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Paying the Bills: Examining How Norwalk Can Pay for its Capital Projects

The Norwalk Board of Estimate and Taxation in April 2023

How will Norwalk’s bond rating be affected as the city takes on more debt to pay for school construction projects? And what can the city do to limit that effect?

Bill Lindsay of Munistat Services, the City’s financial advisor, shared some answers and suggestions with the Board of Estimate and Taxation at its meeting on Tuesday.

“I think it’s important to continue to be prudent as the city has historically been,” Lindsay said.

Overall, he recommended the city examine its $155 million in authorized projects that the bonds haven’t yet been issued for. 

“You can take those authorizations and reallocate them to other future projects—that helps bring down what you will issue in the future,” he said. “I think that’s a necessary and prudent approach that the city’s historically undertaken. And I think it’s important to keep in mind—credit ratings are a point in time. So at this point in time, [the current AAA bond rating] is not in jeopardy, but it isn’t to say three, four years from now that we don’t need to revisit this analysis again.” 

Current Credit Rating Status

In 2023, Norwalk earned ‘AAA’ ratings, the highest rating possible, from all three major credit rating agencies: Moody’s Investors Service, S&P Global Ratings and Fitch Ratings. That rating both helps the city get lower interest rates and serves as a sign that it’s likely to pay back its debts, making it a “safer” investment. It’s also a status symbol, Lindsay said. 

“The loss of prestige far outweighs the financial cost,” he said. “To be able to say to prospective business and homeowners, ‘Hey we don’t just think that Norwalk is a great city, these Wall Street people think it’s a great city as well.’ I think that’s really what the benefit is.” 

Lindsay said  each agency uses slightly different scorecards to rate a city, but some of the factors include the available cash the city has on hand, its financial framework, the ratio between debt and fund balance, how it funds pension and benefits obligations, resident income in the city, and economic growth. 

Upcoming Capital Projects

As of June 2023, the city had a total debt load of $435 million. Lindsay said that based on his analysis of how the agencies come up with ratings, Norwalk’s debt capacity is $650 million.

One of the biggest questions is the city’s authorized but unissued debt—meaning projects that have been approved but for which the bonds have not yet been issued. Right now, that number is about $155 million, which includes a portion of the South Norwalk Neighborhood School and Norwalk High School, Lindsay said.

Jared Schmitt, the city’s new CFO, said his team is planning to make “more efforts to identify grant projects” to cover some of the authorized projects in order to bring down the amount of bonds.

“I go maybe one step further and say that they will be spread out over multiple years,” he said of  the authorized projects list. “They’re not going to all hit at once.”

He did note that each year, about $34 million of debt is coming off the books from older projects that have been paid off.

Looking ahead, Lindsay said,  an estimated project timeline shows the city reaching the debt limit—before it would affect Norwalk’s credit rating—in 2025-2026. 

Maintaining the Rating

As Norwalk’s debt increases, Lindsay stressed the importance of keeping the other parts of the rating high. 

“It’s important to keep in mind that this is just one of the credit factors. It doesn’t guarantee that there’ll be a credit rating change,” he said. There are other things that are under consideration, including growth in the grand list, which is projected to be healthy, as well as continued positive operating performances—if fund balances were to continue to grow, would allow for, I should say, a slightly higher debt load.”

He also walked the Board through other options including utilizing short-term notes to cover some of the costs of debt. He said some Connecticut towns, like Darien, Greenwich, and Guilford, used short-term funding options, such as bond anticipation notes, to cover school construction. Lindsay said  these would “provide short-term funding during construction to help with cash-flow and phase-in budgetary impact of new debt.” 

“Think of it as a construction loan,” he said. “We can use the grants when they do come in to pay off the note.” 

He said  short-term funding options could be used in anticipation of state reimbursements.

“One of the things I wanted to talk to you about was some mitigating steps that the city could consider to help manage the cash flows for these large projects,” he said. “And some of them have state reimbursement, which is great. But unfortunately, in practice, the state hasn’t always been timely in providing that reimbursement. And they do have 5% holdings in the form of retainage. So when we’re talking about significant amounts of aid, particularly in Norwalk High School, it adds up.”

This would also allow the city to “maintain internal liquidity necessary to preserve ratings,” Lindsay said. 

Chair Ed Abrams asked Schmitt to come back with some final recommendations in a few weeks for how the city can start to implement some of the ideas that Lindsay shared in his presentation.

Comments

2 responses to “Paying the Bills: Examining How Norwalk Can Pay for its Capital Projects”

  1. Bryan Meek

    WTH?

    Did someone tell the analyst that we’ve already broken ground on these projects he says we should re-examine the need to finish in about 3 or 4 years? Did someone tell him the levy needs to increase 37% on homeowners to maintain status quo?

    BANS to cover short term obligations?. So issuing $155 million at 4% for a short term instead of 5% for 20 years is the solution? Why didn’t the Finance Department come up with this earlier if that was the case? Maybe because it knows any savings would be blown on christmas trees and Halloween parties so it wouldn’t matter?

    I’m not blaming the consultant here, but one can see how and why Enron was able to maintain the illusion of its AAA rating up until a few weeks before it collapsed.

    I wonder how much of the $34 million in retired debt went to pay for the $10 million athletic facility we just bulldozed?

  2. Bryan Meek

    “Towns like Darien, Greenwich, and Guilford, used short-term funding options, such as bond anticipation notes, to cover school construction”

    They know how to live within their means.

    Towns like Bridgeport, Waterbury, and Hartford build a few expensive, shiny objects they can’t afford under the guise of state reimbursement with absolutely no ROI analysis, while kicking the can down the road on all other financial obligations until eventually then need a $500 million bailout like Hartord while the rest of the city falls to seed.

    Sadly, add Norwalk to that list in the future at this current pace.

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