For the second time in two months, a major bond rating agency has downgraded New Haven’s rating, citing the city’s low cash reserves and high pension liabilities.
On Monday, Moody’s downgraded New Haven from A1 to A2. The bond rating agency had lowered New Haven’s “outlook” in 2011. The outlook remains “negative.”
The Moody’s move comes just two months after Fitch, another bond rating agency, lowered the city’s bond rating from A+ to A.
Both agencies offered similar reasons for the change. The city has a small general fund balance, a deficit in the current and previous fiscal years, and high fixed costs from pension obligations, according to the report from Moody’s.
Lowered bond ratings can make investors wary of trusting the city with their money and can increase the cost of borrowing money.
The city employees pension fund and the fire/police pension fund are funded at a ratio of 42.5 and 47.5 percent, respectively. The city has about $3.8 million in its “unassigned” fund balance, a figure that will drop as the city tries to pay down the existing deficit. The amount is just a fraction of the recommended fund balance level.
“A rule of thumb often used is that the fund balance should be 5 percent of the operating budget,” said city spokeswoman Anna Mariotti. “In our case with a $486m budget that would equate to roughly $24m.”
“It’s a measure of the struggles we’ve been going through,” Joe Clerkin, city budget director, said of the Moody’s downgrade. “We’re in a position of having gone through difficulties.”
He said the rating decrease moves the city from the high end of Moody’s “upper-medium band” to the middle of that band.
Fiscal year 2013 – 2014 “should be set up for a better year,” Clerkin said. “But we have to see how it goes.”
East Rock Alderman Justin Elicker, one of seven candidates for mayor, released a statement on the downgrading:
“Moody’s decision to downgrade the City’s debt is a clear result of the systematic mismanagement of our municipal finances — taking on immense amounts of debt, failing to adequately fund our pension, healthcare and insurance liabilities, and running our fund balance to dangerous lows. Continuing to raise taxes and sell city assets is not the solution. We must work to address our structural budgetary problems today, rather than passing these problems on to future generations.”