City not immune to credit crisis

Even before the latest stock market tumble on Wall Street, and Congressional votes on “bailouts,” New Haven was feeling the effects of the credit crunch.

On Wednesday, Sept. 17 — the day after the Federal Reserve agreed to rescue AIG — City Hall announced that it would suspend its municipal bond sales, given that financial advisers doubted most of the $39 million in bonds could sell in the volatile market.

At the time, though, financial consultants to the city predicted that credit markets would reopen in about two weeks.

“Knowing that we won’t achieve a desirable interest rate encourages us to wait until the market is in a better place,” said Lawrence Rusconi, the city’s budget director, in the City Hall statement announcing the delay.

But on Thursday, Mayor John DeStefano Jr. admitted that the tough credit market could have long-term effects on New Haven’s development goals. The city government’s position demonstrates that New Haven — like the rest of the country — will be affected by the increasingly unstable economy. But for now, while the city and its residents watch and wait to see the full extent of the crisis, much of the action will take place at the capitol in Hartford. Yet New Haven’s diversified economy may allow it to weather the storm better than other municipalities.

Trickle down

The credit crunch could soon have a detrimental effect on the city’s ambitious program of school construction. That project receives state support, DeStefano said, but the city must front the funds and then seek reimbursement.

“The challenge this represents is that [the weak credit market] could effect our construction funds in the city,” he said. “We don’t know when the market will settle. And until they reopen we may have to arrange for interim borrowings.”

Still, DeStefano said, the biggest impact could come in the form of reduced state aid for social services.

That was a concern echoed this week by local Democratic state representatives, as Gov. M. Jodi Rell announced last week that the expected budget deficit for the current fiscal cycle had doubled to $304 million — although the number has been disputed by Democrats.

Jeffrey Beckham, a spokesman for the Office of Policy and Management, said last week that over 40 percent of the state’s income taxes annually come from Fairfield Country, where many of the residents are investors commuting to New York City. The state will not know until later this fall, Beckham added, what the full effect of the Wall Street crash would be on Connecticut, when the final quarter’s tax receipts come in.

And local representatives recognize that the numbers are not going to be good.

“A fiscal crisis — it has a trickle-down effect,” said Rep. Mike Lawlor, the Democrat representing East Haven. “The state will get hit big, and all these things get passed down to the cities.”

This is especially true, he said, of cities such as New Haven — one of state’s three major urban centers — that end up being responsible for assistance for much of the lower-income and homeless populations.

As a result of the new deficit projections — which do not take into account the most recent turmoil surrounding the “bailout” — Rell and Republican leaders said that both the executive and legislative branches need to look for new ways to cut state spending. Last week, state House Republican leader, Lawrence Cafero, Jr., released a statement pushing the legislature to work with the governor’s administration on “identifying spending cuts” and not to leave the problems for the next legislative session in January.

But while state Democratic representatives have said the legislature must address the economic downturn, they have warned against drastic cuts that could end up costing the state more in the future. And they said the state has a bigger role than ever to play in taking care of its residents.

One example came yesterday.

New Haven Rep. Cameron Staples, the chairman of the Finance, Revenue and Bonding Committee, released a proposal Wednesday calling for Rell’s administration to identify $3.5 million in unallocated funds out of a $42.4 million Department of Social Services fund to use to help support local homeless shelters. In his press release, Staples pointed to the nearly $350,000 cut New Haven made in its budget for homeless shelters this summer that were “forcing the city’s shelters to limit the number of people.”

The city budget reduction came after New Haven did not receive all of the Payment in Lieu of Taxes funding that it had anticipated from the state.

East Haven Rep. Mike Lawlor noted that when some programs do not get funded, the state simply ends up paying for them down the road.

“I think the point is not unlike the debate over the bailout: The do-nothing option is not an option. The question is how you want to do this,” Lawlor said. “When people are not getting services, when they get turned away at [homeless] shelters, ironically, many will end up in prison, and then the state will spend most of the money it just saved to pay for additional expenses on prisons.”

Staples said that even in the current economic crisis, the state must not abandon its most critical services.

“It’s an embarrassment if we don’t provide adequate housing,” he said, referring to homeless shelters.

A diversified economy

Still, state services are not the only way in which New Haven will be affected. Local experts said small businesses could have trouble financing expansions but, more important, might be seeing a decline in consumer spending.

Anthony Rescigno, president of the Greater New Haven Chamber of Commerce, said in an e-mail that he expects both the city and the surrounding region to experience economic difficulties over the next couple of quarters. Hardest hit, he predicted, would be real estate, retail and manufacturing. But he said credit markets should be generally accessible.

“[Connecticut] banks are in better shape [than] a lot of banks in the country, so that is a good thing,” he wrote. “[I]n fact the banks tell me they are in a good position to lend money at this time.”

Connecticut banks are better capitalized than other banks nationally, which means they have more money on hand, experts interviewed said explained — so despite the difficulties, the city is not yet in crisis mode.

DeStefano said that while New Haven is very dependent on state aid because so many of its developed properties are tax exempt — referring to its non-profit universities and hospitals — such a situation can have its benefits when the economy takes a turn for the worse.

“The institutional nature of New Haven’s economy has mitigated against ups and downs of national economy,” DeStefano said. “The ups are lower, and the downs are higher.”

University Vice President for New Haven and State Affairs Michael Morand had a similar prognosis for New Haven’s immediate future.

“Two of New Haven’s most important economic engines —higher education and health care — are both strong and growing locally, with expansion at Yale University, the University of New Haven, Quinnipiac, SCSU, and Yale-New Haven Hospital,” Morand wrote in an e-mail.

“Relatively speaking,” he added, “New Haven stands in a better position than many comparable cities.”

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