Moody’s Investor Service issued a dire warning to lenders Thursday: Hartford is likely to default on its debt by November and, if it doesn’t change course, will run up annual deficits exceeding $60 million through the next 20 years.
On Sept. 26, Moody’s downgraded the city’s bond rating, reflecting the investor service’s belief that “in the likely event of a default,” bondholders may recover as little as 65 percent of their investment.
Moody’s projects that the city’s operating deficits will reach $60 million to $80 million per year through 2036, largely driven by fixed costs, which command 23 percent of Hartford’s 2018 budget, according to a Moody’s analysis. Those fixed costs include pension contributions, benefits, insurance and debt payments.
“Revenues are not keeping up with the growth of these expenditures,” Moody’s warned, “and highlight the need for concessions from three primary stakeholders — bondholders, the state and labor unions — to achieve financial sustainability.”
The lack of a state budget has hamstrung Hartford’s attempts to maneuver itself out of fiscal crisis, Moody’s said. It believes the city will be able to pay $21 million in tax anticipation notes due Oct. 31, but warned that a default on debt could come as soon as Nov. 15, when another debt payment looms.
Hartford Mayor Luke Bronin said the Moody’s report underscores the need for “structural” change and pointed to the bipartisan budget deal announced this week by Republican and Democratic leaders in the General Assembly.
“It is my understanding that the agreement includes a framework that may allow the state to partner with the city in a sustained way,’’ he said. “That said, any adequate and sustainable solution is going to require the partnership and participation of all of our stakeholders.”
Moody’s report called Hartford’s unions “a constraint” to trimming the city’s deficit. “Contractual salary increases and employee benefits are significant contributors to the city's long term structural imbalance,” the report said. Unions would have to make “significant concessions” for Hartford to narrow those deficits, it said.
High labor costs stem from “decades of contractual salary increases and employee benefits,” Moody’s wrote, and those benefits — which include health insurance, pensions payments and workers compensation, among others — are expected to increase by $21 million in 2018. Moody’s found that benefits and insurance costs have increased 6 percent each year for the last 10 years, compared to an annual increase of just 2 percent in the urban consumer price index during the same period.
Moody’s suggested that the General Assembly craft legislation that would open up the arbitration process and allow municipalities to renegotiate contracts.
Of the three avenues Moody’s outlined — debt restructuring, increasing state aid and renegotiating labor contracts — debt payments would be “a smaller source for potential concessions” than escalating state aid or negotiating with unions, it said.
Moody’s said bondholders and city leaders discussed issuing new refunding bonds with a maturity of 30 years, rather than the previous cap of 20 years, which “would provide principal repayment in full but over a longer period.”
While that maneuver would reduce Hartford’s immediate deficits, the city would be forced to pay more interest, increasing the cost of its debt, Moody’s wrote.
Hartford Mayor Luke Bronin has said he is not interested in saddling Hartford with mounting interest for decades to come, and Moody’s said it does not expect him to take this route.
Bronin has requested $40 million from the state legislature in aid to the capital city. Nicholas Lehman, a Moody’s analyst who authored the report, said that while the money would be welcome in the short term, more needs to be done to bring the city onto firmer fiscal footing.
“If they provide funding around $40 million, what the mayor requested, that should provide short term relief,” he said. “That was to fulfill the fiscal year 2018 budget gap. That money alone, though, would not be enough for a long term solution.”
The General Assembly, which announced yesterday it has drafted a bipartisan budget, is considering a bailout for Hartford that could help the city avert bankruptcy.
Lehman said Atlantic City, N.J., once faced a financial outlook bleak as Hartford’s, but managed to fend off bankruptcy and default with a dramatic injection of state aid.
“They had a similar rating, and they were on the verge of default,” Lehman said. “But at the last minute the state stepped in, and a default was averted.”
In Hartford’s case, a default doesn’t necessarily equate to a bankruptcy filing, Lehman said.
“It’s not so cut and dry on the next step the city is going to take,” Lehman said. “Just because a city defaults on its debt doesn’t mean it’s going to declare bankruptcy. And just because it declares bankruptcy doesn’t mean it’s not going to default on its debt.”
Posts
No comments:
Post a Comment