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The message city leaders should take from the recent credit rating summaries for New London is stay the course.
The last two years of the former city manager form of government were not good ones fiscally for the city, with the last budget adopted under the council-manager system spilling into the first year of the new mayoral system. Initially the administration of Mayor Daryl Justin Finizio, elected in November 2011, did not grasp the depth of the fiscal problem and the mayor made decisions early on that the worsened the situation.
To his credit, once informed of the seriousness of the city's fiscal condition, Mayor Finizio took an aggressive approach to address it. Standard & Poors includes that assessment in its recent ratings report.
"New London experienced consecutive operating deficits in fiscal years 2011 and 2012 as a result of overestimating tax collections and other local receipts, and underestimating various expenditures," write S&P evaluators about the last two budgets approved under the council-manager system. "The mayor and his financial management team were proactive in addressing the structural imbalance and identified expenditure cuts, as well as increased the tax rate by 5 percent to restore balance for the fiscal 2013 budget year."
Nobody likes tax increases and those imposed over the past two years were certainly a sizable burden for many of New London's financially struggling households, but the truth is this was a city headed towards a fiscal disaster if nothing changed. Instead, the city on June 30 ended fiscal year 2013 with a small surplus of about $220,000 to $250,000, roughly 0.4 percent of budget, pending final calculations.
Yet the city's situation remains precarious. Of most concern to the two rating agencies is that the consecutive years of deficit spending almost depleted the city's general fund balance, the rainy day fund that cushions a municipality in the event of unexpected expenses or revenue shortfalls. Including the recent year-ending surplus, the available fund balance is about $1.5 million, about 1.6 percent of expenditures, far below the 8 percent reserve called for by the city's own fiscal policy guidelines.
"In our opinion, New London's budgetary flexibility is very weak," S&P notes about the thin safety margin.
The city's other credit rating agency, Fitch Ratings, warns that restoration of the fund balance must be a priority. "The city's ability to maintain stable to positive operations and to restore reserves to adequate levels over the medium term is fundamental to maintaining the current rating."
Fitch, despite calling the property tax increases and spending cuts prudent, was concerned enough about the city's situation to downgrade by one tier its credit rating for general obligation bonds to A+, in line with the S&P's existing rating for such bonds, which are used to fund long-term projects such as school construction and rebuilding roads. On the positive side, Fitch upgraded the city's financial outlook from negative to stable.
New London's general obligation bond rating is four tiers below the gold standard of AAA.
The city got a top-level rating for short-term borrowing from both agencies.
Mayor Finizio has vowed not to return to past practices of avoiding tax hikes and tough decisions by inflating revenue projections and underestimating spending.
Given his strong veto power and working with a new council in which his fellow Democrats continue to dominate 6-1, and where the only Republican is a self-described fiscal conservative, Republican Martin T. Olsen, the mayor will have no excuse for straying from that commitment, though temptation could arise in connection with a potential re-election bid in 2014.
The effort to continue restoring the city's fiscal health cannot entirely fall to its beleaguered homeowners. The Finizio administration must find a way to broaden the city's tax base. Development in the Fort Trumbull area continues to hold the greatest potential, but potential won't pay the bills.
The latest credit reports are more good news than bad, but the red flags are still flapping.