Hamden Borrows $20 Million To Cover Delayed Tax Revenues

The Hamden Legislative Council voted Monday evening to borrow $20 million in order to fill its coffers for the first few months of the next fiscal year and keep the town solvent while it waits for tax payments, which it deferred until October.

The council voted in April to defer the town’s property tax deadline to Oct. 1, in accordance with Gov. Ned Lamont’s Executive Order 7S, which required all municipalities to either defer their tax deadlines or lower interest rates on delinquent taxes.

The town will secure $20 million in tax anticipatory notes (TANs) from Webster Bank to cover the anticipated short-term revenue shortfall from the tax deferment. TANs are a form of a short-term borrowing that give municipalities an injection of cash to pay for expenses until tax revenue comes in. The TAN that passed Monday must be paid back, plus interest (levied at a projected rate of 1.9 percent per year), by March 2021.

Without the large injection of tax revenue that would normally come at the beginning of the fiscal year, which begins July 1, Hamden will need to pull from somewhere else to fund its expenses.

Some municipalities have large fund balances that sit somewhere in the recommended range of 10 – 15 percent of their operating budgets which they can pull from to weather temporary revenue shortfalls and then replenish when taxes do come in.

Hamden has a fund balance of only $2 million, which is less than 1 percent of its annual operating budget.

The temporary borrowing will allow the town to stay afloat until it collects the bulk of its tax revenue on Oct. 1. The town is facing a $15.2 million debt service payment in August, which would be impossible to make on top of other operating expenses without a large injection of cash.

The vote represented one more tough decision in what is shaping up to be a year of bad choices for Hamden officials.

As Council President Mick McGarry put it at the beginning of the meeting, ​“We are going to be in the business of choosing the least worst option.”

Council members held their noses Monday evening as they passed the TAN, loath to have to borrow more money on top of the town’s already crushing debt load, but knowing that if they did not, they would put the town at risk of running out of cash and going bankrupt.

At Monday’s meeting, which lasted five and a half hours and adjourned at 12:35 a.m. Tuesday morning, financial advisors told the council that it really had no other options. If the town did not float the TAN, and taxpayers wait until October to pay their taxes as expected, ​“that’s it. Lights out… it will be in the newspapers. The state will come in and take over,” said financial advisor Barry Bernabe.

A cash flow analysis submitted to the council with the borrowing ordinance estimates that without the TAN, the town might be about $16 million in the red in September, right before taxes come in. The $20 million in borrowed funds will be enough to cover a temporary shortfall of that size.

That projection is just an estimate, though. If enough taxpayers decide to pay taxes in July, it’s possible the town won’t need the TAN. Conversely, if too many taxpayers fail to pay their taxes by October, or if too many fail to pay them at all, $20 million might not end up being enough. Some council members said Monday that they were concerned that may be the case, and the town might end up in the red anyway because $20 million may not be sufficient. The town’s financial advisors said that may well happen, but that only time will tell.

Even if $20 million is not enough, it appears to be the most the town can get, and it is quite lucky to get even that. The council had a surprisingly good offer from Webster Bank, said Bernabe and bond counsel David Panico. A town with a good bond rating might be able to shop around a bit, they said. But Hamden does not have that luxury. Last year, the town approached 12 banks to borrow money for a few capital projects. 11 did not submit bids. Webster Bank was the only one willing to lend to Hamden. Hamden has some of the lowest bond ratings of any municipality in the state. In December, Moody’s downgraded it to one step above junk bond status, placing it ahead of only Hartford and West Haven, both of which have had the state take over their finances.

Still, Bernabe, Panico, and the town’s finance department were able to secure a verbal commitment from Webster to lend the town $20 million at an interest rate of 1.9 percent. (The details are not locked in stone, and are still subject to change.) Bernabe said such a low interest rate is excellent; Southington, a town with a AAA bond rating, recently borrowed money and got a 1.9 percent interest rate.

When the bank agreed to the TAN, he said ​“I was shocked. I would grab that fast and lock it down.”

The bank has other possible borrowers, both public and private, with much better bond ratings and more stable financial situations, that are vying for that $20 million. Bernabe told the council that Webster wants to close the deal by mid-June, because otherwise it will lend to someone else. That means starting the process right away.

Yet council members still had the words of 126 pages of public comment demanding that they delay the vote ringing in their ears. It took Council President Mick McGarry an hour and a half to read through every emailed comment. Most comments said the same thing: This borrowing is too big a deal to rush into; wait until administration presents a clear picture of the town’s finances and how it will dig itself out of its financial hole before voting.

At 11 p.m., the council still had not voted or even amended the ordinance, though some had proposed changes to the language that would give the council more oversight over the funds. McGarry suggested taking a five-minute recess so Panico could draft language. A few other council members, including Brad Macdowall, requested that the council wait two days and take the vote on Thursday. Yet the council has deliberations on its proposed budget scheduled for Tuesday, Wednesday, Thursday, and Saturday, countered McGarry, and it would be unwise to push off one of those meetings.

After council members had argued for a few minutes about whether to postpone the vote two more days to make sure all the I’s were dotted and T’s crossed, Panico chimed in to say he had finished the amendment language the council had requested.

One change specified that the TAN proceeds can only be used to pay for expenditures for the 2020 – 2021 fiscal year. Another said the funds must be deposited into a separate account and released only with council approval, a move that signaled the eroding trust of some council members for the mayor and his administration.

The council needed a two-thirds majority to pass the TAN. It passed as amended with 10 in favor and four opposed.

TANs Only, No Bonds

The administration originally proposed two different ordinances for the council’s consideration, and the council was supposed to choose just one.

The first option was to issue $20 million in just TANs, with no other type of borrowing. The TAN must be paid back by March. This was the option that passed.

The second option would have authorized up to $20 million in TANs, other kinds of notes, and bonds. TANs must be paid back within the fiscal year in which they are used. Bonds and some other notes, on the other hand, are longer-term forms of borrowing.

The second option would have given the council more flexibility, said Panico and Bernabe. If the town collects all the tax revenue it’s supposed to in October, just a TAN should be fine. The town will be able to pay it back with that deferred tax revenue by the March deadline. But if tax revenue is not only late, but also lower than projected, that might put the town in a tricky situation with just a TAN. It would have to find some way of coming up with the lost revenue by March.

Having the option to float bonds would allow the town to smooth a possible shortfall in the next fiscal year over the following few years.

While some council members said they wanted the flexibility of the second option, others said they wanted to avoid any long-term borrowing.

Councilwoman Kristin Dolan said she would rather force the town to avoid incurring more long-term debt. If there is a tax shortfall, she said she would rather mitigate it with expense reductions than push it off as yet another long-term liability on top of the other major liabilities. 

The council voted, just before midnight, to approve the TAN-only option, after a motion to approve the other option had failed.

Tabling Sends Message

Monday’s TAN ordinance came at a heated moment in town politics as officials try to get a handle on a projected deficit in the current fiscal year.

Two weeks ago, the council tabled three financial transfers that it is legally required to pay in order to put pressure on the administration of Mayor Curt Leng to give more information about the town’s financial position. Council members, echoing a swell of letters from residents, said they were unwilling to pass the transfers until the administration gave a report detailing what the projected revenue is and what the plan is to mitigate it.

The transfers came before the council again (at around midnight) at Monday’s meeting. The council had gotten some of what it wanted, but not all.

At the beginning of the meeting, Leng tuned into the video conference call to give a presentation to the council. Usually, Leng appears before the council just once a year, when he presents his annual operating budget. Otherwise, a member of his staff represents him at other meetings.

He spent much of his presentation saying that the town was in much worse shape ten years ago: ​“beyond broke,” he said, describing how the town used to be.

“Through work over the course of the ten years, we got out of those dark ages,” he said, by starting to fund long-term liabilities like pension and medical obligations.

He outlined the steps the town has taken this year and in recent years to get its finances in order: hiring and spending freezes, union negotiations, and potential savings on past cost of living adjustment overpayments in the town’s pension plan.

He also addressed the current fiscal year’s shortfall, though he never got more specific than a ballpark estimate ranging $4 million. He said that before the pandemic, it looked like the town would be under 2 – 3 percent, but that the shortfall has ​“increased significantly” since. At one point, he said the shortfall looked like it was approaching $10 million. A few minutes later, he said it looked like it will land somewhere between $8 and $12 million.

He told council members that he would get a plan to them soon, but that he did not have one in writing for them for Monday’s meeting. He mentioned some of the measures he is weighing to mitigate the deficit. Some of those measures would help in the current fiscal year, and others would take place in the next fiscal year or in subsequent years.

Those include:

• Grant reimbursements from the Board of Education to the town (something the board has fought against).

• A hiring and spending freeze that has been in effect since January.

• Union concessions.

• Reimbursements from capital project funds to pay operating expenses, something people in Hamden sometimes call ​“capital sweeps,” which Leng said is not the best practice, but may be necessary.

• Grant funds. (For instance, he is anticipating $7 million in grant aid in his proposed budget. He originally proposed $5.1 million, then upped that number to $7 million.)

• Removing town staff positions.

• A debt restructure, which he proposed in his proposed budget for the next fiscal year.

• Selling town assets.

• Seeing what payments this year can be pushed off until next year.

A few hours after Leng’s presentation, when the council took up the transfers again, some members said they had still not received what they had asked for: a solid projection of the deficit, and a plan to mitigate it. The mayor’s presentation had not come with any supporting documentation or detail.

Yet the town needed to pay its bills. Fire Chief Gary Merwede had said at the previous meeting that a transfer in his department, to pay for holiday pay, needed to pass by Memorial Day or else he would have to violate the union contract.

The council ended up passing the transfer for the fire department and another to pay for accrued benefits.

When it took up the third, some council members said they still wanted to hold the administration to proving the information they had requested. Though not the best method, they said tabling a transfer was the only way they had to hold the administration accountable.

As Town Attorney Sue Gruen discussed the transfer, which would pay for expenses in her department, she said she didn’t know when exactly the payments were due, but that she would manage if the item were tabled again.

McGarry cut her off. ​“That’s a game changer,” he said. He made a motion to table. It passed at 12:34 a.m. The council adjourned a minute later.