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Rainy Day Fund Gets A Lifeline
by Thomas MacMillan | Oct 8, 2013 7:15 am
Posted to: City Hall, City Budget
The city refinanced $16 million in bonds and came up with an extra $4.1 million, which might start to close a budget hole.
On Monday night, the Board of Aldermen officially received a proposal to reallocate $4.1 million from debt service to the “rainy day fund.”
The measure, proposed by Budget Director Joe Clerkin (pictured), would use money saved by the re-financing of city bonds to replenish the city’s fund balance, known as the “rainy day fund.” The fund was hit hard during the 2012-13 budget, which ended on June 30. The rainy day fund ended the year $4,713,306 in the red.
The city’s depleted fund balance was one reason that several bond ratings agencies recently downgraded the city’s debt. A lowered bond rating could mean the city had to pay more to borrow money. The city’s current efforts to replenish the rainy day fund could help to stop the bond-rating tailspin.
Alderman Jorge Perez, president of the board, noted that the city’s diminished fund balance wasn’t the only reason the city’s bond ratings sank, but it’s “a major one,” he said. “And this is starting to address it.”
Here’s how the proposal would work, according to Clerkin:
In August, the city announced it had refinanced $16 million worth of bonds issued in 2003 and 2005. This move allowed the city lower the interest it owed on the debt from 4.6 percent to 2.95 percent. It’s estimated to save the city $617,050 (in 2013 dollars) over 10 years.
The city is finding further saving by adjusting its planned payments. For one thing, it’s setting aside the $4.4 million it had planned to pay toward that $16 million in bond debt.
In another development, the city took in $1.2 million extra in bond sales to fund the current year’s budget. People paid a premium to buy city bonds, adding up to $1.2 million.
The $4.4 million and the $1.2 million add up to $5.6 million. That’s $4.1 million more than the city had anticipated seeing after refinancing. That’s the total that Clerkin now proposes to put toward the city’s fund balance, which is $4.7 in the red.
The city ended fiscal year 2012-13 with an negative fund balance for several reasons. First, the city had an operating deficit of $4.5 million. Second, it had additional cost overruns in self insurance ($4 million) and in the Board of Ed’s food service and daycare spending ($3.4 million and $1.6 million). It added up to $13.5 million, which reduced the city’s $8.8 million rainy day fund to a $4.7 million hole.
The $4.1 million transfer won’t fill that hole completely, but it will fill most of it.
“I think the ratings agencies would view this positively,” Clerkin said. “But in their view its probably a weakness we still have.”
The move is helpful, but the ratings agencies aren’t likely to say “you guys are good to go,” Clerkin said.
“Conceptually, I think it’s a great idea to replenish the rainy day fund,” said Alderman Perez. Whether Clerkin’s plan is the best way to do it is a matter for the Board of Aldermen’s Finance Committee, he said.
Tags: Joe Clerkin, rainy day fund
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It seems in the refinancing, the only way to save that much money is by extending the term and lowering the rate. So the net effect is that we won’t be paying off those bonds on the same timeline as the original plan and therefore, are more in debt than ever.
“The city is finding further saving by adjusting its planned payments. For one thing, it’s setting aside the $4.4 million it had planned to pay toward that $16 million in bond debt.”
Could the author elaborate on this? It’s great we saved $617,000 by refinancing. And it’s great we made an extra 1.2 million on the bond sale. But doesn’t explain where this $4.4 million comes from.
I agree with Noteworthy, it would be useful to know the terms of the loans: “The City refinanced $16,120,000 in bonds in order to take advantage of lower interest rates that currently exist. The bonds, first issued in 2003, had an average interest rate of 4.6% and have been refinanced down to 2.95% which will save the City approximately $622,300 over the 10-year life of the bonds.”
This says the new bonds are 10 year bonds. But what were the terms of the bonds issued in 2003? If those were 10 year bonds also, they would be just about paid off. Were those 30 year bonds which are now being refinanced into 10 year?
The press release is implying that we are saving all this money. Without more info we don’t know if we actually saved this money or if we’re just pushing the borrowing down the road.
This smells to say the least. The only way to know what is really going on here is for the Budget Director to provide his Excel worksheet that shows the math. Let’s also get the proposal that was sent to the Board of Alderman. If the author of this article can get this information, then those of us with a Finance background can determine what is really happening here. Nice bit of reporting, but this story seems far from over to me.
“The new bonds have payments that are structured so that reserves can be replenished in the current year. Payments will increase in 2020 and 2021—years when debt service will drop dramatically even if borrowing continues at current levels.”
So it looks like they structured the loan so that instead of making steady payments for 10 years, they make small payments in the near term and big payments in 2020 and 2021. It’s basically a balloon loan, where most of the pain of pay back comes at the end (in 2020 and 2021). It provides a little relief to the budget this year because they’re going to pay for it in the budgets of 2020 and 2021, kicking the can down the road. $4 million for the current administration to patch this year’s budget with which we will pay for in 2020-2021 when another administration will need to deal with it. Awesome.
Bounced Bond Notes:
1. Clerkin and the PR flaks at the city should come on here and directly address in details what they did.
2. If they did what amounts to interest only payments on the front end with balloons at the end, it is the height of stupidity. This needs to be confirmed.
3. If my second point is true, then these same people need to explain how in hell that makes a dime’s worth of sense? And are they not setting us up for a big problem down the road? This is just like the pensions that have been promised for union political support, and no real way of paying for them
“Conceptually, I think it’s a great idea to replenish the rainy day fund,” said Alderman Perez.
Conceptually, it is a priority to pay off the overspent budget debt of 13.5M from the 12/13 budget. The first unverified assumption is that there was actually a 8.8M Rainey day fund balance to begin the 13/14 budget year.
See a different story same issue here:
A mathemathical conflict arises because the 3.4M food service and the 1.6M day care deficits belong to the BOE and not to the city.
Both these accounts are financed out of federal grants, in terms of the food service, Harries recently announced that he would be reducing teachers three K-8 in schools like Lincoln Bassett, to reduce the BOE’s 3.5M defict.
See that story here:
Therefore, both the BOE and the city are trying to claim they are reducing the 3.5M deficit for food service.
But the major defect in this proposal is the FAC that Section five of the capital fund section to the budget reads in part;
“The Mayor and the controller in the best interest of the city for the purpose of refunding all or any portion of the city’s general obligation bonds outstanding to moderate DEBT SERVICE PAYMENTS and achieve net present value savings of no less than 2.5%”.
While the no less than 2.5% savings provision would be met, all refinanced bonds should be committed to paying the debt service and not some Rainey day fund which is not a part of the general or capital bond fund of the city budget.
Here it is;
CITY OF NEW HAVEN TAKES ADVANTAGE OF LOWER INTEREST RATES AND REFINANCES A PORTION OF ITS BOND DEBT
$16.12 million in bonds refinanced from 4.6% to 2.95% and will save $623,000 over the life of the bonds.
*The new payment structure will improve the City’s cash flow while maintaining the City’s aggressive repayment policy.
(New Haven, CT) The City of New has refinanced $16,120,000 in bonds in order to take advantage of lower interest rates that currently exist. The bonds, first issued in 2003, had an average interest rate of 4.6% and have been refinanced down to 2.95% which will save the City approximately $622,300 over the 10-year life of the bonds.
“Clearly, its financially prudent to take advantage of lower interest rates on those bonds that qualify for refinancing” said Mayor John DeStefano, Jr. “This will save the City of New Haven over half a million dollars in interest payments over the life of the bonds.”
The new bonds have payments that are structured so that reserves can be replenished in the current year. Payments will increase in 2020 and 2021—years when debt service will drop dramatically even if borrowing continues at current levels.
The City of New Haven is currently scheduled to repay 77.398% or of its bonds within 10 years, a far higher and more aggressive repayment rate than the industry standard of 50%. With the different repayment structure of the $16,120,000 in newly refinanced bonds, New Haven will pay off 77.375% of its debt within 10 years.
“Without altering the city’s practice of aggressive repayment of debt, this refinancing allows significantly improved cash flows and overall savings,” said the Mayor. “It is a prudent decision that balances financial responsibility with the current economic climate to the advantage of the City of New Haven in both the short and long term.”
I agree with others that savings should be used to immediately reduce debt and not to CYA replenish the rainy day fund. Let the BOA figure that out; it’s their job.
It sounds like the city is paying bonds off earlier (faster) and therefore getting a better rate. Usually that means larger payments though do its hard to understand where this savings came from .
More dissection please NHI?
I see what’s going on. In a nutshell:
$617,050 comes from a better interest rate (but it should be spread over ten years, not booked now).
$4.4 M is delayed payment for bond debt (not savings, its debt kicked down the road)
$1.2 M is new bonds (borrowed money, new debt)
I find it questionable to book the $617K as income now but that’s small potatoes compared to the rest.
We should NOT delay bond payments to lessen the pressure on the BOA for budget discipline.
We should NOT borrow money to replenish the rainy day fund and lessen pressure on the BOA for budget discipline.
As the Mayor explained in his letter:
The City of New has refinanced $16,120,000 in bonds in order to take advantage of lower interest rates that currently exist which will save the City approximately $622,300 over the 10-year life of the bonds.
The Mayor, nor Clerkin, breaks down how the 16.2M was spent. The Mayors letter @on October 8, 2013 5:05pm :( above) states that there is 623K savings over ten years. He does not allocate this 623K.
As I see it:
If we are to assume that from the 16.2, 4.1M is left over to be programmed into the rainy day fund that leaves 14.1M to cover the 13.5M deficit plus the $623K = 14.1M. All figure that have yet to be verified.
The city is calculating the city deficit of 9M including self insurance$4M, food service, $3.4M and day care, $1.6M.( All BOE responsibility.
The problem(s) here is three fold:
First the city ended the 11/12 year with a 1.8m surplus in the rainy day, at the end of the 12/13 year they said the rainy day surplus was $8.7M and started subtracting the $9M from this fictitious starting number.
Second, the city says it sold 16.2M in re-fi bonds saving 623K over a new ten year period, after ten years had elapsed. Restarting the clock with the last two years being a balloon note of unknown quantity.
Thirdly, according to the charter and the language within section five of the budget “refunding bonds” All proceeds should be returned to debt service.
After all, the debt service did not borrow 16.2M or 9M or 4.1M from the rainy day fund,
Over estimated revenue and over spending expenditures within the general fund caused the deficit.
I’m not sure I understood everything you wrote but thanks for the charter info. I guess that makes the plan to replenish the rainy day fund with bond savings, not just bad policy but illegal.
@robn “It sounds like the city is paying bonds off earlier (faster) and therefore getting a better rate”. No, they got a better rate simply because interest rates are lower now than they were when the original bonds were written (beginning in 2003). Of course it was smart to refinance and take advantage of today’s lower rates (just like anyone who took out a home mortgage in 2003 has since refinanced). They saved $617k for doing that. Ideally that would have been the end of the story.
But then they said, hey since we’re refinancing, let’s get a little more relief now and push payments back a few years. Let’s say the old bonds on average had 5 years left to maturity. But instead of refinancing into new 5 year bonds, they refinanced into new 10 year bonds. And while we’re doing that, lets structure it so that payments are even smaller now and disproportionately large in 2020 and 2021. (This group of bonds of course is only a small portion of the city’s total debt. There are probably some other significant bonds/expenses that come off the books in 2019 so they figured bumping up the payments in 2020 would be a good time to do it.)
An interesting question to Mr. Clerkin would be, “what is the scheduled pay back of the new bonds?”