S&P lowers New Haven’s bond rating, with negative outlook

NEW HAVEN — S&P Global Ratings has lowered its long-term rating on New Haven’s existing general obligation debt while assigning the same rating to its refunding bond, and giving each a negative outlook.

The rating for $160 million in long-term refunding bonds was BBB+. The agency also downgraded its A- rating for the $58.03 million in existing general obligation bonds to BBB+.

“The downgrade reflects our view of New Haven’s sustained structural imbalance, stemming from optimistic revenue and expenditure assumptions, contribuing to misaligned revenue and expenditures over the past three fiscal years, including a projected $13 million to $15 million deficit in fiscal 2018,” the report states.

It was issued Wednesday as the city gets ready to refund bonds worth $58.03 million in early August, in part to cover its $15 million deficit.

Several factors cited for the lower rating included: “Weak management assessment that reflects a weak operating environment” for the past three fiscal years and limited “long-term financial forecasting.”

Also,“very weak budgetary performance”; “very weak budgetary flexibility”; “very weak debt and contingent liability position.”

On the last one, the report cites debt service carrying charges at 10 percent of expenditures and net direct debt that is “8.1 percent of total governmental fund revenue” in addition to a large pension and other post employment obligations and the “lack of a plan to sufficiently address the obligation.”

The rating agency said the city had operating deficits of negative 2.2 percent of expenditures in the general fund and negative 1.7 percent across all governmental funds in fiscal 2017.

Positive factors include: adequate liquidity with strong access to external liquidity. Also, a strong economy “with access to a broad and diverse metropolitan statistical area” and “a local stabilizing institutional influence,” which is Yale University.

On the other hand, it pointed to the fact that more than half of the city’s properties are tax exempt, “making it difficult for management to raise local-source revenues.”

The report said the deterioration of its “unassigned reserves” (Rainy Day Fund) to negative 0.5 percent of operating expenditures in fiscal 2017 “limits the city’s ability to absorb potential reductions in state funding and rising fixed costs related to medical self-insurance, ongoing capital investment and retirement benefits.”

Because of the changes in these credit factors for several years, it predicted that “New Haven’s weakened budgetary performance and flexibility will unlikely return to levels that support a higher rating in the near-term.”

In fact, it said there is a one-in-three chance that S&P could again lower the rating in the next three years.

Laurence Grotheer, spokesman for Mayor Toni Harp, said it would not be appropriate to comment on what might happen hypothetically in the next three years.

On her staff, Grotheer said “Mayor Harp maintains her confidence in her budget and management team.” Michael Gormany is head of budget and management, while Daryl Jones is the city’s controller.

He said she expects to continue to work with the city’s state delegation in light of the fact that 54 percent of the city’s grand list remains tax-exempt because of a state law. Harp was out of town at a mayor’s “university” in New York City sponsored by Bloomberg.

In a statement issued when the report was released Grotheer said:

“New Haven’s consignment to a slightly lower bond rating reflects the city’s admittedly challenging fiscal cirsumstance; nevertheless, development projects in New Haven continue to attract robust private-sector investment, suggesting a persistently bright economic outlook.”

“It’s noteworthy that an agent at New Haven’s bond insurance provider, Build America Mutural, cites ‘reduced state aid PILOTS, (payments in lieu of taxes,) educational grants, first among causes for the city’s financial difficulties,” Grotheer said.

Grotheer also stressed that the city didn’t know it would lose millions in state funds until the second quarter of fiscal 2018 when passage of the state’s biennial budget was delayed.

New Haven is also experiencing a renaissance of sorts with approximately 1,000 apartments built between 2014 and 2018 and put into service. In addition, some 3,700 units are in the planned pipeline as of this week, including 1,000 units when Church Street South is replaced and the full build-out of the Audubon Square complex is finished.

The rating agency recognizes the problems in 2017. It also noted the city’s projection that some $300 million in taxable value will be added to the grand list after phased-in tax agreements expire in five to seven years.

S&P Global Ratings said its negative outlook for New Haven is based on the fact that the city “has historically and will likely face ongoing difficulties in achieving or sustaining balanced performance, which could lead to further deterioration of the city’s flexibility and liquidity.”

The proceeds from the series 2018A bonds, some $58.03 million, will finance public improvements, as well as school and urban renewal projects.

The 2018B bonds (some $160 million) will be used to restructure certain maturities “to generate near-term debt service reductions that will help stabilize operational budget increases.”

The city is facing an estimated $15 million deficit for fiscal 2018 that ended on July 31.

By carrying out this restructuring, New Haven will realize upfront debt service cost savings of $33.1 million for fiscal 2019.

It will also project cash flow savings ranging from $4.5 million to $18.8 million between fiscal 2020 and fiscal 2025. At that point, annual debt service will jump and extend debt service through the maturity of the bond in 2034.

Since the spring, the city’s Financial Review and Audit Commission, now chaired by Mohit Agrawal, has taken an active part in advising the public of its view on the city’s finances.

He said the down grade by S&P “is sobering.” Agrawal said the $160 million is much larger than previous refunding by the city. “In essence, we are refinancing the city’s credit card and are pushing out the payment schedule,” Agrawal said.

He again stressed the most pressing problems.

“The city has a structural imbalance between our costs and our revenues, and all stakeholders — taxpayers, Yale, the state, and our public employees — must come to the table to discuss solutions,” the chairman said.

“It is vitally important for city residents to be part of this discussion because there are no easy solutions left, and residents must make their voices heard when it comes to the hard decisions we have to make, such as raising taxes or cutting city services or cutting public employee benefits,” he wrote.

He blamed the fiscal challenges on the underfunded pensions and rising health care costs. The S&P also addressed the issue.

“(I)mprovement ... would ... require an improved management environment that enables New Haven to alleviate fixed cost pressures, eliminate the medical self-insurance deficit, and rebuild fund balance,” it wrote.

Agrawal said he looked foward to the recommendations of the pension and medical task forces, which he hoped could generate “constructive solutions that result in real savings.”

He was happy with the projection that some $300 million in property values will be added to the grand list when tax exemptions expires. Agrawal said this translates to $12 million in taxes. He also backed talks with Yale New Haven Hospital on managing chronic medical conditions for city workers.

Agrawal, however, introduced another worry for the city about the impact of the city’s refunding bonds.

“An advance refunding is when the city refinances its debt prior to the call date on the debt. In past years, the new debt associated with an advanced refunding was exempt from state and federal income tax, just like other municipal bond offerings. However, advance refundings no longer qualify for this preferential tax treatment, which means that the city will have to pay appreciably higher interest rates on any advance refunding,” Agrawal wrote.

He said he plans to learn more from the city on the interest rates it expects to achieve on its $160 million in refunding.

mary.oleary@hearstmediact.com; 203-641-2577