Fitch Cuts New Haven Debt Rating One Step to A- Citing Finances

Monday, 12 August 2013 09:11 PM

Aug. 12 (Bloomberg) -- New Haven, Connecticut, had its credit grade cut to A- from A by Fitch Ratings, which cited an “inability to achieve structural balance” and unfunded retirement costs for the city that’s home to Yale University.

The change affects about $500 million in debt outstanding, the New York-based company said in a statement. It kept its negative outlook on the city. Fitch also assigned an A- rating to a planned sale of $39 million of general-obligation bonds.

“The negative outlook reflects Fitch’s concern that potential pent-up salary pressures from unsettled contracts and increasing pension costs could impair the city’s ability to achieve structural balance and restore reserves,” Fitch analysts led by Kevin Dolan said in the statement. The rating is the company’s seventh-highest level.

Joe Clerkin, the city budget director, said in a statement that the cut, while “‘understandable,” was “disappointing.”

The downgrade of Connecticut’s second-largest city, with about 130,700 residents, was the second this year by Fitch and followed similar actions by Standard & Poor’s and Moody’s Investors Service. Moody’s dropped the city a step to a sixth- highest A2, citing its fiscal situation. On Aug. 8, S&P reduced its rating one level to BBB+, its third-lowest score for investment-grade debt, for similar reasons.

Pension Deficit

In making the change today, the Fitch analysts said the city’s fiscal 2014 budget relies heavily on state aid and that its debt ratios are “above average.” They said the institutional presence of Yale and Yale-New Haven Hospital drives the local economy yet limits its fiscal flexibility.

The analysts also cited New Haven’s unfunded pension liabilities, which the city estimated at $541 million in June 2012, according to Fitch. The analysts said using a projected 7 percent annual return on investments, or less than the city’s 8.25 percent target rate, the two retirement plans have 42 percent or less of the assets needed to meet future obligations.

“The city will continue to ensure that we enter into labor agreements that the taxpayers can afford, that are fair to employees and that are mindful of current market conditions,” Clerkin said.

--Editors: Ted Bunker, Pete Young.

To contact the reporter on this story: Annie Linskey in Boston at alinskey@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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