DERBY — GOP candidate for mayor Rich Dziekan said Tuesday that city finances are “in a state of emergency” and that Mayor Anita Dugatto’s silence on the matter speaks volumes.
The Republican candidate’s proof is a Sept. 28 report from Standard & Poor’s showing that Derby is one of nine municipalities that could see its bond rating downgraded.
If that happens, the city could face higher interest rates when trying to borrow money.
But city finance officials noted the “negative
outlook implications” for Derby could disappear if and when the state passes a budget.
S&P issued the negative
outlook implication because of the state’s budget stalemate. Derby faces the potential of losing between $1.6 million to $2 million in state aid — possibly more money than the city has in cash reserves.
Derby is more “vulnerable” than other places to that kind of cut because the city’s fund balance is low, according to the report.
The fund balance is accountant talk for the city’s financial reserves.
From the report:
“The CreditWatch placement reflects Connecticut’s ongoing budget impasse and brinksmanship, which could reduce significant amounts of municipal aid payments to local governments beginning Oct. 1.”
That’s according to Victor Medeiros, a credit analyst with S&P Global Ratings.
“It also reflects our view that the credit quality of these municipalities could deteriorate further due to weaker reserves and liquidity concerns,” according to Medeiros.
Mayor Anita Dugatto’s campaign did not return an email sent Tuesday seeking comment for this story.
Dugatto, a Democrat, is the city’s two-term incumbent mayor.
There Is Still No State Budget
If you live in Derby, you’re probably wondering why your car tax bill hasn’t arrived.
It’s because there’s no state budget.
Democrats, Republicans, and Gov. Dannel Malloy have been battling over a state budget for months.
The spending plan was supposed to be in place three months ago.
State Republicans and a handful of Democrats agreed on a spending plan last month, but the governor vetoed it.
And last month Gov. Malloy issued an executive order to deal with the budget stalemate in the legislature.
It’s sort of a forced budget, but it hasn’t been put into place yet.
Part of the governor’s executive order eliminates payments in lieu of taxes for hospitals and revenue from casinos that are shared with municipalities. Those two items alone comprise $1 million of the Derby budget.
When the state will have a budget remains anybody’s guess.
Derby GOP: We Told You So
Dziekan and the Derby GOP have made taxes, the city’s grand list, and economic development campaign issues since the moment he was nominated by the Derby Republican Town Committee in July.
They say taxes are too high, the grand list is shrinking, and Mayor Dugatto is all study and focus groups when it comes to economic development.
They said the S&P document elevates the GOP’s position above run-of-the-mill election year rhetoric.
Instead, the S&P negative
outlook implication is “objective evidence that Derby is heading in the wrong direction,” Dziekan said.
“Derby now joins a list of financially imperiled municipalities that include Bridgeport, New Haven and Waterbury — not company that a small city like Derby should have to keep,” he said Tuesday.
A portion of his press conference outside Derby City Hall was carried live on The Valley Indy’s Facebook page and is embedded below. His complete remarks are embedded at the bottom of the post.
But Barry Bernabe of Phoenix Advisors, LLC, said the situation isn’t all gloom and doom.
Bernabe is the city’s financial adviser.
He pointed out that the negative
outlook implication could disappear the moment the state passes a budget without deep cuts to municipal aid.
In a worst-case scenario, a downgrade would put Derby’s bond rating at AA minus (from AA stable). That is still a decent rating, Bernabe said.
“To my understanding it’s not because of anything these municipalities have done to themselves. Again, it’s all driven by the state problems,” Bernabe said.
Funds Are Low
But then there’s that pesky “fund balance.”
In addition to the state budget standoff, S&P Global Ratings notes Derby and the other eight communities have “weak” reserves.
If Derby takes a multi-million dollar hit in state aid, the city simply does not have the money in the bank to make up for it, Andrew Baklik, Dziekan’s campaign manager, said.
That points to a deeper problem in Derby’s economy, Baklik said.
The city relies too much on Hartford for fiscal stability and is essentially a “ward of the state,” Baklik said.
“What are we going to cut? The library? Police officers? Cut education?” Baklik said. “It’s going to be something because we’re in this precarious situation of having to rely on the state for financial stability.”
Dziekan pointed out that a 2016 audit on Derby’s finances showed the fund balance was just 2.1 percent of total government expenditures.
“That’s far, far lower than the eight to 10 percent range that most auditors recommend,” Dziekan said.
But Derby hasn’t been in the 8 to 10 percent range in nine years, regardless of whether a Republican or Democrat has been mayor.
According to annual audits of city government the fund balance was:
- 8.34 percent of total government spending in 2008
- 3.9 percent in 2009
- 6.1 percent in 2010
- 5.4 percent in 2011
- 4.2 percent in 2012
- 4.7 percent in 2013
- 6.4 percent in 2014
- 4.7 percent in 2015
- 2.19 percent in 2016
The latest fund balance isn’t available as the city is currently under its annual audit. Dziekan called on the city to release the number immediately.
Meanwhile, the city budget has grown 21 percent since 2010.
There have been tax increases in five of the past eight years. Those increases have happened with both Republican and Democratic mayors. Derby has long been classified as an economically distressed city.
But neither the mayor nor the Board of Aldermen directly control spending — or the fund balance for that matter.
It’s the jurisdiction of the Derby Board of Apportionment and Taxation (or tax board for short), with the mayor having “ex-officio status.”
Republicans have a majority on the tax board. They had a majority when the tax board voted on a 10 percent mill rate increase in 2016.
And Derby City Treasurer Keith McLiverty said the Republicans had a majority on the tax board when the board approved draining some $1 million from the reserves to buy land (including the former Derby Feed) on the south side of Main Street, in the long-stagnant redevelopment zone along the Housatonic River.
McLiverty is running for re-election on the Democratic line this year but has previously been endorsed by Republicans.
McLiverty said the Board of Aldermen, where there is a Democratic majority, and the tax board, where there is a Republican majority, both approved buying properties in the redevelopment zone because they thought it was in Derby’s best interest.
“It was a bipartisan decision,” McLiverty said. “They purchased land on the south side of Main Street for a future return on investment. They shifted assets from cash to property.”
The long-time city treasurer acknowledged the fund balance is too low.
“The challenge now is to concentrate on building it back up. And we’ve done that before,” McLiverty said.
Bernabe said using reserves to purchase land isn’t poor fiscal management.
“Derby over the last couple of years has drawn down their reserve levels to some degree. It’s my understanding that the money wasn’t used solely to balance the budget or reduce taxes, but was used for capital purposes,” Bernabe said. “That can sometimes be looked at as a credit positive. Instead of borrowing to purchase, you use cash. Sometimes that is positive.”
But GOP leaders such as Sam Pollastro, Jr., a member of the Derby tax board, have repeatedly said the Board of Aldermen essentially paints the tax board into a corner when it comes to spending.
The Aldermen, Pollastro has said, makes financial commitments that the tax board is compelled to cover.
The 2015 purchase of land on the south side of Main Street was actually a move to settle a long-running civil lawsuit the former Derby Feed property owner filed against Derby.
In March 2015, the Aldermen voted to pay up to $600,000 to buy the property and end the lawsuit, which had been filed in 2009.
In October 2015, meeting minutes show the tax board appropriated $506,837 toward the purchase contract.
One of the buildings was gutted by fire in December 2016. The city then had to pay to level the structure.
In an email, Second Ward Alderman Art Gerckens, a Democrat, said the city will get a return on its investment when the south side of Main Street is redeveloped.
There is a municipal election every two years in Derby.
Every two years a challenger says he or she will jumpstart the economy.
Every two years the incumbent says Derby is heading toward brighter days.
Outside of the wheels coming off state government in Hartford, Derby isn’t alone with its annual budget struggle.
In Seymour, First Selectman Kurt Miller literally talks about fund balances and bond ratings at every available opportunity.
To get the town on better financial footing, Miller set up a bi-partisan “Strategic Planning Committee.”
Part of the group’s mission is to ensure that sound financial practices get passed from one administration to the next — including a guideline dictating how much money should be kept in reserves.
In Ansonia, the GOP there led a successful push to take budgetary authority away from the tax board (an appointed body in Ansonia, unlike Derby) and give it to the Board of Aldermen (an elected body). The idea was to make local leaders more accountable.
The use of cash reserves and the size of the fund balance has become an annual issue in Ansonia. The Democrats are making it a key point in this year’s election.
In Derby, Dziekan said the city needs a full-time economic development director, which it had under former Mayor Anthony Staffieri (who is running for City Treasurer), to grow the grand list.
“We need an emphasis on real economic and business development— policies and practices that will bring jobs and tax revenue to Derby. Otherwise we risk crushing tax increases, drastic service cuts, or both,” he said.
But McLiverty said Derby residents need to realize the budget scenario this year is unlike anything the city has faced.
No one expected the state to still be fighting over a budget this far into the fiscal year.
There is a real possibility, McLiverty said, that Connecticut is entering a dangerous era in which the state walks away from its local responsibilities.
If that’s true, then it’s time for both political parties in Derby to think bigger — true regionalization in the lower Valley.
“We want long term survivability? Regionalize,” McLiverty said.
“Given the state is not fulfilling their statutory obligations, we have to act: one school district with Ansonia and Derby, one police department, and one public works department. Affordability is the answer for all of us.”