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As Hartford Mayor Luke Bronin and city councilors work this month to cement a budget for fiscal 2017, they won't have access to a key tool leaders have used in recent years to generate cash and plug deficits.
In two major transactions in 2013 and 2015, the city restructured approximately $200 million worth of debt, increasing cash flow by as much as $99 million between fiscal years 2014 and 2017 and reducing the city's annual debt payments by more than $12 million in the current fiscal year, according to credit analyst Moody's.
The restructuring provided Hartford short-term budget relief, but the effects are starting to wear off, and both city officials and credit analysts say it's unlikely city government could refinance its debt again in the short term.
That's leaving Hartford with little wiggle room to deal with annual debt payments projected to rise steadily over the next five fiscal years, peaking in 2021 at $56 million (likely more, depending on borrowing activity before then).
“There have been a few rounds of debt restructuring that kept costs down at the time, but pushed the costs out into the future,” Bronin said. “There's really no ability to restructure the city's debt again without costing the city money over the long term and creating an even bigger problem.”
In the coming fiscal year, Bronin's proposed budget projects debt service will rise to $30.1 million, nearly triple the actual amount paid in 2016, a year that benefitted from the restructuring.
Included in next year's debt service is a $1.4 million contingency related to construction of the Dunkin' Donuts minor league baseball stadium.
The mounting debt wave is a major factor contributing to Hartford's fiscal crisis, which includes deficits projected as high as $79 million in 2021.
To deal with next year's $48.5 million budget gap, Bronin is asking for millions in concessions from labor unions and proposing dozens of city employee layoffs and other major cuts to services. He's also planning to drain the city's reserves.
Even if those remedies gain city council approval, however, Bronin said Hartford's long-term fiscal picture is so dire it will require state assistance. What that means exactly isn't clear, but the first-year mayor has already asked the General Assembly to authorize a financial oversight commission that would give the city more power to renegotiate union contracts. The legislation appears dead, but Bronin may be back before lawmakers as soon as next year asking for help.
Bankruptcy, while not being talked about as a short-term option, hasn't been ruled out entirely.
While restructuring has helped city leaders buy some time, it has its downsides. Refinancing can lower interest rates and short-term payments, but it can constrain long-term fiscal flexibility by stacking up larger payments in later years. Depending on the transaction, it can also create higher costs over the life of the debt.
In addition, credit agencies look down on restructuring, which can lead to credit downgrades and higher borrowing costs. Moody's, which has downgraded the city's credit rating several times since 2014, including last month, criticized Hartford's past debt restructuring, calling it “indicative of financial strain.”
Hartford City Treasurer Adam Cloud declined comment for this story.
Meantime, the city's long-term debt has also increased, drawing further concerns from credit-rating agencies. Last month, Moody's pegged Hartford's debt at $585 million for 2015, up 52 percent since 2011.
The debt is equivalent to nearly 9 percent of the value of all taxable property in the city, up from 5 percent in 2011, Moody's said. The median debt-to-value ratio for cities with similar credit ratings to Hartford (“Baa”) is less than 3 percent, according to Moody's.
Moody's noted that the heavy presence of tax-exempt state and nonprofit properties skews Hartford's debt-to-value ratio higher.
Bronin's proposed budget doesn't borrow money in fiscal 2017 and pares the city's five-year capital projects budget from $110 million to $48 million. He has indicated, however, that he will support borrowing as much as $50 million over a two-year period “to meet basic city infrastructure and school construction needs.”
Debt is just one factor contributing to Hartford's rising projected deficits.
Another is pension contributions, which currently cost the city about $40 million per year and are slated to rise 25 percent over the next five years, partly due to rising overtime costs.
Health insurance costs are also rising.
Even if the city council approves Bronin's proposed budget cuts for the coming fiscal year, the city would still face a $34 million deficit in fiscal year 2018, and even higher deficits in the out years.
Bronin said the city is facing a “perfect fiscal storm.”
“We're a small city with a limited tax base, rising fixed costs, few properties left to sell, and no ability to restructure debt yet again,” he said. “And we can't raise the mill rate any higher if we want to promote growth and investment.”
One silver lining, though it won't help in 2017, is a five-year property revaluation taking place later this year, which analysts say could boost commercial values, generating additional property tax revenues.
Hartford's bond ratings, while they've taken their knocks, are still considered investment grade by both Standard & Poor's and Moody's, but the city could face further downgrades if it doesn't close its deficits.
One positive aspect that's regularly cited by S&P and Moody's is the “stabilizing presence” of state government in Hartford's backyard.
Though neither ratings company states it directly, it may hint at the notion that the legislature, should Hartford truly face insolvency down the road, may opt to bail out its Capital City.
Moody's analyst Robert Azrin said the city also has options to raise taxes, something Bronin has been firmly against.
”We're saying we think there are tools here to address [the deficits],” Azrin said. “Then it's a question of willingness.”
Deficits aren’t new for the city, but officials have managed to close them over the years through a combination of layoffs, cuts, and one-time revenue sources.
Some of those one-time revenue sources have included:
• The sale of the Church Street garage, which provided more than $14 million to close the fiscal year 2015 deficit.
• The city used nearly $17 million in education health benefits reserves to balance the budget this year and last.
• The city dipped into its rainy day fund to close a gap in 2014, and Bronin has proposed emptying the remaining $21.5 million reserve to close this year’s $10 million hole as well as part of next year’s budget gap.
• The city saved $2.6 million in the current year budget by choosing to delay a revision to its pension mortality table, which would increase obligations.
• The fiscal 2015 budget benefited from an extension of the city’s pension schedule by 10 years to create near-term budgetary savings.
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