ORANGE COUNTY IN BANKRUPTCY : Bankruptcy Fling : Bridgeport Tried for Chapter 9 Help, but Judge Didn’t Buy It
The biggest U.S. city to enter federal bankruptcy court in recent years is Bridgeport, Conn., which tried to declare bankruptcy in June, 1991. But the petition was thrown out by a judge, who said the city was not really insolvent.
The severe inner-city problems that led to the Bridgeport filing have few similarities to the sudden fiscal mess in Orange County, which is one of California’s wealthiest regions.
Bridgeport’s then-mayor, Mary Moran, faced with a $12-million budget deficit, crumbling infrastructure and a declining tax base, tried to have the city declared bankrupt over the strong objections of a Connecticut state panel appointed to oversee the city’s financial affairs.
The move was viewed as a desperate attempt to publicize the woes of a decaying city in the midst of a prosperous, heavily suburban state.
The state strongly opposed Bridgeport’s bankruptcy filing in court. A bankruptcy judge dismissed the petition, ruling that the city had enough cash on hand to meet its obligations. Bridgeport appealed, but the matter was dropped in January, 1992, after Moran lost a bid for reelection and the new mayor, Joseph P. Ganim, withdrew the appeal.
However, the brief fling with bankruptcy had consequences for the city. Ratings agencies such as Moody’s Investors Service immediately suspended ratings of the city’s bonds, which had had very poor ratings to begin with. Ratings soon were reinstated, but were upgraded only slightly after the city withdrew its attempts to declare bankruptcy.
From the standpoint of ratings, and the respect of the nation’s financial community, Orange County--and the state--have far more to lose. The county has long enjoyed very high investment-grade ratings on its debt. Municipal finance experts say a successful bankruptcy filing, on top of the unexpected crisis involving the county’s investment fund, could leave investors with a sense of mistrust that might linger for years. Other California cities, counties and the state could be harmed as investors conclude that the state is not prepared to bail out cities and counties that run into financial trouble.
Bankruptcy experts say that, ironically, a petition by Orange County would have a much greater chance of being upheld than the one by much poorer Bridgeport. That is because Orange County’s problems stem from disastrous investments that have threatened a run on county funds and threaten the financial well-being of cities and agencies that invested in the funds. In addition, there is no indication so far that California state officials would oppose such a filing.
