A credit ratings agency slapped the city with a gloomy “outlook” as officials prepare to sell $44.5 million in new bonds.
The downgrading of the city’s “outlook” came Wednesday in a report from Moody’s Investor Services. It means Moody’s sees city bonds as a potentially riskier investment, based on its predictions of New Haven’s financial future.
Moody’s concluded that New Haven government is keeping too little money in reserve and is carrying too much debt for a city its size.
It also shared a concern expressed by Mayor John DeStefano in budget negotiations with city unions: that New Haven faces too heavy a pension burden.
Acting City Controller Mike O’Neil said Thursday that officials were pleased about a more important decision Moody’s made—to keep the city’s bond rating at A1. That affects how much it costs the city to borrow money. Three major ratings agency recently issued reports on the city’s financial condition as a precursor to a July 20 bond issue. All three kept the overall rating the same, O’Neil noted. (Standard & Poor’s set it at A-, Fitch at A+.)
“We’re encouraged on the whole,” O’Neil said.
The downgrading of an “outlook” sends a note of caution to investors and a warning to city budget-makers. While the bond rating indicates that Moody’s sees New Haven as still a good investment, the “outlook” downgrade indicates that it might not stay that way.
O’Neil was asked if the outlook change would affect the upcoming bond sale, which would support a host of projects including school construction.
“We won’t know until we have the sale on the 20th what it means,” he replied. “It depends on the bidders and how they feel. They will have access to a lot of information about the city. They’ll have more than the two or three pages that each of the ratings agencies” published.
Democratic mayoral candidate Jeffrey Kerekes called the Moody’s report “a condemnation of the DeStefano administration.”
“And I’ll tell you why,” Kerekes said. “We’re really getting hit because we raided the rainy day fund, the emergency fund. This wasn’t an emergency. He passed a previous year’s budget knowing there were holes in it. He’s been doing that for years, passing budgets with holes in it.”
“Given the current crises facing the national, state and municipal budgets, this should come as no surprise,” chimed in Democratic mayoral candidate Clifton Graves. “But what is troubling is that Mr. DeStefano at his recent re-election announcement stated that New Haven was doing great. He clearly needs a reality check.”
The ratings report offers an independent expert overview of government finances.
In that overview, Moody’s noted several areas of concern:
• The city projected a $6 million deficit for the fiscal year that ended June 30.
• The “undesignated portion” of the city’s financial reserves fund—i.e. the rainy day fund—dropped this past year from $16. 1 million to a “slim” $9.1 million, or 2 percent of overall revenues.
• The general city government pension accounts were just 52 percent funded at the fiscal year’s end, and police and fire funds a mere 45 percent. (The numbers in 2008: 59 and 61 percent.) The mayor has been calling for modifications in pension plans to stabilize the funds and prevent future deficits.
• City government’s “Internal Service Funds”—which covers workmen’s compensation and self-insurance for lawsuits—had a $16.5 million deficit. That’s better than the previous year’s $21.6 million shortfall. But with uncertain future lawsuit payments looming, notably in the Ricci firefighters’ case, Moody’s is skeptical of improvement.
• New Haven’s adjusted 6.1 percent debt burden, much of it coming from school construction projects, “is well above the median level for similarly-sized cities.”
“The city’s ability to maintain stable fiscal operations is expected to remain challenged given its currently narrow reserve levels, a projected fiscal 2011 operating shortfall, increasing pension contributions, and a still sizable deficit in the Internal Service Fund,” the report stated.
The conversation between Moody’s and city officials took place in late June, after the city released its monthly financial report for May. That report had two negative surprises: a seven-figure dip in expected building permit revenue for the year and word that the state was delaying millions of dollars in education reimbursements.
Since that report came out, the city has gotten word that that education money will in fact probably arrive from the state before the end of August, according to Acting Controller O’Neil. That means the city would be able to pay outstanding bills from the just-ended fiscal year in time to have it count toward that fiscal year’s deficit.
Read the city’s May financial report here.
posted by: cba on July 14, 2011 1:05pm
No one is to blame for this fiscal mess except John DeStefano, since he has been Mayor for a number of terms . It is time to place this professional politician on the unemployment line so he can experience the economic distress that he has been giving to city workers and residents which
posted by: Cinderella on July 14, 2011 1:15pm
Well, here we go. No one will be able to sell any real estate now in this city, in spite of all the renovations and improvements.
Of course, the entire country is now being downgraded by Moody’s so I suppose it’s all relative.
posted by: robn on July 14, 2011 1:22pm
It’s nice to see in this report that the city isn’t party to any derivative agreements however, carrying $474M bond debt which is roughly equal to annual revenue (and 2.5x our property taxes) is quite worrisome.
The report also notes that the city pension fund was funded @60% in 2008, immediately after the financial crisis, but is now funded @50%. How the heck have the fund managers NOT made great returns post-crisis? Other funds have been showing double digit returns in the past 2 years.
posted by: Atwater on July 14, 2011 2:28pm
@ cba: All citizens of New Haven, who voted for DeStefano, are to blame for this mess. They ignored the obvious writing on the wall for more than a decade and continued to vote for him, time and time again. Now, the poop has hit the fan and everyone runs to blame DeStefano. But, the mayor and the BOA are a reflection of the citizenry, people either too dependant on the government to change it, or people who agree with the liberalistic practice of unfunded “renewal” and gentrification. Either way the city is in real trouble and is quickly running out of parking lots and roads to sell to Yale.
posted by: Noteworthy on July 14, 2011 2:35pm
Mike O’Neil is spewing the same political spin the mayor does - drop the kool-aide and be honest about our bond rating. It has not recovered since the last time it was downgraded. The “A” rating in investor language is one step about a C - and with this negative outlook, once the books are closed for the current fiscal year, Moody’s and others will downgrade all future debt. That’s why the city is rushing out the new debt of $45 million before they close out this year.
It’s smoke and mirrors and puts the citizens of this city at great financial peril. We are border line bankrupt and in serious trouble. The city’s bond experts recommend no more than $15 million in new debt a year - which DeStefano routinely ignores. He wanted to borrow $100 million last year which KerekGreeksand other beat back to $27 million. This year, the stench that is the school contruction debt is starting to leak out of the containment barrels at the BOE.
Another round of wild ... spending was rejected by the state on the new schools. It showed up largely hidden and unexpected in the form of new bond debt of $18 million to cover what the state wouldn’t.
So DeStefano can spin a negative rating all he wants, just like he does CMT scores, it doesn’t make it true. This is a major black eye.
And that’s before you get to unemployment number over 13% - the real number being something approaching 18%. And we get lip service about jobs. The real question is when will John DeStefano Jr. just tell the truth about the real state of the city?
posted by: Perspective on July 14, 2011 3:07pm
No city is an island and last time I checked the nation was on negative outlook, as was the state, as were lots of places. This is happening here—but also all over. Like the mayor or not, this is not just here, not just local—Trenton, Los Angeles, Rockland County, Miami among others have all received negative outlooks in the last two weeks alone. NHI might want to offer some broader context.
posted by: Blame the Mayor on July 14, 2011 3:26pm
This is yet another reason I took my name.
I remember the king being asked specifically (Nathan Hale School, Mayor’s budget meeting 2010) if he was going to raid the rainy day fund next year, the king stammered and handed the question to Larry Rusconi. “No” said Rusconi, “We have no plans to do that”
HAH!, you knew it all along.
VOTE HIM OUT!
KEREKES for MAYOR!
posted by: wholly cow on July 14, 2011 3:59pm
It is all a shell game to New Haven leaders, and the pea is under none of the shells. In fact I think John ate it.
Kerekes has my vote as well.
posted by: SaveOurCity on July 14, 2011 4:18pm
It’s time for Johnny D to go. The residents of New Haven need to be educated about the hole the JD has dug for us. Too much spending….too many $$ siphoned off in exchange for votes. Do a google check on how many dollars the construction firms that are building the city schools are pouring into Johnny’s re-election campaign.
Jeffery K may be inexperienced and may be making claims that will be difficult to execute but at this point, its worth a try.
posted by: Jeremy Lossner on July 14, 2011 9:32pm
STOP BUILDING SCHOOLS. YOU ARE KILLING THIS CITY! WE ARE READY FOR A NEW MAYOR. I am not worried about the pensions as much as your spending and borrowing. You need to stop school construction and potentially might need to sell off some schools. The student population is dropping and there has been warnings about this. Stop mayor, stop!!!!
posted by: factcheck on July 14, 2011 10:09pm
robn-The city pension funds have rebounded very strongly over the past 2 years, reflecting the 90% gain in the stock market since March, 2009. There are excellent management advisors who have done a great job. Employees contribute to the fund and the city contributes too. The city has been underfunding its portion recently. The Mayor is trying to make it look like the pension funds will collapse and are unsustainable. Though the regular pension auditors said the pension funds are in solid shape, the Mayor hired an outside contractor (at taxpayer expense) gave him some bogus variables and got a cooked-up report that said the pension funds are doomed. The Mayor is underfunding and doing whatever he can to fool folks into thinking the pension funds are going down. Not so at all. The unions have even offered to pay more into the funds as their contribution to lessen what the city has to pay, but the mayor has rejected this because he does not want a solution.
posted by: robn on July 15, 2011 9:32am
According to the Moody’s report, what you say about a pension fund rebound isn’t true. Even if its @60% funded (their highest figure from 2008), is this in any way sound fiscal management? Shouldn’t the fund be funded 100%?
Also, what would be the mayors motivation if he were trying to create a perception that the fund was doomed? To what end?
posted by: factcheck on July 15, 2011 11:26am
Robn- You’re right. It is bad fiscal management by the city, which should be funding the pension at 100%. The funds have bounced back strongly due to the market rebound and the good work of advisors hired by the pension fund. But the Mayor wants to say the pensions are doomed so he can rip up union contracts and radically change pension agreements with city workers.
posted by: robn on July 15, 2011 11:58am
Sorry but unless you have information which I don’t have about some miracle, the pension funds haven’t bounced back. The Moody’s report (link seems to have dissapeared for some reason) says that as of about a year ago, the city and public safety pension systems were funded at 52% and 45%...down from 59% and 61% in 2008. That was a year ago and it was estimated as a $430M liability.
Whether pension agreements are related to or exclusive from the underfunding of the pension fund, we still have a huge problem.
posted by: Factcheck on July 15, 2011 7:38pm
Robn- You need to go to the city pension fund folk and ask for the latest figures on the balance of each pension fund. The city employees retirement fund, for instance, has gone from about $125 million to about $185 million in the past two years. I’m sure you will agree that is a sizeable jump in the balance, even including payouts to retirees. Ask for the pension fund auditor’s report which says they are in pretty good shape. However, the city has been, as you say, dramatically underfunding its share of the pension fund in recent years. And yes, at this presently underfunded rate, the city pension fund will be unsustainable even with the market gains and the increasing contributions of employees. It is not nearly as big a gap as the Mayor suggests, but it needs to be addressed for sure. As painful and unfair as it would be to city workers, you could ask for an increase in the contribution which comes from employees to make up the gap. But you shouldn’t need to do a wholesale rewrite of pension agreements. It is a problem that needs to be taken care of for sure and Moody’s is right to raise it as a concern.
posted by: BYE, BYE DeStefano on July 16, 2011 11:23am
You and Robn are absolutely correct…We are on the brink, and the mayor is rushing to push us over with this new bond issue. SMH. I simply can’t understand the level of fiscal irresponsibility coming from this man. Spin it all you want, the facts will come out in due course. And we will be left with his legacy just like Bpt schools situation. This madness has to STOP!!
posted by: inside story on July 16, 2011 11:28am
The fund managers are politically connected. Don’t believe me. Look at the last request for proposal posted for the job. It was a small blurb in the Register legal notice (so it was posted,ok) but the close date was within a week and no fund managers were even allowed enough time to submit. I know many that sit on the pension fund committee. I say open up the fund management opportunity for review. If it was not open to the market for proposals it must be presented again with adequate time and recruitment of large scale professional managers. ... To bad this is a blog and not doing any real reporting or any follow-up on any story. Put it out there, get lots of great leads and insights then move to another item so the administration keeps you as their mouthpiece. NHI has lowered it’s standards of professionalism. Time for some of the good reporters to begin a real on line newspaper
posted by: robn on July 17, 2011 9:10am
If what you write is true, then I wonder why Moody’s has such out of date information in its report? Also wonder if they are completely incorrect about the pension funding levels, are they legally liable? They are, after all, affecting the cities borrowing rates and should be accountable for what they publish.