Hartford Nears Bankruptcy as State Aid Remains Uncertain

Hartford, Connecticut

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Connecticut struggles in its third month without a budget and faces a deadline where Gov. Dannel Malloy will have to start cutting municipal aid.

Connecticut’s capital city has renewed its plea for substantial state aid to avert a bankruptcy filing Mayor Luke Bronin says could occur by the end of October.

The six-page letter Bronin and other city officials sent to Gov. Dannel P. Malloy and state legislative leaders last week helped turn up the heat under a budget stew that’s been simmering for months in the Nutmeg State.

When RouteFifty last visited the situation in May, Hartford’s credit had just suffered a downgrade from S&P Global. The ratings agency cited uncertainty about prospects for state financial aid to Connecticut cities as one reason. In July, Moody’s Investors Service followed in S&P Global’s wake, also downgrading Hartford’s credit rating. It cited the city’s decision to hire bankruptcy counsel, the law firm of Greenberg Traurig, as one reason.

State Budget Follies

Uncertainty has continued throughout the summer, as Malloy and legislators have not been able to agree on a budget plan. Because the state’s fiscal year ended on June 30, the governor has had to run the state by issuing executive orders. This week is crucial in the negotiations, as the Senate’s schedule may not allow another gathering until after Oct. 1, when Malloy would be obligated to impose large cuts in municipal aid. Property tax relief funding and education grants would be reduced by about $300 million compared to the amounts municipalities received last year.

That would be a “budget nightmare,” Keith M. Phaneuf wrote in the the CT Mirror on Monday.

State officials have struggled to close huge gaps—in the 9 percent range—between spending and revenues in the 2018-19 biennial budget. The gaps turned out to be much larger than anticipated—about $3.5 billion over the two-year period—thanks to revenue collections that ran far behind original projections.

The governor and leaders of the Democratic House have proposed a shifting menu of tax increases and spending cuts as the summer has worn on. House leaders  proposed an increase in the general sales tax to 6.85 percent from 6.35 percent, with a surcharge on restaurants up to 7 percent. Malloy proposed cuts in aid to relatively well-off municipalities, to help finance more aid to Hartford and other low-income cities. All have counted on large concessions from labor unions—coming on top of concessions made in recent years—to help close the gap. Large increases in taxation of hospitals, to be offset by consequent increases in federal Medicaid subventions, also have been an important ingredient in the stew.

Agreeing on a final recipe has been difficult in the closely divided legislature, where Democrats hold a narrow 79-72 edge in the House and just half of the 36 seats in the Senate. The governor’s latest public budget proposal was released on Friday. It proposed a smaller sales tax increase to 6.5 percent (and 7 percent for restaurants), and it asked hospitals to pay $274 million next fiscal year, and $299 million the following year.

In negotiations over the weekend, House Democrats ditched the sales tax increase, in part because the anticipated gains in Medicaid revenue would in theory provide more money than needed to reimburse the hospitals. (But hospitals are resisting.) If more is needed to balance the budget, House Speaker Joe Aresimowicz, a Democrat from Berlin, told reporters Sunday, “obviously making additional cuts” would be necessary.

Hartford’s Plea

Mayor Bronin warned state officials more than a year ago that Hartford faced bankruptcy in 2017. If it happens, Hartford would be the first state capital in the nation to suffer that fate.

Bronin has been counting on about $40 million in new state aid and $10 million in assistance from major businesses to help balance the city’s budget this fiscal year. In his Sept. 7 letter, the mayor recapped the sources of the problem and outlined solutions he favors—captured concisely in four requests:

  1. Fairly reimburse Hartford for its disproportionate share of non-taxable property;
  2. Create a mechanism that allows Hartford to achieve fair labor contracts that truly reflect the City’s ability to pay;
  3. Join us in insisting that bondholders and other stakeholders participate in the solution; and
  4. Continue to invest in what’s working.

In substantial degree because it is the state capitol, Hartford has a lot of developed property that is not taxed. State buildings are not taxed. Nor are hospitals and colleges. Regional facilities such as the Metropolitan District Commission, providing water and sewer services, and a trash-burning power plant, occupy hundreds of acres of land but are not taxed.

“Countless not-for-profits that operate in Hartford but serve the entire state” are likewise exempt, Bronin writes, adding, “We are a city with the tax base of a suburb . . . the fundamental, structural problem that underlies Hartford’s fiscal crisis.”

Connecticut reimburses cities for hosting tax-exempt property. But the formula has been underfunded. Moreover, state facilities are treated with a lighter touch than non-profits, disadvantaging Hartford. If both problems were corrected, Hartford would gain about $127 million in added revenue annually. Fixing the first problem, at a minimum, would be a significant step, said the mayor.

Hartford suffers from unsustainable labor contracts, whose generous pension and retiree health benefits are a particular problem—as they are elsewhere in the state. “Current state law makes it difficult for municipalities in distress to achieve the savings they need,” Bronin writes. Arbitration panels haven’t worked well, he notes, citing a 6.25 percent retroactive wage increase a panel recently awarded a Hartford union.

Bronin favors a mechanism along the lines of the Municipal Accountability Review Board proposed by the governor earlier this year—empowered to “settle contract disputes with fiscal sustainability as the paramount objective.”

By 2021, Bronin projects, Harford’s debt service payments will reach $61 million, or about a fifth of the city’s current non-education expenditures. That, he says, is “unmanageable,” and is the reason the city retained a lawyers and financial experts on debt restructuring to engage in negotiations with bondholders. “The State of Connecticut,” the letter says, “can assist in that effort, by standing by us as we negotiate, and by making any new State revenue beyond short-term liquidity support conditional on the achievement of a long-term sustainable plan.”

Bronin’s final plea to the state is to “continue to invest in what’s working.”

The New York Times last month took a look at the Hartford situation and reported:

The city’s boosters have pointed to what they see as optimistic signs: the University of Connecticut is expanding its downtown campus and the creation of two high-rise residential developments. On a recent warm summer evening, patrons packed downtown restaurants, families strolled through the sprawling Bushnell Park and a gaggle of young people skateboarded in Heaven, a graffiti-plastered skate park tucked along an interstate.

But the Times also took note of the city’s many problems: poverty, income disparity, blighted buildings, library closures, understaffing of the Police Department, and, not least, the dispiriting decision of one of the giants of Hartford’s key insurance community, Aetna, to move its corporate headquarters to New York City.

To the Times’s list of positive developments, Bronin added that commuter rail is “coming soon,” and that the local Double-A baseball team, the Yard Goats, were selling out the 6,200 seats in their brand new stadium, Dunkin’ Donuts Park. He did not note that the over-budget, $71-million stadium is one reason rating agencies have downgraded Hartford’s debt.

The downgradings are the reason that, as Bronin puts it, “the city of Hartford will likely lack cost-effective access to the capital markets for some time.” So, he writes to the governor and legislative leaders, “continued State partnership on capital projects to maintain basic infrastructure and create a more vibrant, connected Capital City will be necessary.”

Whether the state can come up with enough money to keep Hartford afloat remained in question as the second week in September began.

Timothy B. Clark is an Editor-at-Large at Government Executive’s Route Fifty.

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