Finance Is Connecticut to Blame for Hartford's Looming Bankruptcy? The state's way of governing may be causing some of its capital city's financial problems.

As Connecticut lawmakers debate the best way to close a $3.5 billion shortfall over the next two years, its capital city is having a fiscal crisis of its own, and it highlights how the state's parochial way of governing hurts big cities.

Connecticut has long been touted for its wealthy suburbs. The state has one of the highest median incomes in the country. But the departure in recent years of businesses such as Aetna and General Electric to New York City and Boston, respectively, have sent a signal that times are changing: Connecticut doesn't have the vibrant city life that many companies are looking for these days.

The state's small-town mindset was recently on full display when Gov. Dannel Malloy appealed to Amazon to locate its second headquarters there. In his pitch, the governor didn't cite Hartford or New Haven -- two of the state's biggest cities -- as a selling point, but rather the state's proximity to Boston and New York City.

That snub was acutely felt by Hartford, which is now on the precipice of bankruptcy. "I think one of the reasons Connecticut has been slower to recover from the Great Recession is that we long ago missed the boat and failed to recognize the role that cities play in economic development today," says Hartford Mayor Luke Bronin. "If we want to position Connecticut to be competitive, we need to position our cities to be competitive."

Bronin acknowledges that the idea runs counter to Connecticut's highly parochial structure. "We have a state of 3.5 million people," he says, "and it's carved into 169 municipalities where every service is duplicated in every one of those municipalities."

That may work fine for the suburbs. But for cities that are home to government and academic institutions that are tax-exempt, it means they are paying for more with a lot less revenue to draw upon. That is certainly true in its capital city, Hartford.

Half of its roughly $8 billion in property is tax-exempt. Hartford itself is home to fewer than 124,000 residents, meaning it has a small tax base that doesn't cover the property tax revenue gap. Connecticut also doesn't allow local sales or income taxes, so those options are off the table. And while driving through on Interstate 84 gives the impression that Hartford is comparable to any other mid-sized city, looks are deceiving. Further limiting the city's tax base is the fact that the metro area is divided into three separate jurisdictions: Hartford, East Hartford and West Hartford (the latter two would merely be suburban outskirts of the center city in most other places).

Making matters worse, the state does not fully fund Hartford's PILOT, or payment in lieu of taxes, which is made to compensate a local government for some or all of the tax revenue lost due to tax-exempt property. This year, the existing PILOT formula would have given the city approximately $89.5 million in additional revenue. Instead, the state sent Hartford $37.2 million.

This year, the existing PILOT formula would have given the city approximately $89.5 million in additional revenue. Instead, the state sent Hartford $37.2 million.

Now, Hartford is facing a nearly $50 million budget hole -- about 8 percent of its spending -- and revenues have stagnated. Property taxes are already the highest in the state, and officials have made major service cuts to programs such as community organizations, senior centers and the city's paratransit service.

"Start with a very small city and take half the property off the tax rolls, and you have a fiscal structure that is built to fail," Bronin says. "That is the fundamental structural problem that underlies Hartford's fiscal crisis."

Of course, not all of Hartford's problems can be blamed on the state. Hartford is dealing with backloaded debt payments from previous administrations. As a result, its budget this year increases overall spending to cover those rising costs even as it cuts services. By the city's estimate, its debt payments will balloon to $61 million by 2021, or roughly 20 percent of its noneducation budget.

But now, by all measures, Hartford's immediate future is in the state's hands. If the state fails to pass a budget by Oct. 1, cities across the state will be forced to deal with zero or highly reduced aid from the state. In Hartford's case, Bronin says it wouldn't receive $56 million in scheduled state aid, which would prompt a cash flow crisis that could force it into Chapter 9 bankruptcy. As that deadline nears, Hartford already seems to be laying the groundwork to make its case for bankruptcy.

State lawmakers are acutely aware of Hartford's status, but they're more interested in talking about a financial takeover than the kind of economic partnership Bronin wants, which includes giving Hartford more revenue-raising power, continued support in local economic development projects and fully funding the city's PILOT. Bronin says that any solution to Hartford's structural budget issues would also have to involve renegotiated union contracts and negotiations with bondholders -- two things that are typically difficult to achieve outside of bankruptcy.

Bronin's statements have triggered warning sirens in the municipal bond market. Last week, Municipal Market Analytics added Hartford to its database of defaulted and impaired municipal bonds, calling Bronin a "mayor seemingly devoted to bankruptcy." The city also received "super downgrades" into deep junk status from Moody's Investors Service and S&P Global Ratings because of its impending cash flow crisis.

"In other words," wrote Municipal Market Analytics Analyst Matt Fabian, "it's on."

CORRECTION: A previous version of this story mistakenly reported the amount of additional revenue that the existing PILOT formula would have given the city this year.