Connecticut has placed West Haven’s finances under the most severe level of state oversight due to continuing fiscal stress and what the state said was a lack of adequate control by city leaders.
On Tuesday, Gov. Ned Lamont approved the recommendations of the Municipal Accountability Review Board to designate West Haven as a “Tier IV” municipality, meaning that it will now be put under the greatest level of oversight allowed under state law.
The action followed a legally required 30-day period for public comment after the board recommended a change city’s designation in an April 14 report. The law also required the governor’s approval.
The Tier IV designation is the first by the state since the review board was created five years ago and involves more significant MARB approval powers for budgets, transfers, contracts, debt, and labor contracts. It could require appointment of financial manager and hiring of an independent auditor consultant.
The governor said he approved the change due to the city’s strained fiscal condition, which he said is lacking oversight by municipal leaders.
“As detailed in the MARB
The MARB is made up of 11 members chosen by the governor and by legislative leaders of both political parties. It was created in 2017 to provide technical, financial and other assistance to municipalities that are experiencing different levels of fiscal distress.
West Haven has been in Tier III of the MARB oversight program since 2017. It is now the first municipality to reach Tier IV, the most severe of MARB's oversight tiers. The only other municipalities to fall under MARB are troubled state capital Hartford, at Tier III following a near-bankruptcy experience that led the state to
Tier I and Tier II designated municipalities have oversight that involves providing financial information and reporting on remedial measures and actions, as well as presenting a three-year financial plan.
For Tier II municipalities, the MARB must approve assumptions in regard to state aid and property tax revenues that are used in the annual budget.
For Tier III municipalities, the MARB reviews and makes recommendations related to annual budgets, contracts, and debt obligations as well as having approval powers regarding refunding bonds and labor agreements and arbitration awards.
“This decision is a direct result of the fiscal mismanagement in the city that has gone on for too long,” Lamont said. “Taxpayers deserve to have confidence that their money is well spent, and the stringent oversight that a Tier IV designation provides will allow the state to provide the tools necessary to address this situation.”
West Haven, with a population of almost 55,000, is west of New Haven on Long Island Sound.
The state’s action was both prudent and timely, said Joseph Krist, publisher of Muni Credit News.
“The state has certainly given them chances to improve management, supported a debt restructuring, and already has them under supervision,” Krist told The Bond Buyer on Thursday.
“Clearly, management has not had the will to pursue full reforms. The move to Tier IV makes it clear that management rather than resources does seem to be the primary stumbling block,” Krist said.
Since 2011, the city has sold about $164.4 million of debt, with the most issuance occurring in 2014 when it offered $47.8 million; it was last in the market in 2021.
As of June 30, 2020, the city’s long-term debt, including general obligation bonds and clean water serial notes, totaled $85.7 million.
The city was originally referred to the MARB in 2017 following the city’s issuance of about $17 million of deficit bonds. Under state law, the issuance of deficit bonds automatically results in its designation as a Tier III municipality.
"The city had accumulated a large General Fund deficit, as well as deficits in the Allingtown Fire Fund and the Sewer Fund," the MARB report said. "The negative fund balances were largely the result of recurring operating deficits caused in part by unsustainable budget practices."
The Tier IV designation followed a third-party audit into the city's use of $893,000 in COVID-19 relief funds.
"Recent findings regarding lack of adequate internal controls, policies and procedures, as well as allegations of fraud, could have a detrimental effect on both short-term and long-term liabilities," the report said. "These include losses from alleged fraud that will likely be absorbed by the General Fund as well as the likelihood of having to repay disallowed COVID Relief Funds to the federal government."
In October,
Krist said that when the city restructured the debt, it provided a good opportunity to address the non-financial aspect of its problems.
"But it looks like they didn't follow through," Krist said. "This is where interventions by the state make a lot of sense.”
In September, the city issued an additional $20.545 million of GOs for the continued financing of its high school renovation project as well as other school and city capital projects.
Annual debt service requirements between fiscal 2019 and fiscal 2022 have been in the 10% to 11% range, according to the preliminary official statement on the deal.
Piper Sandler priced the $27.045 million of 2021 general obligation bonds and bond anticipation notes in September. The $20.545 million of GOs were rated Baa3 by Moody’s Investors Service and BBB by S&P Global Ratings while the $6.5 million BANs were unrated.
In April, S&P revised its outlook on the city’s GOs to stable from positive and affirmed the city's long-term and underlying ratings at BBB.
"The outlook revision reflects unaddressed budgetary controls, recently highlighted by a third-party auditor, and the subsequent vote to designate the city as a Tier IV community by the Connecticut Municipal Accountability Review Board, suggests that progress by the city's management team in ameliorating its financial management practices and internal controls to ensure long-term structural balance has been slower than anticipated," S&P analyst Lauren Freire said in a report.
She noted this would likely affect the city's ability to significantly grow its fund balance over the near term.
“We believe these findings, coupled with the anticipated delay in the completion of the city's 2021 audit, underscore weaknesses in the city's risk management, culture, and oversight captured under our environmental, social, and governance factors,” she wrote. “Despite the internal control findings, we believe the ongoing oversight under the MARB provides long-term stability at the current rating level."
Moody’s said in September its affirmation of the Baa3 rating — the lowest investment grade — reflected the city's “very narrow financial position that has been stabilized by deficit financing bonds and municipal restructuring funds.”
In 2019, it revised its
West Haven officials were unavailable to comment on the state's most recent actions.
Krist noted that there were also issues associated with the city’s annual reporting.
"It has had to restate results in prior years. And now the Board notes that the city’s plan was to rely on financial assistance in the form of MRF (municipal restructuring funds) to stabilize its fund balance and to bide time until previously issued pension obligation bonds were retired in fiscal 2022," Krist wrote in an article on Friday. "From that point forward, the city reasoned, a significant decline in required debt service payments would allow for significant and rapid increases in general fund balance without any additional financial assistance from the state."
He said that appears not to have happened.
"The recommended fiscal 2023 budget that was recently submitted to the MARB does not direct the reduced debt service requirements to building fund balance. Rather, the recommended fiscal 2023 budget redirects those funds to operations resulting in minimal funding devoted to increasing fund balance," Krist wrote. "Thus, a key component of the city’s plan for amassing general fund balance appears to have been abandoned. The intervention is not a surprise."
