A debt restructuring could keep Hartford, Conn., afloat if combined with significant revenue improvement and cost cuts including labor concessions, said Moody’s Investors Service.
“There are multiple revenue-raising and expenditure-cutting tactics available, but all face hurdles,” Moody’s said in a commentary Thursday.
Mayor Luke Bronin has openly talked about bankruptcy as an option. He has projected a fiscal 2018 deficit of $50 million for Connecticut’s capital city and announced last month the hiring of Greenberg Traurig LLP as restructuring counsel.
“Moody’s would view a distressed exchange as a default if Hartford and its creditors agreed on new or restructured debt [or other securities, cash, or assets] if it was a lower value relative to the original promise and if the exchange allowed Hartford to avoid a default,” said Moody’s.
Moody’s and S&P Global Ratings have the city’s bonds at junk-levels B2 and BB, respectively, after recent downgrades.
Hartford’s costs, including debt and pension benefits, have exceeded revenue growth. Deficits, partially due to escalating debt costs from pushed-out restructurings, could spike to $83 million by 2023, Moody’s said in its report about July’s downgrade.
Hartford depends upon the state for about half its revenue while state-owned property is tax-exempt, negating economic activity the city generates as a state capital.
Bronin is seeking an additional $40 million in aid from the state. Connecticut, however, is caught in its own whirlwind of downgrades and has operated without a fiscal 2018 budget the past six weeks.
Democratic Gov. Dannel Malloy and state lawmakers are still at odds over a spending plan, although the legislature last week approved a concession package between Malloy and state employee unions. The deal could save the state nearly $1.6 billion over fiscal 2017 and 2018, according to an actuarial study.
The Senate’s 18-18 split between Democrats and Republicans has sharpened the political divide at the capitol. Democrats hold a narrow 79-72 edge in the House of Representatives.
Regardless of the state budget outcome, Hartford faces a challenge in the fourth quarter. The city owes $3.8 million in September and a $26.9 million payment in October that includes tax anticipation notes.
According to Moody’s, the city could choose to skip debt payments anytime, though bondholders would probably sue.
Excluding the TANs, annual debt service surges to $57 million in fiscal 2019 from $44 million, said Moody’s. “After a slight dip in 2020, it spikes again the year after before largely evening out for several years.”
A bill before the legislature would establish a fiscal oversight board for Hartford that could sign off on debt restructurings and appoint a financial manager.
Collaboration is necessary to keep the city out of bankruptcy court, according to Malloy.
“We have to do something. They have to do something,” he told a Municipal Forum of New York luncheon gathering in Manhattan last month. “I’d prefer we avoid bankruptcy, but I’m not sure that can be done.”
The only other state capital to file for bankruptcy was Harrisburg, Pa., in 2011. A federal judge there negated the filing, citing a restrictive state law.
At B2, said Moody’s, Hartford is the lowest-rated state capital by far and the only one rated below investment grade. The median rating for state capitals is Aa2, one notch higher than the Aa3 median for all Moody's-rated cities and towns.
“Most of the higher-rated state capitals benefit from diverse economies that extend beyond their government role or do not share Hartford's outsized poverty rate,” said Moody’s.
Connecticut’s largest city, Bridgeport, filed under Chapter 9 in 1991, but a federal judge nullified the action, saying Bridgeport could pay its bills.
On July 25, Moody's downgraded the general obligation rating of the Hartford County Metropolitan District to Aa3 and maintained a negative outlook on the $568 million of GO debt, while affirming the district's revenue debt at Aa2 and revising the outlook on the $216.8 million of revenue debt to stable from negative.
The "material decline" of Hartford, one of eight member municipalities, weighed on the GO rating.
Recent state legislation, said Moody’s, has countered the Metropolitan District’s exposure to Hartford’s struggles. The district, a nonprofit municipal corporation, provides potable water and sewerage services to Hartford and several suburbs.
“Hartford's problems weigh on the utility's credit profile, but MDC has multiple options to counter failure by the city to pay quarterly dues,” said Moody’s.
Moody’s also called the budget impasse a credit negative for cities statewide. “Some small state-aid grants are not flowing to local governments,” it said.
Connecticut – after lawmakers rejected a proposed Malloy mini-budget -- is operating under an executive order from Malloy that reduces state aid for local governments by about 25% from appropriated fiscal 2017 levels.
The state has not distributed certain small-scale grants and other types of funding that it provided in prior years to local governments, including at least $30 million in road grants.
Some communities have taken proactive steps. For instance, Torrington, in northwest Connecticut, has delayed its school opening by three days to cut costs.
“Options include spending freezes, deferring capital spending, leaving vacancies unfilled or tapping reserves,” said Moody’s.