When people think of a major city declaring bankruptcy the city of Detroit often comes to mind with its sky-high crime rates and areas of urban wasteland. But as more and more cities like Hartford find themselves in impossible financial situations, sometimes filing for Chapter 9 can actually be the best alternative. “When there’s no other real option, it can make a big difference,” says David Skeel, professor of corporate law at the University of Pennsylvania Law School. “And if it’s done well, the sacrifice is shared broadly.”
Mayor Luke Bronin faces a deficit of $48 million in the next fiscal year. His budget, which was approved by the Hartford city council, includes eliminating 100 positions, 40 layoffs and union concessions but did not raise property taxes. Bronin had also tried to push a bill through the state legislature to establish a “sustainability commission,” which would act as the final binding arbitrator in contract disputes with the city’s unions. State lawmakers rejected the plan outright.
In his testimony before the committee, Bronin did not use the word bankruptcy, instead saying someday the city’s deficit may grow so big that the city won’t be able to close the gap. In other words, the possibility of bankruptcy in the near future is very real.
Filing for bankruptcy would require the governor’s approval, a difficult decision for any politician to make. The city would also have to prove that it was insolvent. Professor Skeel notes that Bridgeport was not able to pass the insolvency test in the 90’s and its bankruptcy bid was rejected.
If the city could prove it was insolvent, what would a Hartford bankruptcy look like?
“Bankruptcy is a tool,” says Eric Henzy, a corporate attorney who handles bankruptcy filings, and clerked for the judge who oversaw Bridgeport’s near-miss with bankruptcy in 1991. “We can all be different places philosophically, but when you look at the city of Hartford right now, it’s a math problem,” Henzy said. “The math doesn’t work.”
First the bad news: It can cost a lot of money to go bankrupt. Detroit spent approximately $165 million on attorney fees and the ensuing legal battles. While obviously much smaller, Henzy says that a Hartford bankruptcy would still cost millions.
The other cost is human. “These cases are brutal, they’re brutal,” Henzy says. “When you’re talking about people’s pension benefits, you’re talking about people’s healthcare benefits, it’s their lives. It’s brutal and there is pain that a lot of people are going to experience.”
But there are positive effects of a bankruptcy filing, notably bringing all parties to the table, including the unions, bond holders and retirees. “There’s nothing like a court date to focus people’s attention,” Henzy says. The possibility of a judge deciding future debt payments can be stimulus enough to bring previously hostile parties back to the negotiating table.
To date, unions have signaled they are willing to work with the new mayor, offering $8-$12 million in concessions, but it was not as much as Bronin hoped. However, even with the concessions, layoffs and draining its $21 million rainy day fund, Hartford will still be in the red. Mayor Bronin told the CT-N press “we’re talking about Hartford’s survival.”
Another issue facing Hartford is the level of its bonded debt and its ability to raise money through bonding. Even after restructuring its debt in 2013 and 2015, Hartford’s debt service is expected to triple to $30.1 million in FY17. The City of Hartford’s bond rating has been downgraded by Moody’s Investor Service three times since 2014.
Henzy says that the city’s ability to borrow money may actually improve after a bankruptcy filing because it shows the city has cleaned up its problems and can sustain itself in the future.
Despite its catastrophic bankruptcy filing, Detroit is experiencing a rebound. The city reduced its retiree health obligations from $5 billion to $500 million and does not have to pay toward its retiree pension benefits until 2023. The state of Michigan essentially bailed the city out by covering those payments. This could be problematic in Connecticut where the state faces its own budget crisis.
As Detroit cleaned up its balance sheet, private investment flooded back into the wild west of the mid-west – with money coming from companies like Ford, Quicken Loans and Penske. The bankruptcy also improved the lives of city residents who once again have street lights.
Obviously, Hartford is not as bad off as Detroit was in terms of blight, crime and unemployment. While it does face fiscal problems, the workforce, business presence, and state government investment in Hartford means the city has a better opportunity to make a rebound and bankruptcy would not have to be a death sentence.