In the wake of Bridgeport's bankruptcy filing, some other local issuers in Connecticut are worried they will pay an interest penalty for that city's actions.
"People who have always viewed municipal paper in Connecticut as good as gold now have another factor to consider, and that is the apparent ability of municipalities to file for bankruptcy," said Ralph W. Halsey 3d, controller of New Haven.
That right was established on July 22, when Judge Alan H.W. Shiff ruled that a state law allowing cities the right to enter court also "generally authorized" Bridgeport, and other cities in the state, to use Chapter 9 of the federal Bankruptcy Code.
Mr. Halsey said that, as a result of the ruling, New Haven could face higher-than-usual interest costs next month, when it expects to sell $18 million of debt, including $5.4 million of taxable notes and tax-exempt bonds worth $12.6 million.
A financially sound city in Connecticut might, however, escape the bankruptcy furor unscathed.
Marsha Kjoller, assistant budget manager of Norwalk, said her city -- with its triple-A rating from Fitch Investors Service -- is not losing sleep over the situation.
Colleen Woodell, senior vice president at Fitch, explained the difference between Norwalk and its neighbor to the north this way: "Bridgeport is the aberration within Fairfield County. And there's nobody in the state like Bridgeport, for all intents and purposes."
But to cities with lower ratings, Bridgeport may presage what lies ahead. "In filing for bankruptcy, Bridgeport casts a shadow over not only the other cities in Connecticut, but also over the state as a whole," said Paul S. Rizza, Waterbury's auditor. The state's lack of a budget one month into its new fiscal year doesn't help either, he added.
Investment bankers say Connecticut issuers have reason to worry about how Bridgeport's bankruptcy filing will affect their reputations with bond buyers.
"There's no doubt that the bankruptcy filing has sent some shock waves through the muni market," said John F. Wallace 3d, a managing director at the Bank of Boston.
The specter of more Connecticut cities going bankrupt has already forced interest costs up 75 basis points for some Connecticut note issuers, he said.
In addition, heavy note issuance by the state to accommodate a protracted debate over taxes will glut the market with short-term paper. "It's hard to pinpoint how much of it is supply and how much is Bridgeport," Mr. Wallace said.
The state's bond commission approved sales of $600 million of bond anticipation notes, and the state sold $200 million of general obligation temporary notes late last month.
When a city files for bankruptcy, credit shock waves naturally spread from the epicenter and affect neighboring cities, and James E. Spiotto, a Chapter 9 expert and partner with the Chicago law firm of Chapman & Cutler. "It's sort of like nuclear fallout," Mr. Spiotto said. "The area it affects is more than just the impact zone."
Russell E. Galipo, a vice president in the government finance department of Connecticut National Bank, said he expects the credit fallout from the bankruptcy filing to continue, hitting cities with the worst fiscal problems the hardest. "I would suspect that weaker credits will start experiencing fewer bidders and higher rates. That's got to be an outcome."
The numbers of bids at note offerings has already shown a marked decrease, a factor that could be linked to the notion that other Connecticut communities could soon follow in Bridgeport's footsteps, Mr. Wallace said.
The aura of risk surrounding Connecticut local issuers, particularly those with more pronounced fiscal problems, has also widened spreads between the high and low bids, and banker pointed out.
A recent taxable issue from the city of Waterbury, for example, attracted only three bidders, ranging from 8.94% to 11%, according to Mr. Wallace. In the past, he said, the Baal city "would have seen more bids and better bids, by maybe 50-100 basis points."
Waterbury's difficulty in attracting bids comes at a particularly inopportune time. The city suffered a gap of roughly $12 million in its $195 million budget for the last fiscal year.
The city plans to bridge the gap using $3.5 million in spending cuts this year, tax increases, and about $8.5 million it will borrow over five years.
Waterbury plans to borrow the money from the William Blair & Co. of Chicago, in a complex deal using liens on uncollected property taxes as collateral.
If the deal goes according to schedule, some time in September Waterbury will sell its liens to William Blair and then lease them back over five years for a net interest cost of between 7% and 8%, according to Mr. Rizza, the auditor.
The city will use general revenues, including the collections and interest on them, to pay the interest. It charges late taxpayers an annual interest rate of 18%.
"It's not such a bad deal when you think about it, for the city," he said. "Obviously, we're still going to have to make the efforts" to collect on past-due tax payments.
The leasing agreement, according to Mr. Rizza, is the first of its kind in Connecticut. He said it illustrates the difference between Waterbury and Bridgeport.
"The Bridgeport I'm seeing is just throwing up their hands and saying, 'We're broke,'" Mr. Rizza said. "Waterbury is solving its own problems. Bridgeport is looking for relief."
Waterbury raised its total tax levy by $11.5 million for the current fiscal year, to $103 million. It has also wrung concessions from most of its unions without the aid of a federal court, the auditor said.
Officials in Bridgeport, meanwhile, are trying to chart a course back to fiscal stability, Mahesh Reddy, the director of the city's office of policy and management, said last week. Mr. Reddy said he and other officials are assembling a bankruptcy reorganization plan even though Judge Shiff has yet to rule on all of Connecticut's objections to the bankruptcy filing.
Mr. Reddy said the reorganization plan would be ready by the middle of next month. He also said the task force putting the plan together includes city cabinet members, as well as representatives of the Bridgeport Common Council and the city's delegation to the connecticut General Assembly.
The plan is expected to target city employee unions for concessions and the surrounding communities for higher tipping fees at the city garbage incinerator for example.
For Bridgeport, the largest city ever to file for Chapter 9, the reorganization plan will have implications even if Judge Shiff decides to throw the city's bankruptcy petition out of court, Mr. Reddy said.
"Regardless, we're going to use the plan,' said Mr. Reddy. "It'll be a good blueprint, and will establish a wealth of information." It will address reorganization in other areas besides the city's "executory contracts," such as labor agreements, which can be altered in bankruptcy.
To bondholders, the plan will broadcast a key message on whether the owners of the city's GO bonds should expect to be affected.
Mr. Reddy said that the plan should prove the city does not intend to tamper with its debt obligations. "We're hoping that if we do have a reorganization plan that does not touch bondholders, it will send a message that the city is to be trusted in the credit markets."