Thomas Breen photo
Alders Abby Roth and Steve Winter pitch colleagues.
The five words are buried on page 398. They matter a lot when the city borrows money.
Now two budget-watchdog alders are trying to change them.
Downtown Alder Abby Roth and Prospect Hill/Newhallville Alder Steve Winter broached the wording change Monday night during the regular monthly Finance Committee meeting in the Aldermanic Chambers on the second floor of City Hall.
Monday’s Finance Committee meeting.
The duo pitched their committee colleagues on the Finance Committee to consider changing a single clause in the first sentence of Section VI of Appropriating Ordinance #3, found in the middle of page 398 of this year’s budget.
That clause allows the city to issue refunding bonds “to achieve net present value savings or to restructure debt service payments.”
Despite its apparently arcane contents and remote location, Roth and Winter argued, this clause played a pivotal role in keeping all but aldermanic leadership from being able to vote on the city’s refunding of $160 million in existing debt in August 2018.
That “scoop and toss” borrowing maneuver to cover operating expenses reduced the city’s short term debt obligations and leveled off a spiky payment schedule over the next decade-and-a-half. It also added millions of dollars of new debt service payments for future generations to bear and resulted in a long-term, net present-value cost to the city of around $10 million; and it crossed a line often honored by governments, to avoid large-scale borrowing to cover operating expenses.
The full Board of Alders didn’t get to vote up or down on that record bond sale two summers ago.
Instead, that decision-making power was delegated to the Bond Sale Committee. The committee consists of the mayor, the city controller, the Board of Alders president, the Board of Alders majority leader, and the Board of Alders third officer.
While that Bond Sale Committee has been empowered by city law to oversee and issue refunding bonds since 2008, Roth and Winter pointed out, it was previously constrained to refund existing debt only in order to “moderate debt service payments and/or achieve net present value savings of no less than 2.5 percent.”
That clause was changed in the Fiscal Year 2014 – 2015 (FY15) budget to replace the word “moderate” with “restructure,” and to remove the words “of no less than 2.5 percent” in regards to the required savings that must result from the refunding.
“I just fundamentally believe that a refinancing that would impose a long-term cost on all the residents of our city is a very significant decision that the full board should vote on with majority approval so that all residents can be directly represented,” Roth said.
Winter.
Winter agreed: “If we’re going to do a restructuring that’s going to increase our costs in the long run, what is the public process for that decision making?”
Requiring such a prospective refunding to come to the full board would mean that the item would be subject to a public hearing, he said, and would go through the same path of two readings and a final vote by all of the alders that all other proposed new legislation has to go through.
Westville Alder and Finance Committee Vice-Chair Adam Marchand clarified that the actual item submitted by Roth and Winter to the committee was not a proposed change in the law, but rather a proposed public hearing about a potential change in the law.
So Monday night’s committee hearing therefore ended with a unanimous vote to “read and file” the matter after the Finance Committee alders weighed in. Roth said that the relevant Appropriating Ordinance #3 is voted on by the full board every spring during budget-making season, and could easily be debated and updated then, if a majority of her colleagues are amenable.
Click here to download Winter and Roth’s initial communication to the board.
“What is the ideal role of this [Bond Sale] Committee” in your view? East Rock Alder Charles Decker asked.
The committee itself was created in 2008 at the height of the Great Recession in order to let the city move quickly and take advantage of favorable interest rates when issuing bond refundings that save, rather than cost, money in the long run, Winter said.
Ideally, he said, the committee would continue to be empowered to act in such situations: When the end result is net savings, it should be able to move quickly and not have to wait for the full Board of Alders public vetting process in order to get those savings. But when the end result is net costs or something as massive as debt restructuring, he said, that decision should be voted on by the entire board.
Board of Alders President Tyisha Walker-Myers.
“With the structure that we have right now,” Board of Alders President Tyisha Walker-Myers asked the duo, “who elects the people that are in those [leadership] positions? Who elects the actual president, the majority leader, and the third officer?”
“Obviously it is the Board of Alders,” Roth replied. All 30 alders get to vote on their board leadership, and therefore there is indirect representation of the entire local legislature on the Bond Sale Committee.
“I feel like a direct representation on an issue as significant as a major refunding” is more appropriate, she continued.
“It was only one time under the current administration, since the change was established,” that the city undertook a bond refunding and debt restructuring that resulted in net costs, Walker-Myers said. That was Aug. 2018.
“It was only one time that it was a negative,” she continued. “Basically, off of that one time, are you suggesting that we” change the entire system? Even though the 2.5 percent savings are no longer written into the law, she said, the Bond Sale Committee does not accept any savings under 3 percent as a de facto practice — independent of the 2018 restructuring.
Roth admitted that she likely would not have noticed this esoteric clause in the budget if not for the Aug. 2018 restructuring. Many of her constituents reached out to her in the aftermath of that bond sale, she said, and she had to tell them that she wasn’t able to vote on the matter and wasn’t exactly sure why. So she and Winter started doing some research.
That said, Roth continued, her and Winter’s proposal is not overturning the 2018 decision in any way. “I think that fundamentally that would be a better process” going forward, she said about allowing the full board to vote on future potential debt restructurings.
“I think it would be helpful for us and the general public to have that lengthier process because it would make it really clear why the decisions are made,” Winter added. “I think that would be helpful for everyone involved.”
FRAC Chair Mohit Agrawal.
During the public testimony section of the hearing, Financial Review and Audit Commission (FRAC) Chair Mohit Agrawal threw his support behind the proposed change.
“I’m not saying that the current process is irresponsible,” Agrawal said. “That’s certainly not true. There are lots of steps in place already. There’s nothing saying the process is broken.”
But, he continued, there are questions about “public transparency.” And having a more thorough vetting for bond refundings that ultimate cost, rather than save, the city dollars would be a good direction in curing the latter.
City Acting Budget Director Michael Gormany and City Controller Daryl Jones.
City Controller Daryl Jones weighed in at the end of the hearing with a few clarifications. He pointed out that the Bond Sale Committee itself exists thanks to the City Charter, and not any annual budget ordinance.
He said that debt restructurings and debt refundings are two fundamentally different municipal finance strategies. The latter is a common practice that allows the city to save money in the long-term by ditching old, higher interest rates and taking on new, lower rates.
“The restructuring was done once,” he said. “We did the restructuring because a lot of things were going on that year,” particularly with state cuts to municipal aid.
Leadership knew all about the restructuring, he said, and the process itself played out over weeks, with regular phone calls and four sets of lawyers. “It’s an intensive process,” he said.
He said the move was ultimately the right one. The city leveled off debt payments that would have otherwise spiked to the $70 million range in the short term to around $57 million per year. He didn’t mention that that “leveled-off” borrowing means that the city will be paying higher debt service payments for a a longer period of time thanks to the new borrowing and restructuring.
Jones also stressed that the city recently earned a “stable” outlook from the rating’s agency Moody’s. The city had been downgraded by the ratings agencies S&P and Fitch just before the bond sale.
This year-plus later, he said, he still believes it was the right move.
One that he hopes the city won’t have to undertake again.
“If I didn’t have to do the restructuring,” he continued, “I would have never done the restructuring.”
We had deficits for three years - I don't believe there was one. There was one that is epic - the others were smaller. And the budget still required using Yale's next year PILOT to post to last year's budget.