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Perez: A warning “not to grow more than you need to grow.”
As New Haven prepares to announce a $7.5 million budget deficit for the just-completed year, ratings agencies delivered a unanimous verdict on the city’s financial outlook: “negative.”
That verdict comes from the three major ratings services whose views determine how much governments end up paying in interest when they borrow money.
The verdict also arrives as the city prepares to announce the final figure for its 2012 fiscal year deficit. Mayor John DeStefano said Thursday the figure will come in at or near $7.5 million, driven in large part by millions in unrealized union contract savings and in loss of federal stimulus education dollars. The city will dip into reserves to pay off the sum.
Standard & Poor’s announced its verdict on Wednesday, downgrading its financial outlook to “negative” from “stable.” Fitch Ratings did the same on Tuesday.
The third agency, Moody’s, already had done so last year. Read about that here.
However, all three agencies maintained the city’s actual credit rating, for now.
Click here to read the new Standard & Poor’s report.
The report offers a broad independent look at the city’s finances. It’s interesting for at least two reasons. First, the problems it identifies—a perilously low 1.4 percent in financial reserves, underfunded pensions, an historic reliance on one-time revenues. And second, potentially promising signs it detects in the local economy as well as in city government’s handling of financial pressures.
In other words, the ratings agencies are sending New Haven a serious warning. But by not actually downgrading the city’s credit rating yet, they enabled New Haven to avoid higher costs of borrowing and get a chance to fix some structural problems. The city remains in a stronger position than its counterparts across the country confronting lower ratings and even bankruptcy. At least for now.
Mayor John DeStefano Thursday said the report “points to the need to run a surplus in the current year” and avoid “drawing down further on reserves. ... [It also points to] the need to resolve two large outstanding contracts” with the police and fire unions. The city is seeking concessions on pension and health care costs, concerns cited by the ratings agencies. Contracts remain expired and under negotiation (or not even under active negotiation) with six of the city’s 14 labor unions.
“It makes it more urgent for everybody to come to a solution,” Board of Aldermen President Jorge Perez said of Thursday’s news.
“In my opinion, the biggest way [to get finances under control] is not to grow more than you need to grow,” Perez said. “That’s one of the reasons we [aldermen] didn’t include some of the positions the mayor wanted” approving the new $484.4 million fiscal year 2013 city budget. The aldermen rejected City Hall requests to create a new communications person at the police department and to borrow money to build a new home for Hyde School. Also, the board rejected receipt of a grant to study creation of a streetcar system because of concerns about the city’s long-term financial liability as well an immediate $90,000 match; the board’s union-backed majority reached the same conclusion on that question as did the previous board’s pro-City Hall majority.
Looking Back, Looking Ahead
Standard & Poor’s offered two main reasons for its lowered outlook: “structural fiscal imbalances in recent years, which have led to reliance on one-time revenues to balance operations” as well as “a significant draw-down expected by management in general fund reserves in fiscal year 2012, due, in part, to revenue shortfalls, as well as expenditure cuts that did not fully materialize.” In other words, City Hall will be raiding the rainy-day fund and not leaving much for the next rainy day.
The report noted that New Haven had planned to save $5.3 million on labor costs through contract negotiations. That never happened; only around $1 million was saved. Police overtime came in higher than expected, parking and building permit fees lower than expected. The city plans to end the year with a $6.4 million fund balance (money it has in reserve) after dipping into the reserves to pay off the deficit. That comes to about 1.3 percent of the budget. Ratings agencies want to see 5 percent in reserve.
The DeStefano administration had also wanted to resort to yet another sale of an asset, a long-term monetization of parking revenues, to plug a budget hole last year, a practice the agencies frown on because it fixes a problem for just one year without changing the overall condition of city finances (and can actually create bigger debts or lower revenues in the long term). Opposition among aldermen and from the public killed the scheme. The rating agencies’ repeatedly stated concerns about one-time revenues suggest that had the monetization scheme been approved, the city may not have escaped without an actual ratings downgrade this year.
The S&P report also noted that the city did stuff right. It prevented what could have been a bigger deficit, and started addressing structural problems, through a hiring freeze, emergency conservation, “stricter oversight on police and fire overtime spending, and pre-approval of all non-personnel spending,” among other measures.
Then comes the kicker, and the message in neon lights for officials for the coming year: “We believe New Haven’s financial performance remains pressured” by the need for labor concessions, including “changes to pension benefits, medical benefits, longevity, and work rules. Should the city not be successful at negotiating these concessions, it could face another structural imbalance and have to revert to the use of one-time measures or the use of reserves to close out fiscal 2013.”
“Should the city achieve structural balance in its finances without reliance on one-time revenue sources and restore general fund reserves closer to its 5% target level, the outlook may return to stable. In addition, progress towards funding the city’s pension liability could also serve as a positive credit factor,” S&P promises in the report.
The city is also laying off Board of Ed staff to get finances in order. The Board of Education ran its first deficit in years, about $4 million, the past year, the mayor noted. He attributed much of that to “expiration of stimulus funds and lack of any budget increases from city for three years.” The board responded to the situation by eliminated 130 positions, through a mix of layoffs (including some custodians) and attrition. Sixty of the eliminated positions were for teachers.