Underwriter Carlos Desmara: City loses 10 million — or 83 million.
Christopher Peak Photos
Alders Richard Furlow, Tyisha Walker-Myers at Thursday night’s vote.
New Haven went ahead Thursday night with a $160 million restructuring of the city’s debt, after three key players — alders who had to vote to approve it — won a commitment from the Harp administration to develop strict spending controls aimed at avoiding fiscal ruin.
The $160 million refinancing of the city’s debt and $58 million in new borrowing were both approved in a unanimous vote by the city’s Bond Sale Commission at a 40-minute meeting Thursday evening at City Hall.
It was the largest bond sale and debt restructuring in New Haven’s history, in effect paying off debts by borrowing more money.
The three alders on the five-member commission — Board President Tyisha Walker-Myers, Majority Leader Richard Furlow and Third Officer Aaron Greenberg — all signed on, after a seven-hour negotiation earlier that day with the commission’s other two members, Mayor Toni Harp and Controller Daryl Jones.
During those negotiations, the alders got a promise that the city would put some of the up-front savings from the refinancing into addressing long-term fiscal challenges, rather than just into general operating expenses, as underlying debts continue to mount.
According to the resolution that was passed, the up-front savings will go toward preparing for “unanticipated shortfalls,” like a loss of state aid and medical self-insurance overruns; paying off the estimated $11.5 million shortfall from the fiscal year that ended on June 30; and depositing $4.5 million into the city’s two cash-strapped pensions, split evenly between the City Employees Retirement Fund and the Police & Firemen’s Pension Fund.
“We are faced with difficult times both in our City and State,” the alders stated in a written statement explaining their vote. “As we are confronting a series of hard choices, we will continue to look at other options to drive down costs and keep the burden of undue tax increases from our residents. As the budgetary authority of the City, the Board of Alders remains steadfastly committed to using legislative actions to facilitate that outcome by taking all the necessary and appropriate steps to do so.”
In the short term, New Haven’s budget won’t be under the same squeeze. Over the next seven years, the city will get a $108 million reprieve from debt payments. But over the long run, it will have to pay nearly twice that amount back. Over the following nine years, the city will owe $198 million.
How “10.3M” = $84M
Underwriters, lawyers, finance analysts and alders review the bonds one more time, before the sale.
In total, the city ends up paying $84 million more due to the refinancing, as the 4.82 percent interest rate adds up over the years.
The underwriters, however, didn’t use that number in their briefing. Instead, they referred to a loss of $10.3 million in “present value.” That much-lower figure discounts for inflation and assumes investment returns over the years.
Asked after the meeting about the discrepancy between the $83 million “gross dis-savings” and the $10 million “present value dis-savings,” Controller Jones and Budget Director Michael Gormany said they didn’t know. They called up the underwriter to ask him to explain the concepts over the phone.
The bond’s underwriter, Carlos Desmaras of Loop Capital Markets, which took a $1.45 million commission out of the sale, claimed that the arrangement will help space out the city’s debt more evenly. Each year until 2034, the city will now pay a lump sum of about $50 million for all its debts.
Desmaras compared it to his own home mortgage, where payments of a similar size are made each year. They’ll be smaller, too, once he refinances his mortgage.
“I could take out a 15-year mortgage or a 30-year mortgage. I’m choosing to go with the 30-year mortgage. Why? Because my payments are going to be much lower. If I get in a position where I lose my job or I’m facing health challenges, I’m making a much lower payment,” Desmaras said. “The analogy is if the state makes a cut or there’s some additional overtime that’s not budgeted. I’m in a position where the mortgage I have today is much, much lower.
“Actually, frankly, it is a conservative approach,” he continued. “When people say, ‘Hey, it’s a scoop and toss,’ I think that really overstates it.”
But municipalities aren’t the same as homeowners. They might refinance once or twice in their lifetimes, but city governments borrow money against their tax base every year paying for much-needed infrastructure, technology and repairs.
“It’s helpful for the city to have a level debt service for the next 15 years, but it’s important to recognize we may have future debt-service boding,” pointed out Mohit Agrawal, chair of the Financial Review and Audit Commission (FRAC), the city’s independent budget watchdog. “We normally borrow around $50 million each year. It’s only level right now, and it won’t be once we start adding.”
Agrawal added that the argument that the city’s trying to level out its debt isn’t entirely true either. He pointed out that this year the city will pay a little over $35 million, before the rate jumps back up to $55 million next year.
Unless the city stops all capital projects, any new borrowing will mean New Haven faces an uphill climb, with bigger and bigger debt payments due each year, rather than the downhill slope that it’s always had, paying off bills as they come due.
The approach to paying off debts by borrowing money through the kind of refunding approved Thursday night is known by financial analysts as “scoop and toss.” (Read a story about that here.) It results in escalating payments in later years; the practice led Hartford to the brink of bankruptcy and a state bailout, its mayor, Luke Bronin, recently said at a conference on municipal finance. He called the strategy “short-sighted” and “irresponsible.”
Market Responds
Controller Daryl Jones reads the terms of the sale aloud.
While analysts (including credit rating agencies) worried about the outcomes of New Haven’s refunding plan, the markets stepped Thursday night in the form of buyers for the bonds.
After shopping the refinancing proposal around Wall Street, including in 11 different conference calls, the city was able to negotiate several changes to its original plan, including a provision that allows it to pay off their debts early and to receive more up-front cash to pay current bills.
Amon the highlights of the final version of the deal:
• The city’s go-to insurer, Build America Mutual, had said in recent years that it already had too much of New Haven’s debt to insure more. So the city was prepared to proceed with this bond sale without insurance. But the company reconsidered and decided to insure the debt restructuring along with Assured Guaranty. The city has to pay extra for the insurance, but the security lowers the interest rates.
• The bonds didn’t sell for their face value. The $58 million in new money bonds sold on the market for $63 million, meaning the city can pocket a $5.8 million bonus known as a “premium,” which the alders required be reinvested to pay down interest.
• The interest rates the city got for the refinancing bond were slightly lower than expected. At 4.82 percent, that’s still high, surpassing what some homeowners pay for a mortgage, a much riskier investment. “Usually cities are halfway between the U.S. Federal Reserve and home mortgage,” Agrawal said.
•The city can get out of the debt early. Through a “call feature,” New Haven can pay off the bonds ahead of time, perhaps through another refinancing like this. The city is taking a gamble here that it will be on better financial footing in a few years. Because bond holders want their interest payments to keep coming over the bond’s entire term, they raise interest rates if there’s a call feature. The city will benefit from closing out early only if it can find the cash and if interest rates go lower than they are now. Otherwise, it wouldn’t make sense to refinance at a higher interest rate.
Altogether, the city’s projected losses aren’t quite as high as indicated in the preliminary statement describing the bond, which predicted a $96 million loss over the whole refinancing.
Agrawal: Structural Mess Unchanged
Thomas Breen Photo
FRAC’s Mohit Agrawal.
FRAC’s Agrawal said Thursday night that the city’s bond sale didn’t change his outlook on the city.
“My general sense is that the city’s financial situation is more severe year by year,” Agrawal said. “The interest rate is going up. It’s quite high for a municipality, and that’s real money that the city is going to have to pay off until 2034.”
He added that the city’s $31.2 million break in debt payments that the city needs this year reaffirms FRAC’s analysis that the city has a $30 million structural deficit that they need to realign in future years.
“This is the pattern we’ve been expecting and seeing for a few years,” he said. “We’re going to get through this year financially, but next year, the savings on the debt service are only worth $20 million, so we have to see if there is a plan to raise taxes in next year’s budget. If the state support is the same, the grand list doesn’t change basically, pension costs go up, medical costs go up, teacher salaries go up — all those costs that are kind of built in — if nothing were to change, the deficit will be slightly bigger than this year’s.”
Agrawal said he doesn’t know how the city would pay for those extra costs, but he said he looked forward to seeing alders’ proposal for developing a five-year financial plan.
Righting The Imbalance
The city is restructuring its debt like a mortgage, the underwriter argues.
Financial analysts say that deferring payments in a “scoop and toss” refinancing can remove the pressure to make needed tough cuts, papering over a city’s structural deficits (estimated at $30 million in New Haven).
The aldermanic leaders voting Thursday night to approve the bond sale said they understand the dire financial consequences facing the city. They said they won a commitment from the mayor to work together on a five-year strategy to tackle the challenge.
The alders said the city needed to refinance the bonds to “safeguard the City’s finances in order to continue to provide the critical services our residents depend on.” The refunding gives them “necessary budgetary flexibility while new projected revenues from economic growth are realized.”
In the meantime, they added, the alders will also be instituting strict financial controls that will be worked out among the full board.
“We have also insisted on long-term efforts to control expenditures for medical and retirement benefits, education cost overruns and overtime reductions especially in the Police and Fire Departments,” the statement read.
The sale also included a resolution guaranteeing that “a portion of the monies go towards addressing some of the structural deficiencies that credit agencies pointed out in downgrading the city’s rating last week — namely, increasing payments to the pension, medical and litigation settlement funds.”
“This is the first step in the five year plan that will be put together by the Administration, Board of Alder’s Leadership, Board of Alders Finance Committee Chairs and other stakeholders,” the statement read.
Furlow said that the alders would be meeting weekly with the city’s budget team. He said they’d be looking at bringing large-scale developments onto the tax rolls sooner, cracking down on overtime and looking for more revenue wherever they could find it.
Other alternatives, particularly a state bailout that some alders want to consider ‚didn’t seem like reasonable option to Furlow. Because of its credit rating downgrades and high tax burden, New Haven is now eligible for financial assistance like state’s debt takeover that saved Hartford from bankruptcy. But in the process, the city would have to give up final say over its union contracts and annual budget. Or worse, Furlow said, if the city ended up in a higher tier like West Haven, every expense could be questioned and rejected.
Without other options, Furlow said the decision had not been easy for him to make.
“This is a tremendous amount of restructuring that we’re doing,” he said before the vote. “There’s been days and hours of work…, the telephone calls, sometimes answering the same questions in different ways to help us understand what’s going on. Those questions were necessary, over and over, to make sure that we understand what we’re doing. We’re not coming in here on a whim and just signing the city away.”
He added later, “We’re residents too. I’m not going anywhere. I owe it to this city to do the right thing. You absolutely better believe we’re going to get this under control. Everyone’s not going to be happy about it, but these are measures that we’re going to have to do, to get this paid off and come out of this whirlwind.”
An earlier version of this story follows:
3 Alders Decide City’s Fiscal Fate
Markeshia Ricks Photos
“Scoop and toss” sale is up to, from left, Alders Aaron Greenberg, Tyisha Walker-Myers and Richard Furlow.
A city’s stark choices: One in a series.
The city’s largest-ever bond sale — a quest to borrow more money to retire mounting debt — is set to become official Thursday, unless three alders decide otherwise.
If the sale goes through, it will either lead the city to financial ruin, as some analysts warn. Or it will give New Haven a needed tool to close one deficit and tackle future ones, as City Hall claims.
The three alders — Board President Tyisha Walker-Myers, Majority Leader Richard Furlow and Third Officer Aaron Greenberg — sit on the city’s five-member Bond Sale Commission alongside Mayor Toni Harp and city Controller Daryl Jones.
At a meeting Thursday, the commission will hear how much interest banks want to participate in the $160 million bond sale. Almost certainly, the city will hear less advantageous terms than in previous bond sales, because of its declining financial condition.
After the cheapest proposal is selected, the sale will be put to a vote.
In the past, the commission’s nine-figure transactions have gone through unanimously, usually within less than 10 minutes. It’s not clear what will happen this time, amid fears of the implications the sale could have for New Haven’s fiscal future.
Walker-Myers, Furlow and Greenberg all did not return phone calls on Wednesday about how they plan to vote.
Thomas Breen Photo
Alder Steve Winter: Kicked can “gets bigger.”
Other alders who said they want to halt the sale — at least, temporarily — won’t have a chance to weigh in. That’s because the city’s hired bond lawyers note that the board signed away all its oversight, when members apparently failed to read the fine print hidden in every city budget for the last decade.
“This is not just kicking the can down the road. It’s a can that’s getting bigger and bigger down the road,” said Prospect Hill/Newhallville Alder Steve Winter. “We can’t keep doing this forever. There’s obvious limits to how much financial engineering can paper over deficits.”
The deal will provide cash to close an $11.5 million shortfall from the fiscal year that ended June 30. It will also take an estimated $27 million out of the budget, nearly closing an estimated $30 million structural deficit, for now.
Overall, the deal will take one-fifth of New Haven’s debt off the books for a couple of years, before Wall Street’s bond-buyers make the city pay back almost double what it saves up front over the next two decades.
For the first seven years, the city will get a $105 million break. But over the next decade, the city will have to scramble to make up $201 million. Overall, the city will lose about $96 million in the transaction.
The city faces less advantageous terms than in past sales because ratings agencies have downgraded its credit, insurers won’t touch the bonds and the federal government will levy a tax because the refinancing is being done so soon after the bonds were issued, multiple analysts said.
Recognizing those challenges, the city didn’t put the bonds on the open market, where it might not have gotten many bids. Instead, their underwriters are negotiating privately with banks, which will likely drive up interest rates even further.
“Scoop and Toss”
New Haven will owe an extra 96 million dollars on the refinancing.
To avoid paying the bills, the city wants to use a controversial practice known as “scoop and toss.”
Essentially, the city “scoops” up a load of debt that it owes now and “tosses” it years away. The problem, for whomever has to handle it later, is that the debt is now far bigger in size.
Think of it like maxing out a credit card and taking out another one to pay it off, then waiting several years before you get around to dealing with the old expenses.
Those bills eventually came due in Hartford. After years of deceptively low debt payments in Hartford from a similar refunding, all the bills suddenly came due, Mayor Luke Bronin said recently, almost pushing the city into bankruptcy. Instead the state took over Hartford’s finances in return for a $550 million bailout.
“The city had done what I think were some irresponsible, short-sighted refundings that left us with a rapidly escalating debt service,” meaning the annual payments owed to bond-holders, Bronin said in an interview with New Haven-born journalist and analyst David Wessel. “To me, those … bond transactions were just unforgivable. That restructuring, I think, was totally unjustified because the consequences of it were so clear.”
Mayor Harp said in an interview that she can avoid catastrophe by stashing the up-front savings into the city’s depleted rainy-day fund, which will pay down everything she’s borrowing now and address a needed problem with government reserves.
Analysts say cities rarely find that kind of discipline with the up-front cash from refunding.
New Haven has already scooped and tossed twice, without putting any money away for the repayment plan.
In her first year in office, in 2014, Harp added $14.5 million more of debt for future years, after which her staff announced a balanced budget at a press conference.
Three years later, the administration pushed out another $31.6 million in a refunding. But this time, it still ended the fiscal year with a $11.5 million deficit. Leading to this latest proposed refunding.
Watching these refinancings, close observers of New Haven’s budget have been sounding the alarms for years. The rest of the city, including alders who aren’t clued in to the municipal bond market, didn’t know where to begin, how to even phrase the right questions about the premiums, interests rates and yields in an “advance refunding.”
The city’s independent budget watchdog, the Financial Review and Audit Commission (FRAC), warned of a budget balanced through “gimmicks,” with long-term debt paying for normal operating expenses.
Ratings agencies, meanwhile, downgraded the city’s credit. In its latest downgrade last week, Standard & Poor’s cited the latest planned bond refinancing as part of the reason. Its report said continually pushing back payment due dates put the city in a “very weak” position financially.
Mohit Agrawal, FRAC’s chair, said the refinancing would give the city cash to pay down last year’s deficit. But he said he didn’t know why the city had opted to do that through a bond at what will almost certainly be a higher interest rate.
“I understand the financial difficulties. I understand why we need to free up cash in the short run, but what I don’t see here is a long-term solution” he said. Because this bond will be taxed, “that’s a real problem. That’s real money we’ll be paying through higher interest rates. That’s a situation we should be worried about, if we let it go for so long, paying exorbitant interest rates to cover our bills.”
Agrawal said that, as an alternative that could both “meet the needs of the city and allow a longer discussion with more buy-in from the alders,” the city could pay down last year’s debt with a “tax anticipation notice.” Essentially, that’s an advance from a bank which gets paid back with property taxes mailed in over the coming months.
No Say
By the time the restructured payments ramp up, the city could have already paid off its debt.
In the meantime, three alders are effectively calling the shots. The other 27 alders will be able to watch, but thanks to their own lawmaking, they won’t have an official say in what happens, despite provisions in state law that say they should.
According to state law, the alders are supposed to weigh in anytime the city takes on new debt. In fact, under new provision that took effect last year after the creation of the Municipality Accountability Review Board (MARB), the state considers bond refinancings to be so consequential that a two-thirds vote is required for any bond to pass.
But thanks to their own lawmaking, New Haven’s alders signed away their oversight — without even knowing it.
Every year, the alders attach an “appropriating ordinance” to the budget. For the most part, that amendment determines how much the city can bond and what the money can be spent on. The alders pore over this document, picking out line-items that they don’t think are worth it.
But the document also comes with some fine print.
For the last decade, the alders included a provision that allowed the mayor and controller to refinance bonds without a vote, as long as they determine the refinancing “to be in the best interests of the City” and that it’s done “to achieve net present value savings or to restructure debt service payments.”
That language first appeared in the years after the 2008 stock-market crash. At the time, everyone agreed the markets were fluctuating so erratically that waiting for official approval from the alders might mean missing a chance to score lower interest rates.
That boilerplate language has stuck around in every budget since, even though most alders didn’t know it was there. The city’s bond counsel says that’s all that’s needed to bypass the legislative branch and authorize the refinancing.
Markeshia Ricks Photo
Alder Abby Roth: My bad.
“I didn’t know that. That’s completely my bad,” Downtown Alder Abby Roth said of the provision.
“The Board of Alders are the ones responsible for passing the city budget in the end,” Roth said. “I think we totally should have a say in what they’re doing. This impacts our decisions now and in the future. I think it’s critical. We represent our constituents, and no one I’ve heard from is happy. Everyone wants a say in it.”
Roth said the administration should still have to explain the debt restructuring publicly, answering questions and listening to feedback.
“They should be working constructively with the full board, walking through exactly what will happen and what the consequences are,” she said. “To do this at the last minute, rush rush, is completely irresponsible.
“We’re facing a critical situation and we need to work together to try to resolve it. We should be very open with all the taxpayers of this city.”
Several alders said there needs to be more serious consideration of a bailout from MARB, the state agency that took on Hartford’s debt after “scoop and toss” caught up with the city. In exchange for similar financial assistance, the city would have to subject its union contracts and annual budget to MARB’s veto.
“I think it underscores the need to take really seriously the option of working with the state and the Municipality Accountability Review Board,” Alder Winter said. “It wouldn’t be a painless process, but I think the facts are clear that the city now qualifies … for the state to assist us both with our operating fund and even potentially assuming some of our debts, just like they assumed all of Hartford’s outstanding debt principal. There’s no question Hartford is on better financial footing, having worked with the state, and it behooves us to take that option seriously and take it up sooner rather than later.”
Hill Alder Dolores Colon said that the city had long paid off old debt with new debt, “borrowing from Peter to pay Paul.” Dating back to DeStefano’s administration, “This is the way we do business,” she said. But she argued that the sale should still go through, as one of the only ways to raise revenue.
“We are in extreme duress. Extreme situations call for extreme actions. No one wants to owe a lot of money, but no one also wants to pay an 11 percent increase in taxes,” she said. “Sometimes we have to do difficult things that are not attractive or completely problem-solving to give us breathing room to come up with better solutions.”
East Rock Alder Anna Festa also cited the recent tax hike, but as a reason not to further burden taxpayers under even bigger debts to come.
“This short-term fix of refinancing is irresponsible with long-term negative effects,” she said. “I understand the bills need to be paid and the budget needs to be balanced, but there is obviously a spending problem if we can’t balance the budget with what funding comes into the city.”
Whatever’s scooped and tossed would eventually fall on residents, she added, and “refinancing may not be an option for them.”
Click on the links below to read other stories about the city’s structural deficit and ideas for closing it.
• Hey, Buddy, Can You Spare $30 Million?
• City Ends Policy As It Begins To Pay Off
• Mayor Open To Idea Of Fewer Top Cops
• S&P Downgrades City Credit Rating
• City Will Refinance Debt To Avoid Takeover
• Fixing the Budget: Fire Choices
• Like Hartford, New Haven “Scoops & Tosses”
"to achieve net present value savings or to restructure debt service payments"
There's no problem with achieving net present value savings, although I doubt the alders or Harp even understand PV. The problem is with the restructuring alone, when, as in this case, the PV of the debt will increase.
Overall, I am reminded of the scene in The Big Short where Mark Baum tells the stripper that she won't be able to refinance (her two mortgages each on five houses and a condo) before the teaser rates expire and her payments increase 200%. Besides, while in the long run we will all be dead anyway, even by 2027/28 Harp will be gone, so why should she care? (My elderly dad had the same attitude toward the carpenter ants that were eating his house. Me: "Dad, you need an exterminator because these ants will cause your house to collapse. Dad: "Not in my lifetime.":)