Hartford Stunner: Four-Notch Downgrade from S&P

Hartford's four-notch downgrade by S&P Global Ratings struck one bond analyst as dramatic, given the markets' longstanding awareness of the fiscal woes in Connecticut's capital city.

"It seems to me that given the visibility of a city like Hartford, getting a four-notch downgrade seems highly unusual," Alan Schankel, a managing director at Janney Capital Markets, said after S&P on Thursday night dropped the city's general obligation bond rating to BBB from A-plus.

"When I see a four-notch downgrade, it's usually after a piece of news popped up. I don't see that here," said Schankel. "But it's important that they get their structural balance in place."

S&P, which has a negative outlook, cited continued deficits and "lack of a credible plan" to balance the 125,000-population city's budget and curb outyear gaps. S&P, which had lowered city GOs from AA-minus in March, cited a one-third chance of further downgrades within a year.

S&P also lowered the Hartford Stadium Authority's lease revenue bonds to BBB-minus, the last notch above junk, from A.

The move did not surprise Mayor Luke Bronin, who has said the city might run out of cash by the end of the year.

"The rating agency action reflects what I've been saying for many months, which is that the city of Hartford can't cut or tax its way out of this challenge by itself," he said in a statement.

Moody's Investors Service in April downgraded the GOs to Baa1 from A3. S&P's new rating is one notch below Moody's.

Bronin repeated his call for help from the state and the region's suburbs. Initiatives include a regional tax and reworking tax laws to lessen city reliance on the property tax.

"We can put Hartford and the capital region on a path to fiscal health and economic growth, but it's going to take everyone coming together – in Hartford, the region and the state – to face the realities that we need to face," he said.

According to Municipal Market Analytics, Hartford's struggles parallel those of many older cities. MMA referenced high, escalating fixed costs -- debt service, pensions and other post-employment benefits -- that account for about 19% of fiscal 2017 expenditures, and a depressed tax base where more than one-third of the population lives below the poverty line and unemployment reached nearly 11% in July.

The alarming numbers, said MMA, more than offset Hartford's lifestyle benefits, which include concentrations of art and entertainment venues, and entertainment and hospital clusters.

The city, said MMA, relies overly on state aid, which dropped by $45 million in fiscal 2016 from the previous year.

Increased borrowing and restructurings have forced a spike in short-term debt. By 2018, debt service could nearly double to about $46 million, according to forecasts by city officials. Benefits and insurance costs are nearly as punishing, according to MMA, rising to $83.3 million in fiscal 2018.

Bronin, a first-year mayor and former chief counsel to Gov. Dannel Malloy, said past budget practices made Hartford a disaster waiting to happen.

"When governments are in fiscal crisis, one approach is to hide it or minimize it just to buy a little more time. That's what Hartford did for many years," he said. "That's not the approach I take. We're opening the books and telling the real story, because that's the only way we're going to be able to make real and lasting change."

Hartford hinged its $553 million fiscal 2017 budget on reserves and labor concessions that the city has yet to realize. It also faces gaps of more than $30 million in 2018 and $50 million thereafter.

"Until the city can adopt a credible plan and sustain improved budgetary performance, the rating reflects our weak view of management conditions," said S&P credit analyst Timothy Little.

The stadium authority's lease revenue bonds are secured by a lease agreement between the city and the authority. The authority owns the Dunkin' Donuts Park minor-league baseball field near downtown, construction of which is so far behind schedule that its tenant team, the Hartford Yard Goats, missed an entire home season.

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Connecticut
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