The Chapter 9 filing by Bridgeport, Conn., last week may become a test case for municipal bankruptcy, according to some observers who say it portends a rash of filings by similarly troubled cities.

With a population of roughly 140,000, Bridgeport represents the first large city to avail itself of recently amended federal laws that allow for a municipality's financial restructuring.

The city, which on Thursday night filed a petition for protection from creditors with the U.S. Bankruptcy Court, amid heavy opposition from the state.

Bridgeport faces a gap of $17 million in its $304 million budget for the fiscal year that begins July 1. It has been under the control of a state oversight board since 1988, when it required state backing to issue bonds to fund a $60 million deficit.

"It's going to be a test case," said Jeffrey Cohen, a principal in the Denver law firm of Cohen & Herm, which specializes in municipal bankruptcy.

Mr. Cohen, who has served as creditor's counsel on a number of special tax district bankruptcies in Colorado, believes bankruptcy offers a useful alternative. Other communities, he says, will soon follow in Bridgeport's footsteps.

"Philadelphia or some of the other large cities are going to say, 'Well, wait a minute. It worked for Bridgeport, maybe it'll work for me.' Bankruptcy in the municipal finance business is going to be a fact of life, whether people like it or not," Mr. Cohen said.

James E. Spiotto, a partner in the Chicago law firm of Chapman & Cutler, said that of the 69 Chapter 9 bankruptcy filings between 1980 and 1990, only seven involved cities, counties, or villages. Others involved special tax districts and municipal utilities.

Bridgeport, he said, is "the first city of its size, with a complex operation and financial condition that has filed."

He said he does not believe other cities will necessarily follow Bridgeport's example. "I think it's still a question of how the credit markets will react of it."

Cities have been loath to file, he said, because of "the concern of the stigma. The question is whether or not in seeking this they will have the same access to the credit markets as a municipality that didn't file."

Bridgeport may became a case study in bankruptcy for other cities, according to Frank Shafroth, director of policy and federal relations at the National League of Cities. "A number of cities are going to follow very carefully what happens with Bridgeport," Mr. Shafroth said.

If Chapter 9 helps Bridgeport regain control of its finances, he said, "there are going to be a lot of cities that will follow suit.

At least one municipality in Massachusetts has recently begun considering Chapter 9. The mayor of Chelsea last week said bankruptcy might be Chelsea's only remaining alternative.

But Bridgeport's filing has a dubious future.

On Friday afternoon, Connecticut's attorney general, Richard Blumenthal, said the state would file papers with the U.S. Bankruptcy Court requesting the court not to accept the city's bankruptcy petition.

"The city has absolutely no legal authority to petition for bankruptcy under federal and state law," Mr. Blumenthal said in a printed statement issued Friday. He said that under laws that established the Bridgeport Financial Review Board, a state oversight body, the city needs approval of the board of enter into bankruptcy.

At a meeting yesterday in Bridgeport, the board affirmed its stolid opposition to the city's bankruptcy bid, adopting a resolution that asks Mayor Mary C. Moran to withdraw the Chapter 9 bankruptcy petition, and authorizing the attorney general to file papers with the court.

According to Mr. Blumenthal, the city's Chapter 9 filing violates not only state statutes, but also Chapter 9 itself.

"Under the code," he writes, "a municipality must be authorized to be a debtor under state law." Bridgeport has received no express authorization from the state of Connecticut to enter into bankruptcy, he says. If the bankruptcy court refuses to hear the case, the city could appeal to the U.S. District Court in Bridgeport.

Mayor Moran on Friday visited Wall Street bond rating houses. "We had some very open and honest and detailed discussions," Mrs. Moran said as she emerged from the gilded doorway of Standard & Poor's Corp. at 25 Broadway. However, she declined to comment on Mr. Blumenthal's opinion.

Gov. Lowell P. Weicker Jr. stands firmly behind the opinion, saying that Bridgeport has exceeded its rights in trying to enter bankruptcy, according to press secretary Avice A. Meehan.

"It's the view of this administration that Bridgeport lacks the authority to file for bankruptcy without the specific authorization of the state," Ms. Meehan said. "And, obviously, that authorization is not forthcoming."

Relations between the state and Bridgeport have grown increasingly frosty since January, when the mayor first indicated she might authorize a chapter 9 filing.

On Friday, Standard & Poor's lowered its ratings on the $77.7 million of outstanding Bridgeport bonds to CCC from BBB.

The rating agency also placed Bridgeport's bonds on CreditWatch with "developing" implications, meaning that the CCC rating "can go up or can go down, depending on upcoming events," said Peter D'Erchia, a senior vice president at Standard & Poor's.

Bridgeport's filing does not present an immediate threat to bondholders receiving their principal and interest payment, Mr. D'Erchia said. Under the legislation that created the financial review board, the city's property tax revenues pass through a trustee, which sets aside money needed for debt service. The city's bond trustee already has $6 million slated for distribution to bondholders in August.

Mr. D'Erchia said that although upcoming debt service seems secure, the Chapter 9 filing indicates a higher level of risk to Bridgeport bondholders.

Standard & Poor's also stressed that $100 million in insured Bridgeport bonds retain their triple-A ratings.

About half of the outstanding Bridgeport bonds are insured by the major bonds insurers. Officials at the companies that insured the bonds in the primary market -- Financial Guaranty Insurance Co., AMBAC Indemnity Corp., and Municipal Bond Investors Assurance Corp. -- said the the chance of default is extremely remote.

At the same time, the officials bristled at what they deemed a blatant political ploy undertaken by the major of a city whose budget gap was far too small to justify the severity of the filing. And they suggested that the bankruptcy filing itself would end up being thrown out of court.

"She's just playing politics up there," said one insurer, who asked not to be identified. "This is going to be squashed."

The industry as a whole characterized Mayor Moran's action as an isolated incident and said a Chapter 9 trend is not in the making.

The most significant exposure to Bridgeport's debt is at Financial Guaranty Insurance Co., which backed a $105.97 million general obligation sale in August 1985. The deal was backed when FGIC was only a year old.

The insurer's total current exposure to the city -- including principal and interest payments and net of reinsurance -- is about $111 million, based on an average annual debt service $7.6 million, 14 years of remaining payments, and a payment of about $4.7 million due Aug. 15.

Christopher A. Richmond, director of public finance at FGIC, said at this point a default "seems unlikely," but that "should a default occur, as with all FGIC-insured securities, bonholders can rest assured that FGIC stands ready to meet its obligations."

FGIC reinsured a portion of the deal to Financial Security Assurance, and FSA now has $9.6 million of principal and interest reinsurance exposure to the 1985 deal, according to an FSA spokeswoman. Other reinsurers have exposure to the sale, but FGIC declined to name them or their potential liabilities.

AMBAC Indemnity Corp. insured a $6.97 million Bridgeport borrowing in 1983. The insurer's total principal and interest exposure is $7.8 million, and a payment of $291,000 is due Nov. 1, 1991. A total of $2.4 million is reinsured to "seven or eight" reinsurers, many of which are foreign firms, according to a spokeswoman.

MBIA had the least exposure to Bridgeport of the four major bond insurers, with a current potential liability of about $4 million. In September 1981, the company insured a $5.5 million GO sale. Friday's Bond Buyer incorrectly stated that it was a 1991 borrowing.

The annual average debt service is about $400,000 on the issue, and the next payment is due Sept. 1. An MBIA spokesman dismissed the possibility of a default.

"We are not concerned about Bridgeport defaulting," the spokesman said. "We take comfort in the state's actions [Friday] and the 'intercept' mechanism in the review board's enabling legislation."

Bridgeport's $35 million in state-guaranteed debt, which it sold in 1988, carry the AA rating of Connecticut, and, like the state, are on CreditWatch with negative implications.

Mayor Moran also visited Moody's Investors Service, an agency that Thursday night announced it was suspending its Baa rating on Bridgeport's uninsured general obligation bonds.

The mayor said she had not come to the rating agencies in a bid for clemency to prevent them from further lowering her city's already low bond ratings. "My purpose in coming here was to explain all the actions that have been taken," the mayor said.

Mayor Moran, sporting red, white, and blue clothes and a confident smile, averred that the uncharted realms of bankruptcy court will benefit her city. "If I didn't think it was the bst thing for the city," she said, "I wouldn't have filed the petition."

- Staff reporter Nicholas Boyle contributed to this article.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.