Unbalanced budgets lead to downgrades for New Haven
New Haven, Connecticut, received a downgrade Wednesday night from S&P Global Ratings, which lowered its rating on the city’s existing general obligation debt to BBB-plus from A-minus.
S&P also assigned its BBB-plus long-term rating to New Haven’s series 2018A GO bonds and series 2018B GO refunding bonds.
The outlook on all ratings is negative.
"The downgrade reflects our view of New Haven's sustained structural imbalance, stemming from optimistic revenue and expenditure assumptions, contributing to misaligned revenue and expenditures over the past three fiscal years,” said analyst Thomas Zemetis. That, said Zemetis, includes a projected $13 million to $15 million deficit for fiscal 2018.
Fitch Ratings followed suit Thursday afternoon, downgrading New Haven two notches to BBB from A-minus, and assigning a negative outlook.
"New Haven's financial flexibility has worsened from already weak levels," according to Fitch.
S&P pegged at least a one-in-three chance that it could lower the rating within two years.
S&P also said the deterioration of unassigned reserves to negative 0.5% of operating expenditures in fiscal 2017 limits New Haven’s ability to absorb potential reductions in state funding and rising fixed costs related to medical self-insurance, ongoing capital investment and retirement benefits.
“Given material changes in these credit factors over several years, we believe New Haven's weakened budgetary performance and flexibility will unlikely return to levels that support a higher rating in the near-term,” Zemetis said.
New Haven, with a roughly 130,000 population, is Connecticut's second-largest city.
"New Haven’s consignment to a slightly lower bond rating reflects the city’s admittedly challenging fiscal circumstance," said Laurence Grotheer, Mayor Toni Harp's director of communications. "Nevertheless, development projects in New Haven continue to attract robust private-sector investment, suggesting a persistently bright economic outlook."
Grotheer added: “It’s noteworthy that an agent at New Haven’s bond insurance provider, Build America Mutual, cites ‘reduced state aid' -- payments-in-lieu of taxes, educational grants -- first among causes for the city’s financial difficulties.”
The negative outlook reflects S&P's expectation that despite New Haven's use of debt restructurings and identification of budget adjustments to adjust for state-level fiscal uncertainty and accumulated deficits for fiscal 2019, it “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.”
Officials intend to use proceeds of roughly $160 million from the Series 2018B bonds to restructure certain maturities to generate near-term debt service reductions that could stabilize operational budget increases.
Under the restructuring, the city could produce upfront debt service cost savings of $33.1 million for fiscal 2019. It also projects cash-flow savings ranging from $4.5 million to $18.8 million between fiscal 2020 to fiscal 2025, at which point, annual debt service will increase through final bond maturity in 2034.
The restructuring is intended to provide the city with flexibility to issue new money debt for future infrastructure projects consistent with its capital plan.
City officials intend to use the $58 million from the Series 2018A bonds to finance various public improvements, including school and urban renewal projects.
Wednesday’s downgrade comes amid heightened scrutiny of the problems in Connecticut’s cities, and the fiscal plight of the state itself.
The state last year formed a Municipal Accountability Review Board, an oversight panel to which capital city Hartford and New Haven’s neighbor, West Haven, have applied. Another new board is the Connecticut Pension Sustainability Commission, a 10-member group scheduled to report its findings to the General Assembly early next year.
In West Haven, an independent audit showed the city’s fund balance decreased by $1.4 million during fiscal 2017, leaving the city with a $2 million deficit despite the city having sold $16.1 million in deficit funding bonds.
Auditor Joseph Centofanti of PKF O’Connor Davies’ in Wethersfield, Connecticut, presented the audit to the West Haven City Council this week.