Hamden’s Christmas Gift: Bond Rating Drop

After a year of political battle over Hamden’s finances, Moody’s presented Hamden with a metaphorical lump of coal in its fiscal stocking last week: a downgraded bond rating that places the town among the state’s 3 lowest-rated municipalities.

Moody’s downgraded Hamden’s rating from Baa2 to Baa3 on its general obligation bonds, as first reported by the New Haven Register’s Clare Dignan.

Then, on Dec. 17, Fitch Ratings changed Hamden’s outlook to negative, though it affirmed its rating of BBB+. A bond rating indicates to investors the financial position of a municipality and how likely it is to pay back its debts. A low bond rating generally means that investors will charge higher interest rates on bonds.

“The downgrade to Baa3 reflects the town’s very narrow financial position, which will remain challenged in coming years due to a high equalized tax rate and high, and rising, fixed costs,” Analyst Lauren Von Bargen wrote in a press release dated Dec. 10. ​“The town’s long-term liabilities are high, largely due to years of under-funding pension liabilities, including in fiscal 2019. The rating also incorporates the town’s stable tax base, benefitting from the presence of Quinnipiac University and ongoing development projects.”

Only two other municipalities in the state have ratings as low as Hamden’s. West Haven also has a Moody’s bond rating of Baa3. Hartford, at the bottom of the list, has a rating of B1. Both Hartford and West Haven are under review by the Connecticut Municipal Accountability Review Board (MARB), the state agency that takes over the books when municipalities go into the red.

According to a Fitch Ratings press release, Fitch changed Hamden’s outlook to negative because of ​“uncertainty regarding the town’s ability to absorb higher scheduled debt service costs and the ramp-up to full funding of the pension.”

Moody’s also gave Hamden a negative rating outlook. A negative outlook reflects Moody’s’ opinion about the direction of a bond rating in the medium term. ​“The negative outlook reflects the town’s ongoing fiscal challenges including rising pension contributions, escalating debt service schedule and very narrow reserves,” the release states. ​“While the town is taking steps to increase pension contributions, the low-funded ratio exacerbates depletion risk of the plan.”

The decrease brings Hamden to the lowest investment-grade bond-rating level. An investment-grade bond rating indicates to investors that a municipality has at least acceptable credit quality. That is, it indicates that buying a bond from Hamden is relatively low-risk and that Hamden will likely pay it back, in full, on time. Should Hamden’s bond rating decrease any further, that would bring the town into the speculative-grade quality region. A speculative-grade rating would indicate a risk of default, and would prompt investors to charge higher interest rates.

The release states that in order to get an upgrade, the town must ​“sustainably balance financial operations” and fully fund its pension, improve financial reserves, and reduce long-term liabilities.

If the town sees a reduction in its reserves, increases its debt or pension liabilities, or does not fully fund the pension in 2021, that will lead to a downgrade, the report says.

“It’s obviously disappointing to have a downgrade in the grading, but it was not entirely unexpected given that we have not completed the things that we have been working toward,” Mayor Curt Leng told the Independent. He said the agencies are waiting for the town’s 2019 audit and its pension actuarial valuation and for the town to fully fund its pension, all of which is on the way.

According to a Moody’s credit opinion, Hamden has $309 million worth of direct debt, of which $118 million is from a pension obligation bond issued in 2015. An audit on the 2018 fiscal year, which came out this summer, reported that in total, the town had $1.2 billion in net liabilities. With assets totaling $309 million, that brought the town’s net fiscal position to negative $888 million.

The Moody’s credit opinion cites Hamden’s stable $5.7 million tax base, Quinnipiac University, and relatively high resident median income as considerations that weigh in the town’s favor. It also outlines a number of cost saving efforts that the town has taken, such as switching employees to Health Savings Accounts.

However, the town’s high debt and pension obligations put the town in a precarious fiscal position, the opinion says. Hamden’s fund balance currently hovers a little over $1 million. ​“The town has historically operated with very narrow fund balance and cash positions, but high fixed costs and rising expenditures will continue to pressure the town’s ability to maintain structural balance and ultimately increase reserves,” the opinion states.

As of 2018, Hamden had $457 million in net pension liabilities, 40 percent of which was funded. The pension remains about 40 percent funded, though a more up-to-date long-term liability estimate is not yet available. In the 2020 fiscal year, the town will pay $19 million into the pension — 85 percent of its actuarially required contribution (ARC), which is the amount it must pay annually to be on track to full funding. In 2021, state law requires the town to pay 100 percent of ARC.

The Moody’s opinion states that Hamden ​“is on track to fully fund ARC in fiscal 2021; inability to do so will indicate increased fiscal strain and will result in negative credit pressure.”

General obligation debt will also likely increase. The town’s 2020-fiscal-year budget includes a payment of around $17.9 million in debt. Moody’s projects that, based on the town’s debt service schedule, that payment will increase to $28 million by 2023.

The Moody’s opinion focused mostly on the 2018 fiscal year. As it details, it was an abnormally bad year for the town partly because of an unexpected cut in state funding. The town had to decrease its pension payment by about $5 million and sweep millions of dollars in bonded funds from capital projects to close the books.

The 2019 fiscal year, said Leng, has featured no such ​“unusual and extraordinary actions.” He said the town is on track to close out the budget with a small surplus, and without using any bonded funds for operating expenses. He said the 2020 fiscal year has gone very well, and that he’s confident that the town will fund 100 percent of ARC in 2021.

However, he said, those positive trends were not reflected in the ratings because they have not yet been proven.

“In our conversations [with the rating agencies], they were pleased with the direction we are going but they needed to see the fiscal 19 close the way we believe it is going to,” said Leng. He said they need to see the 2019 audit and the 2019 pension actuarial valuation, both of which he said are on track to be completed by the end of the month.

“It is somewhat frustrating and confusing that you get a downgrade when you have these different positives,” he said. But ​“they need to see those next steps and that’s their process.”

Once the audits are in and the 2019 budget has officially closed, he said, it’s possible that Hamden’s ratings could change again, for the better.