Bondholders and unions hold the key to whether Hartford files for bankruptcy, according to Connecticut Gov. Dannel Malloy.

"Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues," Malloy told reporters Friday at the state capitol while releasing a $41 billion spending plan, his sixth budget proposal this year.

"On the other hand, if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided."

Connecticut Governor Dannel Malloy
"Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues," said Connecticut Gov. Dannel Malloy. Bloomberg News

Malloy, under fire from municipalities across the state who accuse him of holding them hostage during the budget impasse, took a swipe at Hartford.

"There is an issue that Hartford has done some pretty stupid things over the years, and that bondholders and bond rating agencies tolerated that stupidity," said Malloy. "And if there’s going to be relief, it has to be comprehensive in nature.”

Hartford Mayor Luke Bronin said Thursday that his city could file under Chapter 9 within 60 days without the necessary support from the state, labor unions and bondholders.

Bronin seeks an additional $40 million from the state to avoid bankruptcy. Malloy and top lawmakers have said throughout the year that the budget provides enough to Hartford.

The aid package, said Malloy, "only presents the opportunity to help Hartford." The budget proposal also calls for a four-tiered municipal board that could oversee Hartford and other distressed cities.

Bronin, who has hired law firm Greenberg Traurig LLP to explore restructuring options including Chapter 9, has said bondholder and labor concessions would only grasp 10% of the problem. One pressing need, according to the mayor, is putting more money on the tax rolls.

Hartford's bonds are junk. S&P Global Ratings and Moody's Investors Service rate the city BB and B2, respectively, after recent downgrades. Neither Fitch Ratings nor Kroll Bond Rating Agency rate Hartford.

After S&P and Moody's hit Hartford with four-notch downgrades last fall, Gurtin Municipal Bond Management said rating agencies had kept the city inflated for far too long. "Ratings agencies often prize the “stickiness” of ratings and, appear to be hesitant to downgrade obligors incrementally as they weaken," said Thomas Schuette, a partner and co-head of investment research and strategy.

Chapter 9 municipal bankruptcy places a strain on financial and operational relationships, according to Chicago-based restructuring expert James Spiotto.

"The fear of Chapter 9 is the financial market stigma, the disruption of financial and creditor relations, and the practical reality that businesses and people do not move into or stay in bankrupt cities," said Spiotto, a managing director at Chapman Strategic Advisors LLC.

Malloy, a Democrat, has been running the state by executive order since July 1 while he and lawmakers remain stalled over a biennial spending plan.

Rating agencies downgraded Connecticut three times within a week in May. Moody’s rates Connecticut GOs A1, while S&P and Fitch assign A-plus ratings. Kroll rates them AA-minus.

The governor's plan would raise the sales and restaurant tax rates to 6.5% and 7%, respectively. Those two changes, he said, would result in revenue gains of $87 million in fiscal 2018 and $133 million the following year.

The governor, who will not seek re-election next year, could face more budget pushback at the capitol, notably in the Senate which is split 18-18 between Democrats and Republicans. Democrats hold a narrow 79-72 edge in the House of Representatives.

"The governor’s proposal would be the third billion-dollar tax hike for Connecticut in less than seven years," said state Sen. Len Fasano, R-North Haven. "It includes tax increases totaling $1.3 billion over the biennium. And this from a governor who pledged to not lead with taxes."

Fasano said he sees no check on cost-drivers such as retirement benefits and debt.

“Obviously, the Senate Democrats are on board with the governor’s billion-dollar tax hike plan. Speaking for all Republicans, I can say that this does not drive us closer to a bipartisan budget deal.”

Malloy's plan would also repeal the back-to-school sales tax holiday and increase the cigarette tax by 45 cents to $4.35 per pack, effective Nov. 1. It would hike the conveyance tax on real estate sales.

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Paul Burton

Paul Burton

Paul Burton is the Northeast Regional Editor for The Bond Buyer and the author of the book "Tales from the Newsrooms." He is a sought-after public speaker and has appeared on radio and TV shows, including former CBS News White House correspondent Sharyl Attkisson’s public-affairs program, “Full Measure.”