Governments use a practice known as “scoop and toss” when they’re desperate for cash. It brought Hartford to near-bankruptcy.
Now, financial analysts say, New Haven is resorting to the practice — while the mayor promises she has a plan to guard against fiscal blowback.
New Haven takes that step this week, as it refinances its debt for the seventh time in nine years, partly in order to plug a left-over $11.5 million debt from the fiscal year that just ended. Worth $160 million, this refinancing will be the largest in the city’s history.
Municipal finance experts who have studied other city and state failures, including Hartford’s, said this offering fits the definition of “scoop and toss,” a risky maneuver that has left other governments unable to catch up on mounting debt payments over the long term.
Under “scoop and toss,” mayors or governors “scoop” up debts owed for their predecessors’ borrowing, and they “toss” the new borrowing extra years away at higher cost for a successor to handle.
According to Brookings Institution’s David Wessel, Breckinridge Capital Advisors’s Adam Stern and several other analysts (who didn’t want to be identified because of their business ties to the city), New Haven’s new refinancing fits the definition of scoop and toss.
The city is taking out refunding bonds to retire debts and reduce a deficit. But the city won’t start paying down the principal on the new bonds for several years.
Think of it like an interest-only mortgage on a house. The city gets a huge discount up front while just paying interest, then owes most of the money for the actual debt on the back end. Often paying more in the end, or getting socked with possibly unpayable balloon payments.
“It’s not an ideal practice, and it’s definitely a sign of some fiscal duress,” said Adam Stern, the head of research at Breckinridge. “Unfortunately, it’s far from unprecedented.”
Those experts say that “scoop and toss” itself isn’t the problem. Instead, the issue is how politicians fit the refinancing into their budgets. Do they realign to what they can truly afford? Or do they keep City Hall open by churning old debts into new?
At a time of fiscal reckoning, New Haven will have to make those decisions: not just over how to retire deficits stacked up in current and recent budgets, but over how to tame an estimated $30 million long-term structural deficit that’s only getting worse with each new round of borrowing.
Few if any pain-free choices are available.
Pay Later. Much Later.
New Haven is planning to offer the $160 million refunding bond to investors in a sale Thursday.
The money from that sale will be used to refinance loads of existing debt that been issued within the past decade. Altogether, New Haven told its potential bond-buyers that it currently owes $755 million. (Other estimates, including by the city’s auditors, put the number slightly lower at $523 million, which might not include interest.) Other experts say New Haven has the fourth-highest bonded debt per capita in Connecticut, behind Hartford, Hamden and Stratford. The refunding bond will shift around one-fifth of it.
Most of the bonds up for a refinancing aren’t that old. A few just went on the market as recently as 2016. None of the debt that’s being taken offline goes past 2026.
“This makes sense,” Stern said. “The city needs to take out these maturities to lower its near-term debt service costs. This is definitely a ‘scoop and toss’ kind of financing.”
To get rid of those debts before their time, the city will do what’s called an “advanced refunding,” a practice that was made less advantageous under federal law this year.
The city will put close to $148 million in a “lock-box” to be invested in U.S. Treasury bonds, along with a similar amount of bonded debt. As the bonds reach their call date or mature to completion, the escrow agent will pay them off, one by one.
The Internal Revenue Service didn’t like the giving out tax breaks for cities to double their outstanding bonds, so Congressional Republicans eliminated the tax-exempt status in the tax reform law. As a result, the city will likely have to pay higher interest rates, Stern said.
“It reflects the seriousness of the financial situation, that they’re willing to pay a premium to get enough cash together,” said Mohit Agrawal, chair of the city’s independent budget watchdog, the Financial Review and Audit Commission (FRAC).
Meanwhile, as those bonds are paid off, the city’s budget will finally have some near-term wiggle room. Over the next seven years, the city is avoiding approximately $105 million in debt payments, including a $27 million break this fiscal year. The city’s preliminary bond statement issued in conjunction with this sale states that those savings will be used to compensate for the loss of state aid, cover medical self-insurance overages and replenish depleted cash reserves.
But over the following decade, the city will pay a big price for the decade-long break from the bulk of its debt service.
From 2027 to 2034, the costs just for paying back the principal will ramp up fast every year: $3.5 million, $14.2 million, $18.6 million, $24.2 million, $27.6 million, $31.8 million, $36.3 million, and, finally, $3.9 million.
In total, the city will have to come up with $160 million in principal during the bond’s second decade, plus the $96 million extra in interest before, an expense the city has to pay for bonds that are downgraded, taxable and uninsured.
Put simply, the city gets $105 million in relief for the first seven years, then turns on the pressure to find roughly $201 million it owes for the next ten years.
But those estimates will depend on how the market assesses New Haven, after its recent rating downgrades — a variable we won’t know until Thursday.
A Second $58M Deferral
In another transaction the same day, the city will also Thursday offer $58 million in general obligation bonds. That’s the normal debt that’s used to pay for capital projects: “various public improvements, and school and urban renewal projects,” as the bond statement describes them.
But unusually, the city is deferring payment on those until 2021. The bond statement also notes that the city plans to take out an additional $50 million bond in the fall.
Asked about this year’s debt issuance, City Controller Daryl Jones said he wouldn’t comment until after the bonds are sold.
“Our bond deal will go through,” he said. “It’s gone through every single year for the last 25 years. We will go through with our bond deal, I have no doubt.”
So Why Do It?
New Haven officials, like those in other cities, argue these scoop-and-toss refinancings make sense because, if you get a better interest rate than you had for your previous borrowing, you save money overall. Like how you refinance a home mortgage.
And even if you can’t get a better interest rate, spreading the debt over a longer period might help you make payments on time.
But analysts say that approach masks two problems that led Hartford to fiscal ruin.
One: The refinancing frees up cash that’s very tempting to use to pay current bills. That removes the incentive to make long-term changes that prevent that costs from recurring. Instead, the operating costs simply keep growing.
Two: Meanwhile the repayments kicked down the road for later years have ballooned. Huge payments come due for later elected officials and taxpayers.
This isn’t the first time Mayor Toni Harp’s administration has tried out scoop and toss. It issued a smaller refunding bond at $33.4 million just last year. After the state didn’t come through with all its anticipated municipal aid, the city refinanced and used the one-time cash savings to cover the regular costs of running the city.
After a year, the $31 million freed up by tossing the debt has all been spent. And so far there’s no long-term plan for paying it back.
In fact, the city’s finance team says it actually needs need more scoop-and-toss refinancing, because last year’s wasn’t enough. The just-concluded year’s budget, the teams point out, is still $11.5 million short.
Luke Bronin, the mayor of Hartford, blamed similar scoop-and-toss arrangements for nearly plunging his city into bankruptcy; its finances are now under state control as part of a $534 million bailout. Mayor Harp said she believes she can avoid a similar fate for New Haven.
“For the future [elected leaders] who have to pay the bills and the New Haven taxpayers who expect to live in the city for the next 17 years, the question is, Is this a good deal? Are they solving a short-term problem by making a long-term problem worse?” asked David Wessel, a native New Havener and former Wall Street Journal reporter who now studies this issue as a senior fellow at the Brookings Institution.
“The other question is, Compared to what? Could you possibly cut spending enough in the near term to do the equivalent? Could this be the best of bad choices?”
At a recent conference on municipal finances, Wessel interviewed Bronin about how the city government he inherited wrecked its own budget. (Click on the play arrow to watch the interview.) Bronin said scoop and toss nearly led his administration to file for bankruptcy, after the city spread out its debt without a plan for solving a structural deficit in the budget.
When Bronin was first elected in 2015, he knew the city faced challenges, he said.
“I knew that the city had done what I think were some irresponsible, short-sighted refundings that left us with a rapidly escalating debt service. I knew we were going to have some big gaps to close in the years ahead,” he said. “What I didn’t fully appreciate when I took office was just how deep in the hole we were that very first year, that the budgeting had really relied on inaccurate assumptions about revenues and expenditures, one-time revenues to a very large extent.”
At first, debt service payments were quite low, only about $10 million, compared to $30 million a couple years before. Bronin said that was because of two scoop-and-toss refinancings, a $124.6 million refunding in 2013 and a $78.1 million 2015, along with some new bond issuance.
But the bill for that spending arrived in the very first budget he prepared, when debt service payments skyrocketed up to $56 million, without any new borrowing.
“To me, those two bond transactions were just unforgivable,” he said. “That restructuring, I think, was totally unjustified because the consequences of it were so clear.”
Even though he trimmed what he could, Bronin didn’t see any way that he could cut deep enough to make up for those extra debt service charges. Eventually, the state stepped in and agreed to assume the debt.
Bronin said that the financial challenges facing Connecticut’s urban areas were real and pressing. But he added that papering them over with more debt didn’t help.
“If it’s that deeply broken, it’s not going to change. It’s only going to get worse,” he said. “Recognize that sometimes shining a bright light on a crisis, calling it out, and bringing it to a head can be the best possible thing for long-term stability. Being afraid to do that may be the worst thing.”
Jones refused to talk about the consequences Hartford faced from scooping and tossing past debt.
“I’m not comparing myself to Mayor Bronin,” he said.
“We do this every single year. There’s no new news here,” Jones went on. “The city has refunded bonds in the past, and the city will continue to refund bonds in the future, as they come up to due. This is the normal course of tools that are provided for cities around the state.”
He then said he wouldn’t answer any more questions.
He said it would take “three hours” to explain municipal bonds to a reporter. He spent the next 20 minutes saying it was too complex, before walking out of his office with a final “no comment.”
New Haven’s Way Out?
Mayor Toni Harp said in a subsequent interview that, under her watch, New Haven won’t follow the same missteps that led Hartford to near-ruin. She said that she hopes to put any savings from the bond into a cash reserve. She predicted that will help the city prepare for what’s owed on the back end.
“Because our debt-service payments are going to be low, I’m going to argue that we pay what we would normally be paying to cover our bills and also put it into a rainy-day fund,” she said. “I don’t think Hartford did that.”
While the interest rates haven’t been determined yet, the city can expect to save around $13 million annually for the next six years of the restructured debt.
If Harp’s plan is executed, stocking that away could help New Haven with its monthly financial statements. It’d be able to get its pensions invested in the stock market earlier and get payroll out to small contractors. The extra money could also help New Haven recover from recent downgrades in its credit ratings, after analysts dinged the city for not keeping a rainy day fund. That keeps a door open for the city to borrow later on at lower interest rates.
Harp added that the fund can’t be built up without the bonds, because the city just doesn’t have enough cash on hand. The other levers to generate money — cutting expenses like laying off teachers and closing schools, bumping revenues like increasing property taxes or taxing the hospital directly — just don’t seem to be doing enough, she said.
Mayor Harp said that a refinancing strategy will be difficult to carry out, with city agencies wanting to expand the vital work they do, taxpayers begging for relief from the rising mill rate, and unexpected emergencies sucking up available cash. She said it will take “discipline” to carry out.
“You’ve got to be conservative about the way you handle the dollars. And you’ve got to — I can’t overemphasize this — build up the rainy day fund,” Harp said. “We should put as much of the money as we can into the rainy day fund so that we are building our savings. Every year after that, we put a certain portion so that we’re not taking the savings and adding more staff, but using the savings to build up a real account so that when we run into another downturn or need money to pay off at the other end of this, we’ll have money.”
Wessel said he understands the dilemma that the mayor is in.
“If you have a choice to lay off 20 percent of the police force or spread out debt payments, it might make sense to take the debt: ‘We have to do something; I can’t cut current expenses or raise taxes enough to solve problems,’” Wessel said.
“But the problem here is that, if you’re basically in trouble because you’re spending more than you take in, because of big structural problems, whether that’s too much tax-exempt property or too many employees, it’s not enough growth.
“You’re not solving the problem. [You’re] just making it easier to live with the bad situation you’re in.”
Before Harp took office, the city had usually done the typical refinancings, aiming to get up-front cash and a lower interest rate over the extended life of the bonds.
In 2013, for example, the DeStefano administration called $27.4 million in bonds that had mostly been issued in 2003, at interest rates as high as 5.25 percent. With a new issue at slightly lower rates, the debt spread out until 2023, saving $1.1 million on interest in the process.
After Harp’s election, the priorities seemed to change. The city was willing to refinance bonds not just to get a better deal on interest rates, but also to free up money in the general fund. That meant scooping and tossing, even when it would cost the city more in the long run.
In 2014, Harp’s first time on the bond market as mayor, her administration took $78.9 million in existing debt, much of it callable within the next three years, and pushed it back. It scheduled six years without paying down the principal. Then, everything would come due in a few lump sums, including a massive $23.3 million payment in 2024. Altogether, that refinancing cost the city $3.4 million in higher interest rates.
Controller Jones talked up that refinancing at a press conference two months later, as the Harp administration celebrated closing the books with a $4.7 million surplus.
The administration had finished their first months in the black, in part, Jones said, because the refinancing had saved $14.5 million. That was true for the bond’s first year, before the decade-long bill would come due. Jones said the money covered a shortfall in the city’s self-insurance funds for medical expenses and litigation settlements. The administration also put six-figure leftovers toward the rainy-day fund.
Some cautioned the mayor to take advantage of the one-time savings to make major changes in the city’s budget.
“You can do only so much refinancing. You can only sell so much property. We need to stay focused on the structural issues,” said Jorge Perez, then president of the Board of Alders. FRAC, likewise, warned that the city would ultimately have to pay for the “front-loaded” savings from this refinancing.
Harp said she’d commit to “sustainable” long-term measures, like bolstering the pension funds, doing multi-year financial planning, following through on “promising economic development projects,” and continuing to pare down department budgets.
But the Harp administration would aggressively refinance bonds again in the following years. The mayor said those decision had been necessary.
“When I came in, we had very little money in our rainy-day fund. Then, when the state runs into its problems, we don’t have any other place to go,” she said. “We’re stuck.”
In many cases, it actually did save the city money. In 2015, Jones gave himself a $5 million break up front from on debt service, but he also saved $2.5 million in interest overall on a $53.4 million refinancing over 13 years. Repeat in 2016, when Jones got a major $9.3 million debt savings overall by spreading a $77.7 million refinancing over 20 years.
But last year, three months before facing voters at the ballot, the Harp administration was back to scooping and tossing that would weaken the city’s long-term finances.
When the state failed to produce a budget, leaving New Haven in the lurch, Jones stuck a shovel into that year’s debt payment. He scooped out a $31.6 million payment coming due and tossed it a decade away. In 2026 and 2027, the city will be hit back-to-back with $13.3 million and $12.1 million payments, respectively. And that’s just to pay back the principal for this one-time relief, excluding interest. Overall, with interest totaling up in the meantime, the city lost $9.2 million in the transaction.
Jones said that the up-front savings would amount to only $170,000 in the first year, which was far from true. Indeed, the following month, the Harp administration would soon plug $31 million right into the monthly financials, directing $18.4 million into a special “revenue initiative” and $9 million into the medical self-insurance account from the bond refinancing.
Across the four completed fiscal years that Harp’s been in office, the city’s debt load has shot up by $79 million, an 11.6 percent increase.
Of course, that’s not because the city’s coffers are lined with cash. For comparison, the general fund has increased by only $31 million, a 6 percent increase, during the same four-year period.
Yet even as the debt outpaces the budget, the city is actually putting far less money towards paying back what it owes. Debt service in this year’s budget amounts to only $58.6 million, about 11 percent of total expenditures, while the city was budgeting $70.4 million, about 14 percent, in Harp’s first approved budget.
That reprieve won’t last for long — unless the Harp administration manages yet another scoop and toss. As the payments from his original 2014 refinancing approach, Jones is hoping to pull off a broad restructuring of the city’s obligations, issuing a bond of an unprecedented size.
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?
• Fixing the Budget: Fire Choices
• 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