Town’s Credit Policies

Earn It Windfall Savings

By John Voket

According to an advisor at Webster Bank, Newtown received better rates on its February 14 bond sales than AAA-rated Greenwich was able to achieve on a similar offering just a few weeks earlier. This despite the fact that one rating agency, Standard & Poor’s, believes Newtown is still about three years away from achieving a bump from its current, second-tier AA+ status to the equivalent of a perfect credit score.

 This was just one piece of favorable information that drew unanimous applause from the Legislative Council February 15, after First Selectman Pat Llodra and Finance Director Robert Tait reviewed the outcome of back-to-back bond sales and refunding that occurred earlier this week.

In a briefing with The Bee before the council meeting, Mr Tait reviewed the sometimes complex financial information that added up to significant savings and an unanticipated windfall for the community. Board of Finance Chairman John Kortze also provided a snapshot of how Newtown performed against a number of other bond sellers, including the State of Connecticut.

This week, Newtown offered $11.8 million in general obligation bonds.

According to Morningstar, an investment research firm that compiles and analyzes fund, stock, and general market data, general obligation bonds offer investors a relatively safe investment vehicle while providing states and local governments with funds for community improvement.

The latest Newtown bond sale generated funds to primarily complete paying for the Newtown High School addition.

Mr Tait said the true interest costs, or an average rate on the 20-year issue, was 2.35 percent, which was lower than projected just a few weeks ago as the selectmen completed the 2012-13 budget proposal. The debt service for these bonds next fiscal year will be $317,993 — an additional savings of $65,000, which will be accounted for when the Board of Finance takes up budget deliberations February 23.

In applying those modest savings over projections over the 20 years of future debt service, illustrated by a schedule closely watched by town officials, Mr Tait said the lower than anticipated interest rate has created more of a buffer between the total amount of annual borrowing costs and the ten percent debt cap Newtown maintains.

Refinancing Success

On February 15, Mr Tait’s attention turned to a planned refunding or refinancing of $15,375,000 in qualified existing bonds. He said while his last estimate of potential savings in January was $1.3 million, a number of factors added up to Newtown locking in a $1.6 million savings windfall.

This news elicited a spontaneous round of applause from council members as they received the news just a few hours later, along with shouts of “good job” from a number of the local officials in attendance.

Mr Tait said $375,000 in savings — $125,000 more than anticipated — will be applied to Newtown’s undesignated fund balance. Another $804,000 in savings will be applied similarly in 2012-13, with the balance of about $375,000 in savings being applied in the 2013-14 fiscal cycle.

The windfall will immediately boost the fund balance that both S&P and bond rating agency Moody’s say is currently below that of other similarly rated towns, and is a barrier to Newtown receiving a coveted AAA rating.

Nonetheless, officials say Newtown bonds are still a highly attractive investment in the marketplace, perhaps due to the frequency the town issues bonds or refunding. Officials also believe investors like Newtown’s myriad financial practices like paying down debt ahead of schedule, and maintaining a formal debt cap.

The latest issue may have been even more attractive now that a number of new initiatives have been formalized to help save for strategic capital purchases while further infusing the fund balance.

Besides achieving the lowest interest rate ever for a local bond issue, Mrs Llodra said the town’s bond advisor told her Newtown did better this week than AAA-rated Greenwich, when it issued bonds back in January. And this week’s offering attracted eight bidders, the most ever for a local issue.

Historic Rates

Mr Kortze said documentation he can access through his work at Wells Fargo Securities provided additional evidence that the price/yield of each Newtown bond issue is historically high. And in the case of a particular issue offered by the AAA-rated State of Connecticut and another from AAA-rated Stamford, Newtown received substantially better interest rates.

“In terms of borrowing advantage, Newtown is closer to a AAA-rated town than the AA+ towns in our current rating category,” Mr Kortze said. “On paper, Stamford looks like a better credit risk, but on one particular bond issue their borrowing rate was ten basis points higher than Newtown. The marketplace treats us better.”

The finance board chairman did the math on how much interest savings are worth compared to other similarly rated towns as well. Mr Kortze said a particular $12 million bond issue with a 2017 maturity date offered by AA1-rated Redding achieved a 1.14 percent rate while at the same time, Newtown received a 0.85 percent rate.

“In actual dollars and cents, that means even though Redding and Newtown are rated the same, in the marketplace, Newtown received a rate 29 basis points lower,” Mr Kortze said. “Doing the math, that represents $34,000 in interest savings annually for the same amount of borrowing for the same period as Redding.”

Mrs Llodra also told the council February 15 that S&P designated Newtown’s overall financial practices as “strong,” a status reserved for only about ten percent of all S&P-rated entities.