Bankruptcy could be the best thing for Hartford - WFSB 3 Connecticut

I-TEAM INVESTIGATION

Bankruptcy could be the best thing for Hartford

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Two judges who helped steer Detroit out of bankruptcy said Hartford should just get it over with. (WFSB) Two judges who helped steer Detroit out of bankruptcy said Hartford should just get it over with. (WFSB)
DETROIT (WFSB) -

One of the hot topics at the state capitol is whether or not a compromise state budget should include a bailout for Hartford.

The capital city said it needs $40 million in additional state funding to pay its bills and some said no matter the cost, bankruptcy must be avoided.

However, two men from a city that's already gone through the process told the I-Team that bankruptcy may actually be the best thing that could happen.

The I-Team recently traveled to Detroit, MI to speak with the men who led the largest municipal bankruptcy ever and they had a simple message for Hartford: Get on with it.

Abandoned buildings, decaying roads and tens of thousands of burned out streetlights.

Those were the symbols of Detroit's despair. As the auto industry that sustained the region crumbled in the early 2000s, the long, slow decline of a once proud American icon picked up speed.

"The city really wasn't a city at all, it was spiraling toward oblivion," said Hon. Gerald Rosen, retired federal judge.

By 2013, Detroit was broke.

Things became so bad that sometimes it was upwards of an hour before an ambulance responded to an emergency.

However, rockbottom led to a new start.

That year, Michigan's governor appointed Kevyn Orr, a Washington DC lawyer, to be the city's emergency manager. Soon after, Orr took the city he now single-handedly controlled into bankruptcy.

"The goal was to get Detroit through the bankruptcy as promptly as we possibly could," said Hon. Steven Rhodes, retired federal judge.

That filing brought Rhodes and Rosen into the picture.

The two judges became Detroit's guides through the maze of restructuring.

Rhodes oversaw the case in federal bankruptcy court. He appointed his friend and fellow judge, Rosen, as the mediator.

Rosen was tasked with bringing all of the interested parties together in a compromise that would end the case and give the people of Detroit their city back.

"There was great anger in the city about it," Rhodes said. "That anger first became apparent when the emergency manager was appointed in 2013. People didn't like having their democracy taken away from them."

The judges said they tried to move quickly.

First, they said the figured out the city's assets like how much cash was on hand, how much tax money was coming in and what property did the city own that could be sold.

Then, they figured out everyone the city owed money to, which the court refers to as "competitors."

It could be a vendor, someone who bought a municipal bond or even a city retiree living off of their pension.

Then the court took all of the available assets and paid creditors some of what they were owed. The rest of the debt was wiped clean.

The idea was to come out of the other side with a brighter future. And the judges felt to do that, they needed to work fast and find compromise.

"And if we didn't get a fully consensual or almost fully consensual plan of adjustment, the city would have been in bankruptcy for years," Rosen said.

The biggest boon for Detroit is what they now call the grand bargain. It started with a doodle from Rosen.

The city owned all of the art in the Detroit Institute of Art and he knew creditors would demand it be auctioned off to pay the city's bills.

"I didn't want my legacy to be the guy who helped sell off one of the world's great art collections to sheiks in Dubai [or] oligarchs in Russia," Rosen said. "So I began to think of ways to leverage the art to bring in outside revenue."

He came up with a plan to put the contents of the museum into a trust that could then solicit donations from non-profits around the country to make sure the art stayed accessible to the public.

The money raised by the trust was transferred to pay the city's pension liabilities.

It was such a success that it raised hundreds of millions of dollars to keep the art in the museum and the doodle that Rosen sketched ended up there too.

"This is a reproduction and this is hanging in the DIA," Rosen said as he showed the I-Team.

Today, Detroit's downtown is bustling. Abandoned properties have largely been demolished and those burned out streetlights have been replaced.

The I-Team asked Rosen and Rhodes to do some digging into Hartford's financial woes.

"It looked to me as if Hartford is just piling more debt onto existing debt and as I said before that's really a disaster for the city," Rosen said.

The judges noted the well-publicized budget shortfall in Hartford and the city's request for millions in addition aid from the state.

Both men felt a state bailout would be a big mistake, especially with upcoming increases in pension payments that would tie up huge percentages of  the current city budget.

"Legacy debt is the death beetle for a municipality, or for a state for that matter, because it grows and grows exponentially, and that's what was happening in Detroit," Rosen said.

The judges said all of the signs are there, from the budget deficit to the city's bond rating falling to "junk status" and worse.

They said if anyone doesn't believe them that bankruptcy is practically inevitable, just look to the professionals who just downgraded Hartford again last week.

"This is a reflection of the judgment of professionals of the credit-worthiness of the city," Rhodes said.

However, Hartford doesn't have a building full of city-owned Van Goghs. And without the Grand Bargain that saved Detroit, is bankruptcy still the best idea?

'I think virtually every municipality has its own Grand Bargain to find," Rosen said. "There are assets that can be consolidated and monetized in any number of ways, budget cuts that I saw Hartford is already doing."

But their biggest advice is to avoid a short-term fix like a state bailout. They said that just delays what these two experienced bankruptcy judges said is inevitable in Hartford.

"Kicking the can down the road doesn't solve anything," Rosen said. "The problems are just going to get worse."

"It's going to be hard but if the city needs a fresh start," Rhodes said. "The sooner it gets started on that fresh start the easier and more efficient it is."

The I-Team reported that the first step for Detroit was the appointment of an emergency manager who became the sole decision-maker, essentially taking all power away from the mayor and the city council.

The judges said having one person in charge made things move faster, which they thought was a big part of the success.

In Hartford, the I-Team questioned if Gov. Dannel Malloy would take any power away from Mayor Luke Bronin, his longtime ally.

But the judges had an interesting suggestion. They thought Malloy should take power away from city government, then appoint Bronin as emergency manager and authorize him to file for bankruptcy as soon as possible.

While the I-Team was in Detroit, it also spoke to union officials, business leaders and people who live in the wealth suburbs to see how they were affected.

Those reports will be broadcasted all this week.

Stay tuned to Channel 3 for more on this I-Team Investigation.

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