Here's Hartford's Risky Plan To Strongarm Concessions From Its Creditors

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.
 

Connecticut State Capital Prepares For Bankruptcy Amid Collapse In Hedge Fund Revenue

The state of Connecticut has been hit hard by the double whammy of a deteriorating local economy, coupled with a plunge in hedge fund profits - as well as hedge fund managers permanently relocating to Florida - leading to a collapse in tax revenues. According to the the latest Connecticut budget released last week, the state is reeling from the consequences of sliding tax revenue from the super-rich, i.e. the state"s hedge fund managers. The latest figures showed that tax revenue from the state’s top 100 highest-paying taxpayers declined 45% from 2015 to 2016. The drop adds up to a $200 million revenue loss for Connecticut.

In a dramatic, if of questionable credibility, soundbite Department of Revenue Services Commissioner Kevin Sullivan says these wealthy people are “dramatically less wealthy than they were before.” He was referring to annual income, not actual asset holdings, because judging by the all time high in the S&P, the local financial elite have never had a higher net worth.

“When you look at the top 75, top 50 ... this is a group of wealthy people who are dramatically less wealthy than they were before,” said Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services. “These folks, for a number of reasons, are either not realizing as much income or don’t have as much income.”

Just don"t expect tears from the general public. Sullivan also noted how several international hedge funds have recently failed, resulting in “significant retrenchment” from investors. That drop in tolerance for risk brings smaller margins and ultimately less personal income for the state to tax, he added. It"s fascinating how the Fed"s central planning, superficially meant to restore "confidence" in a rigged, manipulated market is having such proound and adverse 2nd and 3rd order effects on state budgets.

Sullivan also acknowledged part of revenue decline can also be attributed to “a handful” of wealthy individuals who moved to more tax-friendly states — an issue frequently raised by legislative Republicans, who argue Connecticut’s tax policies encourage the state’s super-rich to move out.

Of course, for tax purposes it"s the actual income that matters, and as a result the steep decline has exacerbated Connecticut’s budget woes. The projected deficit for the new fiscal year beginning July 1 has now jumped from about $1.7 billion to $2.3 billion, while the deficit predicted for the second year of the state’s two-year budget is now about $2.7 billion.

According to AP, lawmakers and the governor have already discussed the possibility of making deep cuts throughout state government, including to state colleges and universities and social services. Meanwhile, there’s a threat of about 4,000 layoffs if a $700 million labor concession deal isn’t reached with state employees. Lawmakers say these latest revenue figures make that agreement even more crucial.

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Meanwhile, in a stark confirmation just how dire the state"s economic and fiscal situation has rapidly become, the Hartford Courant reports that city leaders in the state"s capital have taken a step toward bankruptcy, soliciting proposals from law firms that specialize in Chapter 9. It adds that the city is reviewing several firms and could hire an attorney as early as this week, sources with knowledge of the plans said.

Facing a $65 million deficit next year and a $14 million shortfall this year, Mayor Luke Bronin has hinted for months that Hartford could file for bankruptcy, and said during his budget release in April that he was "not in a position to rule anything out."  Bronin proposed cuts and concessions from the unions, but is still seeking $40 million in additional state aid to close next year"s budget gap. The city resorted to short-term borrowing to cover costs such as payroll payments this year.

The mayor confirmed Tuesday that the city was looking at firms. "We have not engaged bankruptcy counsel, but we have had initial conversations with firms that have experience in Chapter 9 and municipal restructuring," Bronin said. "Given the uncertainty of the state budget process and the depth of the state budget crisis, it shouldn"t surprise anyone that we might engage counsel in the near future."

Some, such as Council President Thomas Clarke II, who was briefed by Bronin on the prospect of hiring a bankruptcy lawyer, called the move premature. "I was told it was possible that a decision would be made before the end of this week," Clarke said Tuesday. "It"s premature. We haven"t exhausted every option and every avenue for us to go down this road."

Maybe not yet, but time is fast running out.  Meanwhile, reminding the state that "we"re all in it together", Bronin stressed that the state must be a partner in pulling Hartford "from the brink of financial ruin", noting that more than half of the city"s properties are tax-exempt and that Hartford has limited options for revenue.

"We"ve made clear for more than a year that Hartford"s fiscal challenge cannot be responsibly solved at the local level alone with the tools that we have," Bronin said, "and we continue to push hard to build a new partnership with the state of Connecticut to put our capital city on a path to solvency, stability and growth."

However, as noted above, the itself has its own problems, with a more than $2 billion budget gap estimated for next year. It is unclear whether there is support in the General Assembly for bailing out Hartford.

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Clarke said that if the city proceeds with legal representation, the council will look to hire its own lawyer. A key question members want answered is whether the mayor must get the council"s approval to file for bankruptcy, the Courant notes. The state statute covering municipal bankruptcy says that a city or town must receive consent from the governor, and that the governor "shall submit a report to the treasurer and the joint standing committee of the general assembly." It doesn"t specify whether a mayor needs the council"s approval.

In other words, if Bronin intends to go through with it, Hartfort may be in bankruptcy within weeks, if not days.

Hartford wouldn"t be the first city in Connecticut to seek Chapter 9 protection. Bridgeport filed for bankruptcy in 1991, but a federal judge dismissed the petition, saying the city was capable of paying its bills. Other cities that have filed include Detroit, Stockton and San Bernardino, Calif., and nearby Central Falls, R.I.