-cutting eyes to the picture. It could also force the police and municipal unions to offer more concessions.
Another measure, suggested by Moody’s and others on Wall Street, is a more moderate restructuring. Yet another is “more aggressive cash management,” essentially delaying payments to vendors. Prioritizing pursuit of tax delinquents is also an option.
The city could also cut back on payments to its retiree pension and health care funds.
“As it happens, the city is fairly well funded in its pension. But Bronin said, “We are not interested in short-term fixes that make the future more difficult.”
Whatever it decides, the city needs to act, because a Detroit-style bankruptcy, Haar says, would “add to the caravan of moving trucks exiting Connecticut” – a reference to the resident flight that has plagued the state in recent years, after lame-duck Democratic Gov. Dannel Malloy passed a series of controversial tax hikes to help shore up the state’s pension funds.
However, Bronin probably knows that he can’t depend on the state government for support. Connecticut is now the only state in the US that hasn’t passed a budget for the current fiscal year – its government has been operating for two months under emergency measures imposed by Malloy that have delivered dramatic cuts to municipal services.
If not Bronin’s best option, asking the state to predicate any bailout funds on investor concessions might be his only shot at securing a lasting fix.