CIP Maxed Out—

Llodra: Less Debt Should Be Part Of ‘Greater Financial Discipline’

By John Voket

With a capital borrowing plan maxed out against a municipal borrowing debt cap, two local boards continued to volley proposed bonding plans for the 2015 fiscal year. That action ended up in the Board of Selectmen’s court this week, where officials continued to debate maximizing project potential while reducing the town’s long-range debt costs.

On February 17 the Board of Finance recommended a Capital Improvement Plan to the Legislative Council incorporating a step-down in borrowing in its final year, and leaving the decision about how to allocate those projected year-five expenditures to the Board of Selectmen.

During discussion that evening, the finance board learned that the first of three $500,000 allocations to help Newtown Hook & Ladder pay for its new headquarters project can be moved from the current fiscal cycle, to 2013, the third year of the new CIP. But, according to Finance Director Robert Tait, that move simply shifts the debt allocation out in the plan, without creating a half-million more in borrowing availability before June 30 of this year.

The finance board also was told that $2.2 million that was saved in borrowing for a middle school roof project has already been reallocated in the new CIP. Those savings allowed for more borrowing, and were applied in part to cover additional unanticipated hazardous substance remediation on a Fairfield Hills demolition project.

Most of the balance was earmarked to complete the new animal control facility, a project left hanging in the CIP until the state deeded promised land to the town. That transaction could not be completed until this year, when the town determined the parcel was environmentally safe and able to accommodate that new facility.

At the same time, finance board members universally agreed that if it is possible, the town should proceed with a plan to reduce a municipal cap on borrowing from its current ten percent to nine percent. Through all the discussion, First Selectman Pat Llodra continued to remind her elected colleagues that reeling in the debt cap by even by slightly less than one percent would correspond to a $10 million reduction in project potential.

Mrs Llodra previously told the finance board, “If we lop off $10 million in year five, we’re not going to do it painlessly.” But part of that pain means holding the line on restricted borrowing capacity in year six through eight of the CIP as well, because there is only $5 million in available borrowing in 2016 and 2017, and just $10 million projected available to borrow in 2018.

Graduated Reductions

As a result, Mrs Llodra pitched an alternative for achieving the nine percent goal during the selectmen’s meeting February 22. Her idea was to soften what would be an abrupt drop in borrowing potential by stepping down the borrowing ratio over what would be years six through ten in the capital plan.

This would create some minor flexibility if it is required, while keeping Newtown on track with plans to reduce its debt costs while still maintaining what Newtown’s bond rating agencies both agree is a healthy level of investment in local capital improvements.

“We would scalpel it down,” Mrs Llodra explained, adding that even a few hundred thousand extra dollars in borrowing capacity each year between 2016 and 2021 would make reaching the nine percent goal more manageable than if it happened “in one fell swoop.”

But the first selectman said even that relatively major improvement in financial practices would not be “meaningful unless it is part of a greater financial discipline,” Mrs Llodra told the selectmen this week.

She then took the opportunity to relate additional tactics to her board, including eliminating Newtown’s use of its undesignated fund balance to reduce taxation, and at the same time increasing that fund balance to the point where it represented a healthy nine percent of the overall budget.

Mrs Llodra also talked about permanently establishing a similar capital fund for school district projects, to “build a capacity for the Board of Education to use the same discipline.” In the end, the first selectman said, it could be well worth the savings in remaining bonding costs, particularly if the combined practices result in a bond rating increase to AAA status, the optimum rating.

“If it’s worthwhile to pursue AAA, we should be looking at nine percent in our fund balance,” Mrs Llodra said. In looking at the financial statements from other AAA-rated towns, as well as other municipalities sharing Newtown’s AA1 Rating from Moody’s Investors Service, the first selectman noted that in some cases, Newtown’s current fund balance is below that of other AA1-rated communities.

“Moody’s has laid out an agenda for Newtown,” she said. “And the fund balance seems to have the most weight in their assessment.”

AAA Equals Savings

Earlier in the meeting, Mrs Llodra said based on its latest bond issue, Newtown would have saved an additional $383,000 if it enjoyed a AAA rating from Moody’s; the community is already rated AAA from Standard & Poor’s, a competing municipal rating bureau.

Currently, Newtown’s fund balance stands at 6.9 percent.

In a canvass of a number of Moody’s AAA-rated communities across Connecticut, a number of finance officials in those towns told The Bee that they maintained either official or unofficial policies to hold the line on undesignated fund balances.

West Hartford currently maintains an 8.13 percent ratio, and since 2001 has subscribed to the best practices minimum of seven percent as an “unwritten guideline.” At the same time, neighboring Weston maintains a 10–12 percent range by policy, with its current fund balance standing at 12.85 percent.

Westport has a 10.1 percent fund balance in the current budget, while Norwalk’s finance director Tom Hamilton said his city is currently maintaining 9.7 percent of its overall expenditures.

“Our fund balance policy states that we will maintain a fund balance between five and ten percent of expenditures, with an overall objective to maintain our fund balance at the median of other Aaa- and AAA-rated municipalities in Connecticut,” Mr Hamilton said. “The median for Aaa- and AAA-rated municipalities is currently 9.2 percent, so I am satisfied that Norwalk’s fund balance level is prudent and appropriate.”

Ridgefield is currently at seven percent, and Gary Conrad, chief financial officer of New Canaan said, “Our June 30, 2010, Unreserved/Undesignated Fund Balance...represents 12.85 percent of total expenditures. This is above our standing policy where fund balance will not be below ten percent of expenditures.”

Conversely, a spokesman at the Stamford Comptroller’s office told The Bee that his community was recently downgraded from its long-held AAA status because that city dropped its undesignated fund balance to three percent. And even considering other risk management funds that are maintained for specific exposures, Stamford’s overall aggregate of so-called rainy day savings “is well below ten percent.”

Mrs Llodra said she, too, would be canvassing other state municipalities to present her board with a full range of fund balance data at its next regular meeting March 7, when the selectman are expected to finalize plans for year five in the CIP, as well as suggesting how the next three to five years might play out.