Major credit rating agency indicates economic upturn for New Haven
Last week, Fitch Ratings revised its rating of New Haven’s finances from Stable to Positive.
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Fitch Ratings upgraded its assessment of New Haven’s general obligation, or GO, bonds from Stable to Positive, specifically citing Connecticut’s new Tiered Payment in Lieu of Taxes, or PILOT, program for the revision.
Fitch Ratings is one of the largest credit rating agencies in the United States and is responsible for rating debt instruments based on the likelihood that a debtor will be able to repay a loan. According to Fitch Ratings’ report, the Oct. 5 change in the rating on New Haven’s GO bonds “reflects the projected maintenance of adequate reserves through fiscal 2021 and improvement in city revenues primarily from the state’s revised PILOT program, which will help absorb growth in city spending.”
“What a change from Stable to Positive means is that the rating agencies feel that the city is moving in the right direction financially,” said Acting Budget Director Michael Gormany. “What that means for residents is that we are trying to keep the tax rate low, and when we try to borrow for bonds and other financial instruments, the interest rates stay low.”
The PILOT program allows cities in Connecticut to receive reimbursement from the state for tax revenue lost due to tax exempt or largely tax exempt groups, like colleges and hospitals. Last year, Yale’s voluntary contribution was valued at $13 million. Mayor Justin Elicker has repeatedly said since March that the city is “cautiously optimistic” that the University’s contribution will rise this year, but a higher contribution has not yet been announced. In a rough assessment, City Tax Assessor Alex Pullen estimated that if Yale’s real estate was taxed at normal rates, it might raise as much as $121 million, according to NBC Connecticut.
This year, the state government adopted and fully funded a three-tiered PILOT plan. In large part because of the PILOT program, the state’s contribution to the Elm City has doubled to more than $90 million for the 2021 fiscal year.
“[The PILOT program] is something that is helping us meet all our obligations from a budgetary perspective,” said Gormany. “I think that was one of the biggest factors that the rating agencies saw … especially with almost 60 percent of New Haven’s property being tax exempt.”
In addition to the PILOT program, Fitch Ratings also cited a hike in federal funds — including funding to the city’s Board of Education and roughly $114 million in reserves from the American Rescue Plan — as reasons for the upgrade.
The ratings company also praised the city government for ending the 2020 fiscal year, despite the pandemic, with a $2.1 million budget surplus. But Fitch Ratings was also critical of City Hall, specifically because of the not-yet-secured funding that New Haven’s current budget depends on.
“The budget does include an anticipated additional voluntary contribution of $4 million from Yale University, Yale New Haven Hospital and certain other entities, which Fitch believes is not prudent because similar voluntary contributions have not always been achieved in prior years,” the report reads.
The agency also expressed concern regarding the prevalence of poverty and economic hardship in the city. In August, according to the Bureau of Labor Statistics, New Haven had an unemployment rate of about 5.8 percent, about 1 percent above the national average. Additionally, the city’s 2019 poverty rate, which refers to the percentage of individuals under 65 who make less than about $13,000 a year, was 26.5 percent — compared with the national average of 13.4 percent.
Fitch Ratings cautioned the city government against assuming that current trends in funding will continue.
“Management will need to carefully manage its expectations for future state assistance and other non-tax revenues to prevent a return to structural imbalances in city and school operations,” Fitch Ratings wrote.
Elicker called the report “good news for the city” and labeled the report as a vindication of his administration’s efforts to optimize New Haven’s budget.
“From day one my administration has aimed to paint an honest picture of the city’s financial situation,” Elicker wrote. “Historically the city has experienced some financial challenges due to outsized debt obligations and underfunded pensions — but over the past year and a half we’ve taken many steps to get the city heading in the right direction and this upgrade shows that our efforts are bearing fruit. Capping new debt, increasing our annual pension contributions, and working with our state partners to increase PILOT funding have put us on a new, more sustainable, path.”
City Hall plans to raise funds by selling $53,610,000 series A bonds and $38,720,000 series B bonds.