Downturn could test resilience of Connecticut's cities
Connecticut's municipalities generally enjoy high bond ratings. Whether they can sustain them in a downturn is still up for question.
"Municipalities face differentiated risks when the next recession rears its head," Janney Capital Markets managing director Erin Ortiz said in an overview of the state's local governments.
Connecticut has 169 cities and towns, of which 137 have bonded debt totaling nearly $10 billion. Most have maintained strong ratings even as property values and population levels plummeted since the last recession.
Moody’s Investors Service, S&P Global Ratings and Fitch Ratings rate 80% to 90% of Connecticut local governments in the triple-A or double-A rating categories,
Still, the headline struggles of capital Hartford and other large debt issuers have cast a glare on cities. Hartford last year signed a contract assistance agreement with Connecticut, making the city's $540 million of debt a general obligation of the state while putting the city under state oversight.
The unusual debt deal enabled Hartford, which was on the brink of bankruptcy, to refinance bonds using Connecticut’s full faith and credit backstop. It also puts the state on the hook for Hartford’s GOs through 2036.
West Haven is also under state oversight.
"Since many investors hold municipal securities long-term, understanding the risks that could likely occur through economic cycles are important," said Ortiz, who considers the Hartford bailout a probable outlier.
Relative reserves, debt burden and fixed costs, Ortiz said, can help gauge how a municipality can cope with a downturn. Other factors include attention to the well-being, sector trends and exposure to large taxpayers, even if not outsized.
"Even businesses that are doing well can choose to leave an area if conditions are not favorable or specific business lines are not profitable," she said.
Regionalism, which Hartford Mayor Luke Bronin has frequently advocated, could help the state's municipalities, Gov. Ned Lamont said at think tank Regional Plan Association's annual summit in New York.
"We have 169 towns. They go back hundreds of years and they're pretty feisty in their ways. It ain't easy," said Lamont, a Democrat who took office in January. "When it came to Amazon, every town was bidding. I can see [chief executive Jeff] Bezos saying 'who is Danbury, exactly?'"
Cities and towns, said Lamont, could team up, for example, to purchase healthcare or Internet technology. "Maybe we can share some of this overload."
Lamont and lawmakers are debating the governor's proposed two-year, $43.26 billion budget. One sticking point is the degree of funding by communities to teacher pension costs. Other expense items affecting local governments include the flatlining of municipal aid from 2019 levels, and implementing cost sharing for administrative functions at small local school districts.
Demand for Connecticut paper is still high, said Ortiz, despite negative headlines about demographics, pensions and tax rates.
Spreads relative to the triple-A Bloomberg valuation benchmark for 10-year Connecticut bonds are roughly 50 basis points, which similar to other state spreads has narrowed considerably.
Ortiz attributed a lack of muni supply compared with the money available from redemptions, and S&P's outlook revision to positive on March 19.
According to Ortiz, 126 Connecticut municipalities with available data, or 81%, have fund balances higher than in 2007, before the recession. Twelve, including Hartford, have balances equal to or lesser than in 2007 and as a percentage of revenue under 10%. The others are Bridgeport, New Haven, New London, Stratford, Brooklyn, Derby, Hamden, Plymouth, Seymour, Sprague and Stratford.
Most Connecticut local governments sell debt competitively, with less than 20% of GO bonds issued through negotiation since 2014.
A majority, since the federal elimination of advance refundings, have shortened their par calls to five years.