Top 10 of 2017: #3 – Budget Woes Grow With Debt, a Downgrade and Frozen Education Support
Many important stories have been covered by the New Britain Progressive in 2017. It may be difficult to name only a few articles as the top stories of the year, but there are a few the New Britain Progressive would like to share as our Top Ten. Other Top Ten stories can be found at “Top Ten Stories of 2017.”
Republican Mayor Erin Stewart’s budget policies came under increasing scrutiny in 2017. Stewart has long claimed financial competence as a hallmark of her administration, but closer analysis showed that Stewart actually pushed millions of dollars of debt into the future, at an increased cost to taxpayers in the long run (“City Hall Watch: Deferring Municipal Debt Payment Means Cash Now, Higher Interest Next Year“). City Democrats were quick to highlight this in their campaign against her and other Republicans. And, the New Britain Progressive reported that Stewart’s most recent budget plan apparently contained at least $15 million in one time revenue that raised concerns about additional future budget deficits (“$15.5 Million Deficit Appears Hidden in Stewart’s Budget“). Stewart’s dismissal of the Democrats’ critique as mere politics took a hit when a major credit rating agency downgraded its assessment of New Britain, citing similar concerns to those raised by Democrats (“New Britain’s Bond Rating Drops From Stable To Negative: Huge Spike In Debt Through 2021 Cited By Moody’s“).
The New Britain Progressive also reported that Stewart’s budgeting had not significantly increased education funding, and not at all in 2017, but had substantially increased City Hall spending (“Stewart Proposes Freeze on City Education Support, Increase in City Hall Spending“). The Progressive also reported that spending increases during her administration had expended essentially all of the substantially increased taxes she had imposed.
With the new, Democratic-led City Council already examining the budget impacts of Stewart’s borrowing-driven budgeting (“Council Leader Calls Special Meeting for Presentation From City’s New Borrowing Consultant“), this appears be shaping up as a continuing story into 2018. The importance of this, not just during 2017, but for the city’s long-term makes this the #3 story on the New Britain Progressive’s Top 10 of 2017.
City Hall Watch: Deferring Municipal Debt Payment Means Cash Now, Higher Interest Next Year
February 10, 2017
Opinion
By John McNamara
The Stewart administration is shifting $6 million from a scheduled payment on the city’s rising municipal debt— creating an election year windfall to avert yet another tax increase. The Common Council approved what representatives of William Blair & Company, the city’s bond counsel, called a “re-structuring” of a $28 million bond at a special meeting on January 11th.
Expect Mayor Stewart to trumpet a “savings” to avert her third property tax hike or claim a hefty boost to the city’s “rainy day fund” as municipal budget talks get underway in a few weeks.
But using the city’s credit card to increase cash flow in the current fiscal year is hardly a savings or proof of Stewart’s fiscal prudence. It obligates the city to shell out more to bond holders in the out years. Pushing debt obligations to 2018 and beyond guarantees all the borrowed money (short and long-term debt for capital projects and allowable expenses) will come with considerably higher interest rates.
“We’ve been seeing the rates increasing from last year,” William Blair’s Richard Thivierge told the Common Council. “Some debt rates have gone up 60 to 80 basis points.”
Ward 5 Alderman Carlo Carlozzi, who extensively questioned bond counsel along with Alderman Manny Sanchez on January 11, expressed some frustration on the new deal with creditors which will lower the payment this year from $28,315,000 to $21, 600,000. “The city always seems to be restructuring its debt.” Carlozzi said, wondering out loud if moving the debt was kicking the can down the road at higher interest rates.
Bond counsel representatives explained that the city is not re-financing — which is usually done to get lower rates — but is deferring the debt a portion of which stems from borrowing in Stewart’s first two terms. Because of the city’s “high debt base” Thivierge said the city needs to “levelize” its debt service by slowing down its payments. Always the obliging middle man in extending the debt, Thivierge called it “budgetary prudence.” In political terms that’s a euphemism for not having to raise taxes or cut services in an election year. Pressed by Carlozzi’s questions, the Mayor, Finance Director Lori Granato and Bond Counsel tacitly acknowledged the city could pay down its debt at a lower interest rate this year, but that the extra $6 million will be needed in the next budget after July 1.
Obligating the city to pay more for debt at the start of 2017 stems from structural factors that cash-strapped cities face. New Britain, according to the state Office of Policy and Management (OPM), is the slowest growing grand list in the state with 97% of the land developed and a considerable amount of real property owned by the state or nonprofit institutions. This inelastic tax base, reliance on the property tax and dependence on state aid that this year exceeds $100 million makes the current system unsustainable no matter who is mayor or serves on the Common Council. All of this is why the bond lenders hold cities in a cycle of borrowing for needed capital improvements not favorable to fiscal stability and residents. Raising taxes is good. Cutting services is better. Selling off municipal assets (such as watershed) is even better for improving your bond rating and pleasing the lenders on Wall Street.
The situation has been made worse in New Britain by “structural deficits” first identified by Mayor Tim O’Brien when he took office in 2011 and quickly acknowledged by Erin Stewart when she succeeded O’Brien despite her politicking that the budget mess was created entirely by O’Brien in one term.
Both mayors pointed to the four terms of former Mayor Tim Stewart who, with the acquiescence of Democratic common councils between 2003 and 2010, relied on one-time fixes and phantom sales of land. With increases in spending and freezing the tax rate year after year during the first Mayor Stewart’s terms, a financial hole was created that the city is still climbing out of.
“We had an issue a few years back when someone came into office and said there were structural problems in the budget,” said Carlozzi at the bond authorization meeting, alluding to former Mayor O’Brien sounding the alarm more than five years ago. “That person was heavily criticized. We now have heard for the last three years that we have structural issues with the budget. That individual was correct.”
As Alderman Carlozzi made clear at the Council meeting paying off your credit card debt sooner rather than later would be a good thing. In 2017, however, the restructuring of debt is a way to paint a hunky-dory financial picture that relies on the city’s mountain of debt getting higher. What is especially misleading is the “rainy day” or “tax stabilization” fund being counted in the millions of dollars. Implying that the surplus stems from more efficiencies and prudent fiscal management as Stewart boasts is false. It is based almost entirely on restructuring borrowed money and a 2014 property tax increase — the largest in city history.
The bottom line is that in a municipal election year all that glitters is not gold when it comes to city finances. Bond authorizations cannot be used to meet current operations only capital improvements. But in New Britain and other financially struggling cities increasing debt costs for ready cash carries a heavy price tag due and payable sooner rather than later.
This column was originally posted on NBPoliticus.
Stewart Proposes Freeze on City Education Support, Increase in City Hall Spending
April 20, 2017
Republican Mayor Erin Stewart’s proposed budget for the fiscal year beginning July 1st would freeze city support for New Britain’s schools while increasing overall city spending and pushing taxpayer debt into the future.
Stewart’s General Fund budget proposal would increase city General Fund spending by $2,167,486 to a total of $241,537,535. Funding for the New Britain school district would remain frozen at the current level $125,700,000.
Earlier this year, the Board of Education, in its first year under Republican leadership, requested what the school district said was the lowest requested increase in city school funding in many years. But Stewart’s proposed budget provides $1,066,706 less than what the school system had requested.
The combined expenses, under Stewart’s proposed budget, of the city’s General Fund, Water fund, Sewer fund, Stanley Golf Course fund and Fairview Cemetery fund, corrected for transfers between these special funds and the General Fund, would be $266,869,431 for the 2017-2018 budget year, $22,928,649 higher, under Stewart’s administration, than it was in fiscal year 2014. In that same time, Stewart’s budgets have increased city support for New Britain’s schools by $2,500,000.
Stewart touted her proposed budget for 2017-2018 as a “no tax increase” budget. The budget proposal, would maintain the 50.50 mill rate from last year. The current proposal would mean that property taxes (current taxes) under her administration will have increased by $19,231,280 since fiscal year 2014, a 19% increase.
In February, Stewart was criticized for borrowing $28 million in order to push payments on the city’s debt from the current year into the future. Her 2017-2018 budget proposal would reduce the city’s payments on its debts in the upcoming budget year by $5,941,294, the same amount that was predicted when the Republican-dominated City Council approved Stewart’s controversial $28 million in taxpayer borrowing. Ald. Manny Sanchez (D-3) is asking questions about the city borrowing, and has submitted an official petition that there be a report to “the Common Council with the refunding efficiency on the most recent refunding transaction, as well as, all other refunding transactions since January 1, 2013.”
Stewart said that, “With this budget proposal, we are truly ‘Leading the Way’ in setting an example for other communities and for future budgets.”
A public hearing on Stewart’s proposal will be held on April 25 at 7:00 pm at Smalley Elementary School.
$15.5 Million Deficit Appears Hidden in Stewart’s Budget
May 22, 2017
The city budget proposed by Republican Mayor Erin Stewart has what appears to have a hidden $15,541,294 deficit built into it, a deficit that could continue to re-appear into future budget years.
Stewart’s budget contains two substantial budget lines that are based on short-term assumptions. The first, as the New Britain Progressive reported in April, is the $5,941,294 reduction in the city’s payments on its debts. Stewart has been criticized for borrowing $28 million in order to push payments on the city’s debt from the current year into the future. Her 2017-2018 budget proposal would reduce the city’s payments on its debts in the upcoming budget year by $5,941,294.
But that $5,941,294 reduction in expenditure would be a temporary, rather than a permanent cut, leaving a potential $5,941,294 deficit in future year’s budgets.
Stewart’s 2017-18 budget also relies on $9,600,000 in “Prior Year Surplus” money. The $9,600,000 would effectively be taken against the amount of money in the city fund balance, which is the year-to-year net assets of the city’s General Fund.
Stewart’s 2016-17 budget, the current year budget, also relied on “Prior Year Surplus” money. In that case, $10,000,000 from the 2015-16 budget. However, that $10,000,000 was not shown to be realized revenue in the documentation contained in Stewart’s proposed 2017-18 budget.
Even if the $10,000,000 in budget surplus assumed in Stewart’s 2016-17 budget is fully realized and, for a second successive year, the $9,600,000 she assumes in the upcoming 2017-18 budget year is realized, that $9,600,000 would a one-time amount. If spent, that one-time amount would not be available for future, leaving a potential $9,600,000 deficit in future year’s budgets
The $5,941,294 in temporary debt service reduction and the $9,600,000 use of assumed surplus from previous years appears that it may leave a $15,541,294 systematic deficit embedded in Stewart’s proposed budget.
New Britain’s Bond Rating Drops From Stable To Negative: Huge Spike In Debt Through 2021 Cited By Moody’s
November 4, 2017
Opinion
By John McNamara
Contributing Columnist
Republican incumbent Mayor Erin Stewart, in her re-election campaign this year and throughout her second term, has touted improving municipal bond ratings for New Britain’s fiscal solvency, claiming credit for budget surpluses of $15 million and pushing spending up at City Hall with no need for an election year tax increase.
Fiscal stability is the cornerstone of her platform and a main talking point in her aspirations to leave the mayor’s job for statewide office. Her campaign’s website points to New Britain “gracing the cover of the Bond Buyer,” a trade publication covering the municipal bond market, “not once but twice. The city under her management is a shining example for how to make a financial turnaround work during a difficult economy.”
The November 2nd edition of Bond Buyer, however, paints a different picture for the city’s finances in the latest analysis, portending a difficult road ahead for the city’s budget over the next four years. Moody’s Investor Services, which along with Standard & Poor’s, assesses the borrowing ability and fiscal health of cities in the municipal bond market, has downgraded general obligation borrowing to Baa2 from Baa1. “Moody’s cited New Britain’s reliance on nonrecurring revenues to stabilize its financial position in recent years. The rating agency also revised its outlook on the 73,000-population city to negative from stable,” Bond Buyer’s Paul Burton reported. “The rating also incorporates the city’s elevated debt profile with rapidly escalating debt service and its modest pension liability,’ the rating agency said Tuesday.”
In contrast to Moody’s downgrade four months into the 2018 fiscal year, Standard & Poor’s has previously affirmed a more favorable A-plus rating for New Britain after upgrading the city four notches through two upgrades. Moody’s last assessment came in 2014.
According to the Bond Buyer story:
Moody’s said the negative outlook reflects the short-term challenge New Britain will face to match recurring revenues with recurring expenditures while managing its debt service pegged to spike through fiscal 2021. New Britain, said Moody’s, could earn an upgrade through a sustained trend of structurally balanced operations without one-shots, a material reduction in debt burden, growth in its tax base or an improved resident wealth and income profile. By contrast, continuing reliance on nonrecurring revenues, erosion of its financial position, taking on more debt or deterioration of New Britain’s tax base or wealth profile could lead to a downgrade.
