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Rainy Day Fund Fix Saves Now, Pays More Later

by Thomas MacMillan | Dec 12, 2013 3:33 pm

(2) Comments | Commenting has been closed | E-mail the Author

Posted to: City Hall, City Budget

An aldermanic committee voted to recommend a plan to restore the city’s depleted “rainy day” fund—using dollars borrowed from the year 2020.

The vote occurred at Wednesday evening’s meeting of the Board of Aldermen’s Finance Committee.

The matter at hand was a proposed transfer of millions from debt service to “rainy day replenishment.” That deal would take $4.1 million intended for paying down bond debt and put it toward restoring the city’s fund balance. The fund balance, which is like the city’s savings account, is currently overdrawn, creating a fiscally precarious predicament that threatens the city’s bond rating.

City Budget Director Joe Clerkin laid out the plan for committee’s consideration Wednesday. He faced questions from skeptical aldermen concerned about cashing in on short-term savings in exchange for “ballooning” debt payments in years to come.

The fund transfer plan would dramatically increase the city’s projected debt-service payments in 2020 and 2021, and end up costing the city an extra $269,505 after nine years. Clerkin said the move is needed to fix the city’s fund balance deficit and prevent another hit to its bond rating. A decreased bond rating can make it more expensive for the city to borrow money.

Convinced, the committee voted unanimously to recommend that the full Board of Aldermen approve the plan. The final vote will take place at an upcoming meeting of the full board.

The Deal

The fund balance took a beating in the 2012-2013 fiscal year, ending up $4,713,306 in the red.

Having a healthy fund balance is important not only so that the city has a cushion to handle unexpected expenses, but because bond ratings agencies disapprove of having a low rainy-day fund, let alone a negative one.

As a result of New Haven’s fund balance deficit, several ratings agencies downgraded the city’s bond rating this year. A decreased bond rating can make it harder or more expensive for the city to borrow money.

But the city had some good news during the current fiscal year, which began July 1. In August, the city refinanced some $16 million in bonds issued in 2003 and 2005, lowering the interest rate on the debt from 4.6 percent to 2.95 percent.

With the rate change, the city is now proposing to alter its debt-repayment schedule for the next nine years, freeing up $4,369,037 in debt payments that were planned for the current fiscal year. That money would go toward replenishing the fund balance.

That $4.4 million wouldn’t just appear out of nowhere. It comes from the year 2020. That’s when the city would have to start paying more than it had previously planned in debt service—almost $3 million more each in fiscal years 2020-2021 and 2021-2022.

“Really what we’ve done is push that payment out to the ‘20-‘21 year,” Clerkin told aldermen.

That move would end up costing the city an extra $269,505. That’s a reasonable price to pay to eliminate most of the city’s current fund balance deficit, Clerkin argued.

With the $4.4 million, plus $1.2 million in bond “premiums” (unexpected extra money that people paid to buy city bonds), the city could put $4.1 million toward fixing the city’s $4.7 million fund balance deficit. (The figure is $4.1 million and not $5.6 million because the city had expected to save $1.5 million on refinancing, and had already figured that savings into the fund balance deficit.)

The fund balance transfer would still leave the city’s rainy day fund some $600,000 in the red, Clerkin said. He said he hopes to level off that deficit with another round of bond refinancing.

“It Looks Like It Balloons”

Clerkin told aldermen that 77 percent of the city’s debt is scheduled to be paid off in the next 10 years. The new payment schedule wouldn’t significantly change that, he said. “There’s a very steep drop-off at the end,” he said. “It doesn’t balloon.”

“It’s not like it balloons at the end?” asked Alderman Doug Hausladen. “It looks like it balloons in the end.”

One of Clerkin’s handouts showed debt service payments of $275,250 per year between 2017 and 2019, jumping to $2.8 million and $2.9 million in 2020 and 2021.

“The overall dollars is not significantly more,” Clerkin said. The value of having that money now outweighs the liability of having to pay about $269,505 extra later, he said.

“Why would we go from millions [paid in 2014, 2015, and 2016] to quarter-millions, and back to millions?” Hausladen asked.

“That is complex,” Clerkin said. Each bond deal “has its own parameters.” The deals were put together back in 2003 and 2005. “Each package was put together a different way.”

Clerkin referred to a chart that he said shows that the city would be essentially “flattening” payments through 2022.

“Some people believe that we shouldn’t approve this, and instead we should use the money to pay down the debt,” said Hill Alderman Jorge Perez (pictured), president of the board. “What would happen with the ratings agencies if we don’t address that negative fund balance?”

“It’s a clear and present issue,” Clerkin said. The city has been downgraded, and “there is an expectation” that the city will make the transfer to the fund balance. “It was part of our discussion” with the bond ratings agencies, Clerkin said.

“But this is effectively borrowing to pay our fund balance today,” said East Rock Alderman Justin Elicker. “We get savings today, but we have to pay in 2021-22.”

“No. I would argue that we’re paying the same amount in the same 10-year period,” Clerkin said.

“It’s certainly not $4 million we’re saving,” Elicker said.

“No. We’re delaying the payment,” Clerkin said.

“Ratings agencies care more about our fund balance than our debt,” Elicker said. “Which makes this fiscally responsible.” But it’s also important to be clear that the city will have to pay for this money in the future, he said.

“The so-called savings are partially because we wouldn’t make a payment that we will have to make later,” Perez said.

Dixwell Alderwoman Jeanette Morrison compared the proposal to refinancing a mortgage. “It’s the same as: We don’t have to pay today, but we’ll pay later on. That doesn’t increase the total amount we’ll have to pay.”

“Yes,” said Clerkin.

“Our savings account, right now, has no money,” Perez said.

Later, during the committee’s voting session, aldermen voted unanimously to recommend approval of the rainy day fund transfer.

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Comments

posted by: Noteworthy on December 12, 2013  5:19pm

Dancing on the Head of a Pin Notes:

1. When is a balloon payment, not a balloon payment? Never.

2. When financial deals are too complicated to reasonably explain, you should not be doing them.

3. There would be no problem with the fund balance if this committee and the full BOR didn’t approve spending for which it didn’t have the revenues. There were structural imperfections in the general fund budget just like there are over at the BOE - deficits everybody knew were cooking and did nothing to remedy except to raise taxes and even then it wasn’t enough. Hence, this plan. The rainy day fund should have at least a 10% cushion of unallocated cash - that means $50 million - not $4 million and some loose change from DeStefano’s sofa.

4. Bond Ratings - before this latest round of bond rating decreases to one step up from junk status, the city’s bond rating took previous hits. The city has never recovered and it will not recover from this one simply by putting borrowed money in the fund balance.

5. The lone banker on this committee should know better than to allow the city to be in this place.

posted by: robn on December 13, 2013  10:54am

No,

This is very similar in concept to the Waterfall payments which took down the Detroit pension fund. We’re using borrowed money to replenish a rainy day fund to avoid borrowing money. Either way, its just avoidance of budget cuts.

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