Tag Archives: Restructuring

Reporting

Hartford’s Taxable Debt

Municipal bonds are usually tax-exempt. This is an advantage for cities, as interest rates are lower on tax-exempt bonds.

The last two debt issues by the City of Hartford have included a portion of the overall borrowing that did not qualify for tax-exempt treatment, raising the overall cost of borrowing.

The Hartford Stadium Authority issued taxable bonds to fund the construction of the non-public portions of the ballpark. The City itself issued taxable bonds in the July 2015 restructuring used to balance the current year budget.

Treasurer Adam Cloud stated that the City’s debt can only be refunded once with tax-exempt bonds. Subsequent refundings (of the same debt) are required to be taxable.

Hartford has refunded a lot of bonds in recent debt restructuring efforts. The total is $272.5 million in 6 issues since 2009, of which $240.8 million is outstanding. Refunding bonds represent over 58% of the City’s total outstanding debt. As a point of comparison, refunding bonds represented just 20% of the City’s outstanding debt as of June 30, 2012.

How do the maturities of the Refunding bonds compare to the Original issue bonds?

The City’s debt profile can be separated into refunding issues and original issues. In the chart below, the original issues are shown in blue on the bottom. Refunding issues are shown stacked on top in red. For both series, the darker portions of the bar represent scheduled principal payments and the lighter portion represents scheduled interest payments.

2015-07-23 July 15 2015 Original vs Refunding

Each column represents the scheduled debt payment for a fiscal year. The dark blue section with the thick border at the bottom of each column represents the portion of that year’s obligation that could be restructured using tax-exempt debt.

There are virtually no original issue principal payments due through fiscal 2020 that could be restructured using tax-exempt debt.

It is important to note that scheduled interest payments can’t be restructured away. If interest rates are favorable, then interest payments can be reduced by refinancing to a lower rate. Both postponing principal payments into the future, and accepting higher interest rates, will cause near-term interest expenses to increase.

How much higher is the taxable interest rate?

The July 2015 issue included both taxable and tax-exempt bonds. Plotting the market interest rates from the Official Statement allows a rough yield curve to be drawn, comparing interest rates based on maturity and tax classification.

July 2015 Yield Curves

The market charged Hartford a 1.0% higher interest rate on the taxable debt than on the tax-exempt debt.

If Treasurer Cloud’s statement is accurate (and complete), then the sharp increase in refunded debt over the past 3 years has important implications.

The City has very little near-term debt that can be restructured with tax-exempt bonds. And the financial markets charge meaningfully higher interest rates for taxable bonds compared to tax-exempt bonds.

Future debt restructurings will be much more expensive for Hartford than they have been in the recent past.

Reporting

July 2015 Debt Restructuring

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The City of Hartford began the 2015-2016 fiscal year with a $78.06 million debt issue intended to help balance the current year budget by deferring payments.

The chart below compares the scheduled debt payments before and after the restructuring. The City’s projected debt profile as of June 30, 2015 is shown in the rear in green. On top of that series, the purple bars show the City’s new debt profile after the restructuring.

Columns with green tops represent reductions in scheduled debt service payments. Columns with purple tops represent increases in scheduled debt service payments.

2015-07-22 July 2015 Bond Issue

The primary goal of the restructuring was to dramatically lower debt service payments in fiscal 2016 and 2017. The Hartford Citizen model shows cash savings of over $15 million and $16 million for the two years, respectively. Cash savings are projected to be more modest in fiscal 2018 – 2020. Again, the green tops on the bars represent savings.

In exchange for reducing the near-term debt service, the City took on additional payments of between $4 million and $6 million in each year from 2021 through 2034. Those are the bars with purple tops in the chart. The change to 2035 was negligible, and no debt was added for fiscal 2036.

Note that the Hartford Stadium Authority’s debt has not been included in this calculation. The Stadium Authority is structured as a financial pass-through, where the City makes lease payments that exactly match the Authority’s debt payments. The City will be required to pay an additional $4.26 million per year in lease payments from 2017 through 2042.

$20.8 million of the $78 million in debt raised in July 2015 was issued as taxable bonds. When asked why the bonds didn’t qualify for tax-exempt status, City Treasurer Adam Cloud stated that IRS tax law only allows tax-exempt bonds to be refinanced one time with tax-exempt bonds. Further refinancings are required to be done with taxable debt.

The July 2015 debt restructuring provided the City of Hartford financial relief in fiscal 2016 and fiscal 2017. At the same time, it continued a recent trend of postponing debt, and highlighted an additional cost for future restructuring efforts.

Commentary

Three Phases: A Restructuring Framework

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Hartford’s financial condition has gotten to the point where it cannot be fixed in a single budget cycle. Breaking the process into phases will give the City a better chance at success.

Restructuring will require collaboration between all stakeholders; the Administration, the City Treasurer, the City Council, City employees, the State, the business community, the non-profit community, and the residents. Presumably there are others that have been left off this list; they should be included too.

It is not a process than can, or should, be handled quietly in back rooms and then presented in final form.

Phase 1: Develop Goals and Strategy

Once the community commits to making difficult changes, the first step will be to develop goals and a strategy. All stakeholders need to be involved in the conversation. There must be an extensive public discussion.

Practical concerns seem most pressing. Can Hartford find a balance between revenue, operating expenses, and long-term liabilities?

Philosophical concerns are also important, given the City’s limited resources. How much should the municipal government try to accomplish? How should municipal objectives be prioritized?

Phase 2: Implement Expense Reductions

Reducing expenses first is more conservative than trying to do everything at once. Even the most well thought out plans involve estimates. The City needs to know how effective the expense reduction initiatives will actually be before adjusting the revenues.

It could take years to fully implement the expense reduction ideas, as agreements will likely need to be negotiated with the employee unions.

Reducing expenses first will also allow the City to operate at a surplus for one or more years. The extra funds will not be needed for operations, so they can be used to pay down the bonded debt, improve the pension plan’s funding level, or fund an account for Other Post Retirement Benefits.

Phase 3: Adjust the Revenue

Once City operations have been reorganized, the revenue can safely be adjusted. In practical terms this means dealing with the split tax rate so that the mill rate can come down.

Conclusions

Hartford’s current strategy of hoping that the financial stress resolves itself has failed. A new strategy is required, and it will take years to identify and implement the necessary changes.

The first step is starting the conversation.

Stakeholders need to identify their goals and priorities for the municipal government. Ultimately, Hartford needs as much input as possible, from everyone who has a stake in the community.

Reporting

First Restructuring Committee Meeting

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City of Hartford COO Darrell Hill convened the first meeting of the Hartford Committee on the Restructuring of City Government on the afternoon of Monday, January 5, 2015.

Nine of the twelve committee members attended at least a portion of the meeting. There appeared to be some membership changes since the initial appointments. The gathering focused on background information and the committee’s overall mission.

Mr. Hill noted that the Committee was originally expected to start in July of 2014 and deliver final recommendations in December 2014. He said that he still envisioned a six month effort, though recognized that major recommendations were unlikely to be approved in time for the City budget cycle that is about to begin.

Preliminary documents distributed to committee members estimated a $40.4 million budget gap for the coming fiscal year. Committee member Albert Ilg stated that he recalled a $25 million goal when the resolution establishing the committee was passed in the spring of 2014. Mr. Hill confirmed that the $25 million number was discussed, and said that his understanding was that the committee should try to reduce the budget gap by $25 million as soon as possible. He said that the larger goal was to make the budget sustainable for the next five years without raising taxes.

The conversation touched on the scope of the challenge; it was observed that the City is a complex organization. The background material distributed filled a four inch binder. Committee members will consider forming sub-committees at the next meeting.

Mr. Hill said that the committee must decide if there are services that the City should stop providing. The administration has asked department heads to list and prioritize the services their organizations currently oversee. Councilman Kennedy raised the possibility of identifying additional services that can be shared between the City and the School Board to achieve cost savings.

One budget item that Mr. Hill indicated was not up for debate was the General Fund allocation to education. He stated that the $284 million allocation that the City has made in recent years is a State mandated figure. He directed the committee to focus on the other $268 million in the $552 million General Fund budget.

The committee’s next meeting is expected to be on either 1/15 or 1/16, depending on committee member schedules.

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2015-01-09, 8:30am, Correction: An earlier version of this article identified Albert Ilg as the Acting Finance Director. Mr. Ilg is no longer in that role, which is currently held by Leigh Ann Ralls.

Reporting

Hartford Creates Committee on Restructuring City Government

In response to projections of increasing General Fund budget deficits for the foreseeable future, the Court of Common Council authorized a Committee to research ways to restructure the municipal government.

The Committee’s formal name is the “Hartford Committee on the Restructuring of City Government,” and it was created on May 20, 2014 via a non-financial resolution associated with the adopted budget.

The Committee will be comprised of a total of twelve members; three Council members, three members of the Administration, three representatives of City employee unions, and three experts in government reorganization. The resolution stated that all the members would be confirmed by City Council by July 1, 2014.

The resolution empowers the Mayor to appoint the three members of the administration and the three government reorganization experts. Mayor Segarra submitted five names to the Court of Common Council for confirmation in advance of the July 14, 2014 Council meeting. He appointed three members of the Administration and two reorganization experts.

  • Darrell Hill, Chief Operating Officer
  • Jose Colon Rivas, Director of Families, Children, Youth and Recreation
  • Albert Ilg, Acting Finance Director
  • William Cibes
  • Thea Montanez

Allan Taylor, Legislative and Legal Advisor to the City Council, confirmed that the City Council’s three seats on the Committee were filled at the August 11, 2014 meeting.

  • Kenneth Kennedy
  • David MacDonald
  • Larry Deutsch

Mr. Taylor also noted that the union representative positions were filled at the same time.

  • Nazario Figureoa, representing the police union
  • Vince Fusco, representing the fire union
  • Marc Nelson, representing all other unions

The resolution identifies seven specific ideas that the Commission may consider, and leaves the door open to other ideas that are brought to the Commission’s attention by essentially anyone.

An interim report is requested by October 30, 2014, and the final report is to be issued with recommendations by December 30, 2014.