As New Haven reckons with two recent credit downgrades, a substantial structural deficit, and a double-digit tax increase, city officials are banking on a bright light at the end of the tunnel to guide the Elm City towards future financial health.
That light? New construction.
That was the thrust of a recent presentation before the Standard & Poor’s (S&P) credit rating agency. In the presentation the Harp administration singled out the city’s building boom as a critical, positive counterbalance to recent cutbacks in municipal aid from a state that has a $5 billion projected deficit over the next two fiscal years.
The thrust signaled part of the administration’s strategy in tackling a structural long-term city deficit estimated at $30 million or more.
The pitch ultimately failed to ward off bond rating downgrades this year from two of the big three credit rating agencies, S&P and Fitch.
Although the city does not engage the third big rating agency, Moody’s, to evaluate its debt, Moody’s nevertheless published a report in August that mirrored S&P and Fitch’s concerns with the city’s recent decision to refund $160 million worth of existing debt to help cover current operating deficits and to delay debt service payments.
All three rating agencies also expressed skepticism that New Haven’s current economic strengths are sufficient to sustain city finances in the event of an economic downturn. They also were wary of just how much of the city’s economy is dependent upon major academic and medical non-profits that are by law exempt from paying property taxes on all of their real estate except that which is put to explicit commercial use.
Nevertheless, the July 18 presentation reveals a confidence in City Hall that the burst of mostly academic, medical, research, hotel, and market-rate apartment construction in the past five years represents a safeguard against future deficits.
In the pitch, officials noted that declining and expiring tax deferrals should increase the property tax revenue from existing projects by over $12 million by 2026.
Those waning tax deferrals on existing buildings could take a big chunk out of the city’s persistent $30 million structural deficit.
“It is no exaggeration to say the City is enjoying an economic boom, the likes of which I can’t remember,” Mayor Toni Harp wrote in the S&P presentation, which the Independent obtained from City Hall through a Freedom of Information Act (FOIA) request. She described a “remarkable surge of investment and job growth which continues to accelerate” as a balance to what are likely to be lasting cuts to state aid.
The presentation, which can be downloaded here, also laid out a series of proposed financial management reforms, such as the imminent development of a citywide five-year financial plan and increased employee medical and retirement contributions as part of newly negotiated union contracts. But roughly a quarter of the 32-page document is dedicated to the city’s economy.
City Economic Development Administrator Matthew Nemerson and Deputy Economic Development Director Steve Fontana, who worked closely on the economic portion of the S&P presentation and who are the City Hall employees most responsible for drawing developers’ eyes and dollars to New Haven, told the Independent that the city’s economy is uniquely positioned to flourish now and in the years ahead.
The reasons, they said, are threefold: knowledge, geography, and diversity.
Can the city’s construction boom save government’s finances? Nemerson and Fontana argued the prospects look good.
A Knowledge Center
The first slide of the economic portion of the S&P presentation indicates that New Haven has a thriving economy with a roughly 2 percent annual job growth rate in large part because it is an “education, health, high-tech, and bioscience center.”
Yale University, Yale-New Haven Health, Technolutions, SeeClickFix, Alexion, and Biohaven are just a few of the local “eds-and-meds” (education and medical) players that the city references.
The presentation notes that 39 of the state’s 52 biotech firms are located in Greater New Haven; that local organizations have received $421 million in National Institute of Health (NIH) grants; and that in 2016 the state awarded the city a $2 million “Innovation Places” grant that has thus far helped fund 16 new small businesses.
“I think that investors are saying that New Haven is a worthwhile place to invest,” Fontana said. He said the pillars of the city’s economy transcend yearly ups and downs largely because of the pillars of Yale University and the Yale-New Haven Hospital system.
“I think we have structural advantages,” he continued. “Our location is one of our structural advantages. [So is] the fact that we have two significant industries in the city that can’t relocation: the university and the hospital.”
Nemerson agreed, saying that New Haven’s economy is more resilient than that of other comparable post-industrial cities because of the “institutional core of a great university and a big hospital system and all of the ancillary businesses and foundations and others that go with it.”
He said that the city has seen an average of $400 million worth of economic development each year for the last four years, and that around 60 percent of that has come from Yale. He acknowledged that the university will likely not keep up the same fervid development pace it has gone on in recent years, when it has spent over $300 million on two new residential colleges on Prospect Street and over $120 million on a new building for the Yale School of Management (SOM) on Whitney Avenue. Nevertheless, he said, the university and the hospital have proven through their recent construction projects that they are confident in investing in their New Haven campuses.
And yet, he noted, that investment and expansion do not come without its share of financial headaches for the city. Although the local non-profit behemoths’ continued construction projects do bring in building permit fees for New Haven, all but a small percentage of explicitly commercial Yale properties owned are exempt from property taxes per the state’s constitution.
And with the state’s Payment in Lieu of Taxes (PILOT) program funded at less than 40 percent, that means that New Haven gets just a trickle of property tax reimbursement dollars for some of its most valuable real estate.
“It’s not Yale’s fault per say,” Nemerson said about New Haven’s struggles with tax-exempt real estate. “But we need to be working together to make sure that the legislature understands. Knowledge centers need to be encouraged. We can’t have an expansion of hospitals and colleges if in fact there’s nothing in it for the host community. We don’t build prisons without giving the host communities benefits.”
Yale also gives the city an annual voluntary contribution of around $8.6 million. The university increased its pledged payment to the city to just over $11 million last fiscal year to help the city close its $11 million operating deficit.
Some of the private, existing eds-and-meds companies are going to be bringing in more revenue to the city soon, Nemerson and Fontana pointed out, because of the lapsing and expiration of property tax deferral deals.
“Having completed its last re-evaluation in 2016,” one of the slides in the S&P presentation reads, “one would expect only small increased to the Grand List for the next four years. However, due to the unique timing issues centering around deferral exemptions set to both decrease and expire, New Haven is posted to reap the benefits of its investment in economic development.
In the presentation, city officials estimate that declining and expiring tax deferrals on existing and pipeline projects should add nearly $12.8 million in annual property tax revenue to city coffers by Fiscal Year 2025-2026 (FY26).
Upcoming projects with projected temporary tax deferrals include The Blake, Stamford developer Randy Salvatore’s new luxury hotel to be located at the corner of High Street and George Street; The Lofts at Audubon Square, a new superblock’s worth of market-rate apartments and commercial space at Audubon Street and Orange Street; and The Duncan, a new boutique hotel to be located at the old Hotel Duncan on Chapel Street.
Fontana and Nemerson said that by far the biggest tax deferral expiration and subsequent revenue will come from the Alexion Pharmaceuticals building at 100 College St.
The property is currently assessed at nearly $111 million. But, because of the tax deferral deal that the state and city struck with the now-halfway-departed pharmaceutical research company when it came to town in 2013, the property owners only had to pay around $125,000 each year between 2014 and 2018. This fiscal year the owners, Winstanley Enterprises, through their holding company WE 100 College Street LLC, are slated to pay closer to $140,000 in property taxes.
Over the next five years, Fontana said, property taxes should phase in at a quicker clip on 100 College Street’s owners. Once the deferral has completed expired a few years from now, the property owners will be on the hook for the full annual property tax bill, which, if calculated at FY18’s mill rate of 42.48, would be close to $4.7 million.
“There’s an accelerated amount of receipts that we get as all of these projects that we’ve been working on for the last several years start to roll off in the out years,” Fontana said. “And these are just projects that we have under contract now or have pending contracts.”
Location, Location, Location. & Transportation.
Nemerson and Fontana noted that Yale isn’t the only profitable, immovable entity nearby that helps boost New Haven’s economy. There’s also New York City.
Over the past decade, around 75 percent of all jobs between Trenton, N.J. and New Haven have been located in Manhattan or Brooklyn, according to Nemerson. He said that the Elm City benefits tremendously not just from its proximity to New York, but because of the relative public transit accessibility of the Big Apple.
“New Haven is doing well because it’s got a four-track train system that goes to New York City,” Nemerson said, “and places that don’t are going to be disadvantaged.” He said that rail transit has become all the more important in the age of the smartphone, because people can now begin and continue their workdays as they commute.
“The reason that trains are so important and the reason we have this fantasy about autonomous cars,” he said, “is that with cellphones, you can be working all of the time now. … New Haven’s actually closer to New York operationally than some people who just go there to watch a show or visit a relative think.”
Fontana pointed out that New Haven’s transportation advantages extend well beyond the Metro North and Amtrak.
“We’re one of three deep water ports in the state,” he said. “Two major interstate highways intersect here. We have three commuter rail lines now coming in from the west, the north, and the east. And we even have an airport.”
“A Complete City”
New Haven’s economic strength does not lie just in its growing knowledge sector, its proximity to New York City, its access to regional transit networks, or the timely decline of tax deferral deals, Nemerson and Fontana argued.
It also relies on all of those economic factors working in concert with the city’s arts and culture scene, its walkability, its unique neighborhoods, and its demographic diversity.
“One developer said to us, ‘We like New Haven because it’s what we consider a complete city,’” Fontana said. “By that I assume to mean that we offer, and this is something that Matthew and I and our team work very hard on, that we make New Haven a city where you can find anything, no matter who you are or what you want. You can find something for yourself, something new, a place to make your mark and fit in.”
Nemerson said that, unlike during the urban renewal period the 1950s and 1960s, many people no longer think of cities as simply places to locate businesses for suburban residents to commute to and from.
“Now the whole city is becoming a place where you can live,” he said. He said every neighborhood needs to have great restaurants, places for different generations to live, entertainment venues, and other amenities that make for a high-quality life.
He said, unlike many former industrial hubs, New Haven has successfully reinvented itself as a livable city with ready access to a diversity of jobs, housing, and amenities.
He said that, between New York and Boston, only Stamford offers anything close to what New Haven unique intersection of economic attributes.
Nemerson also said that New Haven’s commitment to social services for the poor, elderly, homeless, and other disadvantaged groups makes it that much more stable of a city.
The city “does have the ability to handle the challenges of the post-industrial world,” he said, “which does have to do with making sure that the people who over the last 40 years have been displaced from good-paying manufacturing jobs can be reconnected to society. That’s a very important part of it.”
Nemerson and Fontana said that that unique convergence of economic factors and nationwide trend towards city living is what they pitch to developers considering investing in any city between Baltimore and Boston.
Nemerson said he is currently talking with two different developers who are each considering New Haven projects in the $150 million to $250 million range. He and Fontana said that prospective developers regularly reach out to their team to learn more about the city’s redevelopment plans for Long Wharf.
“That’s what their job is,” Nemerson said about developers looking to invest tens and hundreds of millions of dollars on new properties in cities throughout the Northeast and Mid-Atlantic. “Their job is to invest that money. And our job is to get them to think about investing it here.”
The city’s presentation doesn’t touch on potential limits on a strategy that relies heavily on a continued building boom, such as the potential for booms to end, or the impact of tariffs on the price of steel.
Mohit Agrawal, the chair of the independent Financial Review and Audit Commission (FRAC), said he agrees that the city is benefiting from a construction boom. But hepointed out some of its limitations. In particular, he said, he is concerned that high property taxes, high energy costs, and crumbling infrastructure will prevent the economic surge of the building boom from benefiting all segments of society.
“Yes, New Haven in growing,” he argued, “but is the tide raising all boats? Given our budget difficulties, the city would hope to use any new tax revenue related to grand list growth simply to balance rising costs rather than to make targeted investments that will raise our quality of life.”
He said that the city’s debt service costs on a cash basis are slated to increase by over $34 million over the next several years, that health costs will continue to rise at 7 percent each year, and that the city’s pension costs should increase to around $140 million per year by 2041.
He estimated that if New Haven were able to increase its annual growth rate to 4 percent and keep it there, “we would have a good chance to grow our way out of our budget deficit. However, the more likely outcome is that grand list growth will help but not fully close the deficit.”
He said that the average annual growth rate for the city’s grand list has been 3.8 percent over the past 22 years. But over the past 5 years, that average annual growth rate has dropped to 1.9 percent.
Furthermore, he said, grand list growth can be a double-edged sword for lower-income families whose income may not rise in proportion to the increasing value of their homes or cost of their rentals.
“So voters and policy makers must think carefully about public policies that would lead to growth being shared broadly,” he said.
All three major credit rating agencies acknowledged the city’s economic strengths. They all also expressed reservations that the city’s current development boom may not be sufficient to sustain city finances in case of an economic downturn.
In their July 27 report, Fitch analysts lauded New Haven as a “regional center for higher education, healthcare, transportation and the arts.” They recognized that the city’s economy is anchored by Yale University and Yale-New Haven Hospital, which provide “stability to the economy” and continue to “attract development and investment from biotechnology, pharmaceuticals and life-science companies.”
But, the report notes, “the city’s unemployment rate remains elevated and wealth levels are well below state and national averages, as has historically been the case. Both statistics are somewhat influenced by the level of students residing in the city. The city’s 2016 poverty rate was a high 26.1 percent.”
The Fitch analysts write that new development and declining tax deferrals “should help modestly offset the need for future tax rate hikes.”
“Fitch believes the city’s ability to reduce expenses tied to its services will become limited in a future economic downturn,” the report continues.
S&P’s analysts expressed similar cautious optimism about the city’s economy in their July 25 report.
They wrote that the city has a “strong economy, with access to a broad and diverse metropolitan statistical area (MSA) and a local stabilizing institutional influence, but also a high percentage of exempt properties within its tax base, making it difficult for management to raise local-source revenues.”
The analysts warn that many people who work in New Haven live in outlying suburbs, “which limits New Haven’s ability to capture revenue from its primary economic strengths. Economic redevelopment efforts have yielded only modest increases in the city’s grand list in recent years.”
In their Aug. 21 report on New Haven finances, Moody’s analysts offered perhaps the most succinct summary of the local economy’s strengths and vulnerabilities.
“Positively,” they wrote, “the city’s tax base and local economy are strong, benefiting from the presence of Yale University (Aaa stable) and Yale New Haven Health (Aa3 stable). However, these important institutions are tax exempt and constrain the city’s ability to generate significant additional property tax revenues. Property tax revenue accounted for 43.3 percent of the city’s fiscal 2017 revenues.”
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?
• If City’s Broke, Can MARB Fix It?
• Fixing the Budget: Fire Choices
• Old Debt Plugs Old $10M Shortfall
• Police, Fire Chiefs: Overtime Budgets “Unrealistic”
• Record Bond Sale OK’d; Discipline Vowed
• Like Hartford, New Haven “Scoops & Tosses”
• S&P Downgrades City Credit Rating
• City Will Refinance Debt To Avoid Takeover
• Mayor Open To Idea Of Fewer Top Cops
• City Ends Policy As It Begins To Pay Off