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New Haven Selling Roads to Yale Shows Fiscal Strain: Muni Credit

Yale University Campus in New Haven, Connecticut
Even with the financial support of Yale, which employs 12,000 and is the city’s fifth-largest taxpayer, New Haven hasn’t been able to halt two straight years of deficits or bypass the same fiscal hurdles that plague municipalities nationwide, such as rising liabilities for pensions and retiree health care. Photographer: George Ruhe/Bloomberg

New Haven, Connecticut, sold two streets this year to Yale University, its biggest employer, and raised taxes to bolster its finances. The moves haven’t been enough to win over investors and ratings companies.

The hometown to the 312-year-old Ivy League school saw the extra yield buyers demand on part of a $38 million bond sale last week almost double from issues in August and last year, data compiled by Bloomberg show. Moody’s Investors Service and Fitch Ratings both cut New Haven’s credit grade twice since April and give it a negative outlook.

Even with the financial support of Yale, which employs 12,000 and is the city’s fifth-largest taxpayer, New Haven hasn’t been able to halt two straight years of deficits or bypass the same fiscal hurdles that plague municipalities nationwide, such as rising liabilities for pensions and retiree health care.

“There is open debate as to whether New Haven has stabilized or it is continuing to erode,” said Robert E. Amodeo, head of munis in New York for Western Asset Management Co., which oversees $28 billion in local debt, including New Haven bonds. “We expect improvement -- but it’ll be slow.”

Cities’ Challenge

The community of 130,000 on Long Island Sound northeast of New York joins U.S. localities still struggling to repair their finances after the 18-month recession that ended in 2009. While cities project that revenue will rise for the first time since 2006, it’s still not enough to meet climbing costs for their workers’ benefits, a survey from the Washington-based National League of Cities showed this month.

Like cities such as Boston and Providence, Rhode Island, which host universities that are exempt from property taxes, New Haven seeks voluntary payments from Yale to bolster its $500 million general-fund budget. Yale and the smaller Albertus Magnus College sit on $2.5 billion worth of tax-free property in the city, according to Joe Clerkin, New Haven’s budget director.

The university provided an $8.1 million payment in lieu of taxes last year, more than any other school in the U.S. save Harvard University, which paid a combined $10 million to Boston, Cambridge and Watertown, according to the Lincoln Institute of Land Policy, a Cambridge-based group that examines tax and regulatory policy.

Yale’s Payments

“Yale knows of no other municipality that receives as much revenue for hosting a university as New Haven does,” said Thomas Conroy, a spokesman for the school. He provided figures showing the city has received $74 million in voluntary payments since 1990.

The school and Yale-New Haven Hospital are the city’s top employers, according to Fitch. Yale’s $20.8 billion endowment is the second-largest in higher education behind Harvard’s.

Two years ago, the university paid $3 million for rights to a parking lot on Broadway Street. This year it spent $3 million to purchase two downtown roads that it had been leasing.

“Did we need the money? I think that was a factor in the decision,” Clerkin, the budget director, said in a telephone interview.

To make ends meet in the past five years, the city has also dipped into savings, leaving the fund balance at the lowest levels since the early 1990s, Clerkin said.

The city raised property taxes by 4.94 percent in June, wrapped up negotiations with unions and no longer relies on one-time revenue such as asset sales to balance its budget.

“It is a sound budget,” Clerkin said of the spending plan for this fiscal year.

Manufacturing Heyday

New Haven’s heyday came after World War II as a manufacturing hub for arms and clothing. It lost employment as factories closed, said Joshua Sandman, a political-science professor at the University of New Haven. He said the city’s changing economy is leaving behind people who lack college degrees.

Yale and the hospital are attracting companies involved in biotechnology, pharmaceuticals and life-science, Fitch said.

“In a knowledge-based economy, you need people with knowledge,” Sandman said. “It is a different type of pattern we see emerging.”

The municipality’s unemployment rate was 12.2 percent in August, exceeding the state’s 8.1 percent level and the country’s 7.3 percent average. About 26 percent of residents live below the poverty level, more than double the state average of 9.5 percent, U.S. Census data show.

Chopping Block

Fitch cut New Haven’s rating in April and August, leaving it at A-, four steps above speculative grade. The company cited deficits, pension costs and the potential for reduced state aid -- which makes up 42 percent of the budget. Moody’s lowered it in June and October, to an equivalent level. In August, Standard & Poor’s dropped New Haven to BBB+, three levels above junk.

The second Moody’s move came after a change in how the state distributes municipal aid delayed about $1 million in expected payments to New Haven. That caused the city to revise its projected deficit higher for a third time this year.

“New Haven was already running very lean,” said Thomas Compton, an analyst for New York-based Moody’s. “They just didn’t have the flexibility to absorb it.”

Proceeds from last week’s tax-exempt bond sale will go toward renovating schools, buying fire-fighting equipment, repairing a bridge and purchasing a phone and commuter system.

Spread Sense

Only one of the 17 maturities was uninsured. That segment, due in September 2014, priced to yield 1.25 percent, or 0.99 percentage point above a Bloomberg BVAL benchmark. That spread is about double the level in an August sale by New Haven. At that time, the spread on a similar maturity, also uninsured, was about 0.5 percentage point, Bloomberg data show. By the city’s calculation, the gap rose only 60 percent from one sale to the next.

“It would make sense to me that in light of a downgrade you’d see more of spread,” said Michael O’Neil, New Haven’s controller.

That one maturity offers only a single data point -- not enough to measure the city’s progress in the eyes of investors, O’Neil said. He pointed out that in the period between the two sales, S&P, which gives the city the weakest grade of the three rating companies, remained unchanged.

“If it was me buying a bond, I’d be looking at the S&P rating,” he said. “I’d be more concerned with where the lowest rating was. That tells me there is something else at play there with that maturity.”

He said the sale of the uninsured maturity was executed via a sealed bid, and only one bidder came forward.

Insurance Effect

In a part of the sale maturing one year later, in September 2015, and carrying insurance, the yield spread was about 0.6 percentage point, Bloomberg data show. Moody’s rates the insured maturities one step higher than the city’ credit.

In the market this week, Connecticut is among localities nationwide offering a combined $5.6 billion of long-term munis for sale, down from $7.8 billion last week, which was the busiest since July.

The governments are borrowing as muni yields are the lowest in four months. Benchmark 10-year munis yield 2.68 percent, a level unseen since June, compared with 2.51 percent for Treasuries of the same maturity, Bloomberg data show.

The ratio of the two yields is about 107 percent, compared with an average of about 99.5 percent since January 2009. The higher the figure, the cheaper munis are compared with Treasuries.

The following is a pending sale:

Connecticut plans to sell $600 million of special-tax bonds as soon as this week to finance transportation infrastructure projects, offering documents show. Debt service is paid from revenue pledged by the state under a 1984 act for construction and repair of highways, bridges, waterways and mass transit.

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