NEWPORT, R.I. -- The city of Bridgeport, Conn., plans to challenge the legal footing of a state board that has overseen the city's finances since 1988, an attorney said yesterday.
Richard D. Zeisler, a lawyer with the Bridgeport firm of Zeisler & Zeisler, which is advising the city, said the issue will be one focus of newly announced hearings slated for June 26. Federal Bankruptcy Court Judge Alan H.W. Shiff late last week scheduled the hearings to examine the relation between the state's Bridgeport Financial Review Board and the city government.
The hearings will precede others slated to begin July 16 on whether the judge should accept a petition for bankruptcy protection filed by the city early this month.
In the hearings on the review board's legal powers, Mr. Zeisler said he intends to equate the 12-member board's broad powers to taxation without representation.
The board has handed down a string of fiscal edicts to the city government including, most recently, a mandate that it impose an 18% tax increase by June 28. "You've got delegated people, not elected people, who are in effect telling the city how much they should charge in taxes," Mr. Zeisler said in a telephone interview.
He said that the bankruptcy court scheduled the new hearings to determine whether the board members "have the proper statutory basis for controlling the aspects they feel they can control." Mr. Zeisler also said the court views the question as a "threshold" that must be crossed before deciding whether to accept the city's petition under Chapter 9.
Regardless of how Judge Shiff rules on the board's constitutionality, Mr. Zeisler said, other thresholds will remain. The city will have to prove that it did nto file its petition "in bad faith," whether it has proper authorization under state law to file, and whether, in fact, the city is insolvent.
"Each one of these is a significant threshold," Mr. Zeisler said. Nevertheless, the bankruptcy attorney said he has become increasingly confident in the strength of the city's case. "It's looking good for us. As we do legal research, we're convinced that we did the right thing," he said.
In another development, the city's common council defeated a measure designed to tighten Mayor Mary C. Moran's purse strings for bankruptcy expenditures. Mr. Zeisler said that his firm had worked pro bono up until the petition filing, donating roughly $20,000 to $30,000 worth of labor to the cash-starved city. Now, he said, things are different. "The city has to be prepared to commit some financial resources" to its bankruptcy filing. Any work done since the filing is not free of charge, but the city and the law firm "haven't really agreed" on the rate, according to the lawyer.
Mr. Zeisler also affirmed the city's ability to protect bondholders and other creditors in bankruptcy court. Once in bankruptcy court, he said, the city will have the right to propose a recovery plan, while the court will have the power only to approve or reject it.
"Chapter 9 law says that the city proposes its plan, and the court has to determine whether it's feasible," Mr. Zeisler explained. "It's the intention of the city, in its plan, to pay bondholders in full," he said.
Moody's Investors Service, in lowering the city's bond ratings Monday, doubted the city's promise "that it intends to protect" bondholders. "To the contrary," the agency said, "given the nature of the city's filing and its previous positions regarding the state review board and threatened bankruptcy, further unanticipated actions by the city may occur."
Included in what will probably be on the table are executory contracts, in which payment is contingent on the performance of a certain service, for example. He said that labor agreements will be deemed executory contracts.
In addition, the city will attempt to redraft agreements relating to payment in lieu of taxes, which allow certain entities relief from city taxes. According to Mayor Moran, the city could garner an additional $12 million a year by changing its property tax agreement with a Bridgeport-based trash incinerator based.
Tort claims against the city could also be reduced in bankruptcy court, Mr. Zeisler said.
In a related event yesterday, Moody's released a clarification of the ratings it announced Monday for the city's outstanding debt. One municipal finance expert attending a conference of the Northeast State Treasurers here questioned why the ratin agency had announced new ratings for Bridgeport bonds before Judge Shiff decided whether to accept the petition.
On June 6, when Mayor Moran announced that she had file a bankruptcy petition, Moody's suspended the city's bond ratings. Some expected that the suspension would stay in effect until Judge Shiff determined whether to accept Bridgeport's Chapter 9 petition.
Joan Dougherty, an assistant vice president and manager for New England regional ratings at the agency, defended the decision to announce new ratings before a concrete development in court. "The suspension was to seek clarification of certain issues, which we did, and we feel fairly comfortable with having reinstated the ratings at the levels we did," Ms. Dougherty said. Even if Judge Shiff refuses the city's petition, "there are some other issues which have reduced bondholder protection, including a more difficult relation between the state review board and the city."
Anger at Rating Agencies
The agency assigned a rating of B to the city's $71 million in uninsured general obligation bonds and a Ba rating to the city's $33.5 million in bonds with a state-backed debt service reserve. Also, it affirmed the Aaa rating on the city's $102.85 in insured bonds.
The developments come at a time when a seemingly endless parade of downgradings has irked municipal finance officials inthe economically troubled Northeast. At a meeting here yesterday, the regional state treasurers association voted to meet with rating agencies to air grievances over what the treasurers perceive to ban inability of the agencies to look beyond ephemeral conditions, such as economic downturns and resulting budget deficits.
"They're not giving as much weight to the basic credit implications as they are to the current economic conditions," said Samuel Shapiro, treasurer of Maine and the regional vice president of the National Association of State Treasurers. Standard & Poor's Corp. lowered Maine's GO rating to AA-plus from AAA, in advance of the state's record $136 million debt sale Monday.
He said the rating agency should focus on other factors, such as the state's debt burden. In 1972, the state had amassed a debt load equal to 46% of annual revenues. As of this year, the state's debt burden has lightened to only 12% of annual revenues.
Northeastern issuers, the treasurer said, have unfairly suffered credit downgradings as a result of the region's cyclical recession. "We constantly have recessions and slow-downs," Mr. Shapiro said. "But once a state is downgraded, it's a long time coming back. We, here in the Northeast, have to tell the rating agencies to slow down."