Town Gets Good News On Borrowing Costs

By John Voket

The town received optimistic financial news between Monday’s Board of Selectmen meeting and Wednesday’s Legislative Council session. In his report to the council August 5, two days after his board met, First Selectman Joe Borst reported the latest refunding on local municipal bonds netted taxpayers $801,671 in savings.

That news was nearly concurrent with an affirmation of the town’s AA2 bond rating from Moody’s Investors Service, the agency that scores Newtown’s municipal credit worthiness.

Paying what Newtown’s bond consultant at Webster Bank described as a “historically low rate,” Barry Bernabe credited Newtown’s strong Moody’s rating for qualifying the borrowing at a true interest cost of 2.43 percent.

The refunding on nearly $13.9 million in obligations affected bonds originally issued in 2004, 2005, and 2007. The town will begin seeing the savings beginning in 2010, ’11 and ’12 where the borrowing cost will be $250,000 less per year. Then the savings multiply to half-a-million dollars annually between 2013 and 2020.

Mr Borst was joined at the council meeting by Board of Finance Chair John Kortze, who helped interpret the information and industry speak in the Moody’s affirmation report. During his review of the information, Mr Kortze pointed out that, according to the Moody’s report, the town is doing the right thing in restricting its bonding to a maximum of 20 years, and paying down debt as aggressively as possible to achieve maximum savings. Councilman Gary Davis had suggested on several occasions since his election in 2007 that the town should explore the possible cost savings by bonding for up to 30 years to lower the net annual expense.

Finance board members have consistently supported sticking to the town’s current practice, and supported both former finance director Ben Spragg and his successor Robert Tait on aggressively paying down debt.

The finance chair said that because of the affirmation, and the added bonus of being recognized for several positive voluntary practices, the town will not have to consider extending bond terms beyond 20 years. “And it will still cost us less,” he said.

Financial Assumptions Incorrect

Mr Kortze referenced a number of points made by Councilwoman Po Murray in a March 22 email to constituents offering her interpretations of financial data, town financial practices, and concerns related to Moody’s rating of the town.

“There was a lot of discussion on reserve levels,” Mr Kortze said.

At the time, Ms Murray wrote that “Newtown’s financial standing is not as dire as it has been portrayed,” and provided an analysis of the general fund balance showing town has saved $12.78 million in a so-called “rainy day fund” in an effort to receive an upgrade from Moody’s.

Ms Murray criticized the Board of Finance for applying only $2 million of that surplus fund to the revenue side, thus artificially necessitating the need to make further cuts on the spending side of the budget and forcing teacher layoffs. But Mr Kortze pointed to an actual decline in the surplus fund, and referenced a comment in the current Moody’s affirmation that recognized Newtown’s “goal of balancing the 2011 budget without the use of fund balance to support the operating budget.” The Moody’s report also noted the finance board’s recommendation in the current budget cycle begins a positive trend by reducing the general fund balance appropriation by 24 percent.

“We stressed not to take more from the general fund,” Mr Kortze told the council this week. “Again we have Moody’s affirming it was a good idea. From Moody’s perspective they would rather you raised taxes” instead of “going to the well.”

Mr Kortze then pointed to further criticism from Ms Murray in her March email to constituents that stated: “The BOF has followed the self-imposed policy of not spending more than 10 percent of the operating budget for capital projects stating that if we spend more than 10 percent, we would receive a downgrade. Five of the ten AAA towns in Fairfield County spend beyond 10 percent and they have not been downgraded.”

“Moody’s flags the 10 percent debt cap as maxing out,” Mr Kortze said of the latest rating agency report. “This is the first time Moody’s has recognized [the 10 percent cap] and is paying attention to it.”

Moody’s A “Necessary Evil”

During a question and answer session following the financial report, Mr Davis asked the finance chair what the cost for borrowing would be if Moody’s dropped Newtown one position in its bond rating. Mr Kortze said he could not identify a specific number, but could confirm “going forward it would negatively affect everything.”

He said even on short-term borrowing which the town recently completed to cover Phase 1 construction costs for the high school expansion, the interest Newtown is paying is based on AAA rating levels because the market observed Newtown’s top standing in the eyes of the rating agency.

“Even staying where we are, I expect getting [interest] rates at the lower end of the scale.”

Responding to an issue Ms Murray first raised in her March email about Connecticut’s Attorney General Richard Blumenthal charging Moody’s and other rating agencies with “deliberately giving lower credit ratings to bonds issued by public entities [municipalities] in comparison to corporate and other kinds of debt.” She noted Mr Blumenthal’s claim that by purposely giving artificially low credit ratings to municipalities, taxpayers have been forced to unnecessarily incur millions of dollars in higher interest rates and bond insurance.

Mr Kortze replied saying that being in the financial business, “nobody is more upset about the failings of the rating agencies than me.” The finance chair said it had long been his opinion that rating agencies were easier on companies than on municipalities in their rating criteria, despite the fact that municipalities pose virtually no real credit risk.

“Ratings agencies are an unfortunate but necessary evil,” Mr Kortze said. “They still hold the cards and what they say matters...110 percent.”