Despite what is touted by the Federal Reserve (debt is good!), states and municipalities are drowning in debt. As are US households.
Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.
The Hartford General Obligation bond is at 6.971% based on $82.768.
The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.
The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.
The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations. The city currently projects a fiscal 2018 deficit of $50 million and is seeking incremental funding from the state to close that gap. The state has not yet adopted a budget specifying aid for the city for the fiscal year beginning July 1. Even if the state’s biennial budget allocates sufficient funds to address the current and following years deficits and create a fiscal oversight structure, the budget is still unlikely to provide a pathway to structural balance over the longer term. City deficits, partially attributable to escalating debt service costs, are projected to grow to $83 million by 2023, making the city’s weak financial position vulnerable to further deterioration.
The negative outlook reflects the possibility that the city will restructure its debt in a way that will impair bondholders. The outlook also incorporates uncertainty over state funding in the current fiscal year and beyond and the associated impact on reserves, liquidity and the ability to achieve sustainably balanced operations.
That is the City of Hartford that is in trouble due to excessive debt relative to tax receipts. But what about US households?
The rising cost of living relative to wage growth is leading to excessive debt use to maintain a standard of living.