Hamden Bets On Fund Balance

When a rainy day comes, Hamden may have money to spare — if an evolving proposal to sell $60 million worth of bonds doesn’t backfire.

That word follows a unanimous vote Monday night by the finance committee of the town’s Legislative Council to approve a $60 million debt refinancing and restructuring plan, the ​“third leg” of the town’s deficit mitigation plan. That plan, launched in 2020 after Finance Director Curtis Eatman discovered that Hamden had a multi-million dollar deficit, involves refinancing and restructuring the town’s debt in order to move more money into the town’s fund balance, the net cash Hamden holds after all the year’s revenues and expenses have been determined. 

The full Legislative Council still needs to vote on the plan.

Here’s the idea: Assuming the full council gives the final go-ahead this month, Hamden will refinance $48 million in bonds, meaning they will adhere to the original payment timeline attached to those debts but hopefully secure a lower interest rate on those bonds. The town will restructure the remaining $12 million, meaning those bonds will also be sold to receive lower interest rates, but that the payment deadline will be pushed further into the future.

Because interest rates are currently so low, the town’s financial advisors have said that Hamden may potentially see savings between $10 and $12 million by opting to reissue the bonds. In addition to lowering the town’s debt service by reducing interest rates — hopefully from around 5 percent to 3 or 4 percent, depending on the timeline the town adopts for selling the bonds, which remains to be determined — extending the debt will hopefully allow the town to secure net savings through the administration’s general fund, which should then be directed to the fund balance.

That fund balance acts as a source of money for unassigned or unexpected costs, whereas the general fund outlines money already allocated through the town’s operating and capital budgets.

The fund balance therefore allows the town to pay for unanticipated emergency measures without borrowing more money — or to meet its outstanding financial obligations in the face of economic uncertainties. 

It also serves as a key indicator of the town’s financial position. 

Rating agencies look to the town’s fund balance to determine credit worthiness, which impacts Hamden’s bonding opportunities for favorable interest rates. Currently, Hamden’s fund balance is in the red by $2.3 million. 

The key to assuring that the town reaps the biggest benefits of the refinancing and restructuring, said Eatman, is creating a ​“structurally sound” operating budget later this year.

Eatman, the town’s financial advisors, and wary council members all repeated those words, ​“structurally sound,” on Monday. That’s because putting more money into the fund balance, which the administration says is crucial to getting the town financially back on track, depends on realistically estimating revenue to match expenditures. If the town misuses the savings earned from the bond sales or creates space for another deficit in their upcoming budget, the fund balance won’t grow. 

(Read more about Hamden’s history of ​“scooping and tossing,” or selling bonds for a profit and then using that money to supplement the operating budget while pushing debt payment further into the future, here.)

Eatman said this time around, the administration will not use that new money to bolster the budget, but send the money straight to the fund balance instead. ​“Think of it as a savings account,” Eatman said, rather than a checking account.

“All of these things are based on ​‘ifs’,” Eatman said of the expected advantages of pursuing the bond sales. Though the finance committee has approved the plan, its execution and success are reliant on federal interest rates, a late February budgetary audit, the perspectives of rating agencies, and the success of the town’s operating budget, which the council will begin developing in the coming months. 

On Monday, the council also approved an additional policy put forward by Eatman to protect the fund balance from politically motivated decision making. Moving forward, if the Council resolves to specifically lower taxes by taking from the fund balance — and that decision would cause the fund balance to fall below seven percent of the operating budget, which is typically around $20 million — the council must agree by a two thirds vote rather than bare majority.

Councilman Cory O’Brien questioned why that requirement would apply only to decisions made from an open intent to lower taxes, rather than any choice which would bring the balance below seven percent. ​“It’s never an honest declaration that this is to reduce taxes,” he reasoned.

Ultimately, however, he voted in favor of the new regulation.

“I’m here trying to look for perfection,” he said, ​“but sometimes perfection is the enemy of the good.”