This story was initially published at Debtwire.com
The Town of Hamden, Connecticut successfully completed an oversubscribed USD 30.4m bond sale yesterday (21 July), an important milestone in the town’s efforts to achieve financial stability – assuming officials maintain their commitment to that effort, said Barry Bernabe, managing director at Phoenix Advisors, the town’s financial advisor.
The bond sale rolled over an outstanding bond anticipation note to long-term debt, and refinanced existing long-term debt to produce current-year debt service savings. Hamden officials plan to use the savings to eliminate an approximate USD 6m FY20 (ended 30 June) deficit and build the town’s fund balance, which currently stands at approximately USD 1.97m. The restructuring will provide USD 6.2m in debt service savings in FY21 and USD 7.8m in FY22.
The town must remain faithful to its FY21 budget, which budgeted debt service at the amount the town would pay had it not completed the refinancing, Bernabe said.
“If they continue for next year, budgeting what they should for debt service, (a boosted) fund balance should follow,” Bernabe said. “The town has to follow through, and they have to have balanced budgets. If they have another deficit this year and next year, they won’t be able to dig out of the hole. And the town has to follow through over the next couple years. If they do, they’ll have over USD 20m in reserves in the next three years.”
Ahead of the sale, the town had concerns about investor interest, after a previous short-term debt sale only attracted one interested buyer, as reported.
But Tuesday’s sale was oversubscribed by 7.2x, enhanced by bond insurance from Build America Mutual and maintaining investment grade ratings from S&P Global Ratings (BBB+/negative) and Fitch Ratings (BBB/negative), Bernabe said. Moody’s Investors Service did not rate the transaction, but rates Hamden’s debt at Baa3/negative.
The all-in interest cost for the debt is 3.07%, Bernabe said.
“The town is on the right fiscal path, righting the ship to make itself fiscally solvent, and the plans are straightforward … to make sure the town rebuilds its fund balance in the next two to three years,” said Curtis Eatman, Hamden’s finance director.
The town has challenges, but it’s taking steps in the right direction, including this refinancing, Eatman said. Hamden is also committed to ensuring accuracy in its budgets, making sure revenues and expenditures are not over- or under-valued, and it budgeted 100% of its actuarially required contribution for its pensions this year, he said.
In addition, Hamden’s council increased the mill rate in FY21, and is looking for other options to move toward fiscal stability and discipline, Eatman said.
Still, such financings should not become routine, as these types of scoop and toss transactions are often a sign of budget weakness, according to a municipal bond analyst.
“When done routinely or for many years, it can become an issue,” the analyst said. “Like many other behaviors in life, ‘the poison is in the dose.’”
“Unfortunately the town has a history of structurally unbalanced budgets, and that has to change going forward, it’s no good to save USD 6m and move one step forward and another back, you end up back where you were,” Bernabe said.