Finance Board Weighing Switch From Moody’s To S&P

By John Voket

Could a switch in bond rating agencies get Newtown that elusive AAA status it has been courting since its last upgrade?

The bigger question that seemed to hang over officials during an October 1 finance board meeting, is whether a AAA from Standard & Poor’s will qualify for lower interest rates than the current AA2 status and the glowing reviews Newtown’s financial practices have received from Moody’s Investors Service.

Barry Bernabe, the town’s bond consultant with Waterbury-based Webster Bank, suggested during a presentation to the board that the only way to know for certain would be to seek ratings from both agencies the next time the town makes a bond offering.

Following the meeting, at least a couple of finance board members thought the modest extra cost to run that experiment might be worth it.

Joe Kearney and Martin Gersten both estimated that at about $10,000 per rating, considering the historically low rates Newtown’s financial practices have justified already, the experiment will likely pay for itself in additional interest savings no matter which rating serves the town best.

“When you look at it buying us tens or hundreds of thousands in interest savings, it just becomes a small one-time administrative fee,” Mr Gersten said.

During his presentation Mr Bernabe said historically, prior to the recent economic downturn when all three top municipal rating agencies took hits in relation to involvement in the subprime lending debacle, their ratings and the differences in interest rates that they influenced was “minimal.”

“But now the differences in those ratings with Moody’s, S&P, and Fitch have become much more magnified,” Mr Bernabe said, adding that Moody’s is still the most highly regarded rating agency for municipalities. Since his institution handles the administration of bond offers for 52 Connecticut municipalities, Mr Bernabe said he has practical and virtually up-to-the-minute data showing the slightly different flavorings each player at the table can bring to the transaction.

In Newtown’s case, Mr Bernabe equated the town’s situation to holding a handful of aces.

He pointed out Moody’s most recent review cited as positive the town’s new policy of managing its fund balance, maintaining a Capital Improvement Plan (CIP), debt management, and overall financial performance, even the stability and tenure of its finance director.

“Interestingly, regular turnover in the finance director position has a negative influence on bond ratings,” Mr Bernabe said. “And they like to see a CIP. That’s always been a big positive for Newtown.”

And while many of the towns serviced by Webster maintain three- to five-year CIPs, Mr Bernabe said, “most do not put the work into it like Newtown does.”

Under questioning from Board of Finance Chair John Kortze about qualifying the single most important factor in achieving consistently high bond ratings, Mr Bernabe replied: “I think the most important thing is a debt service cap.”

This refers to the town’s policy of maintaining a debt service ratio that is ten percent or below its total budget. The Webster consultant said Newtown’s adherence to the ten percent cap “has been a big positive for ratings.”

Mr Bernabe pointed out that rating agencies are now focusing more and downgrading ratings more frequently on towns that use their fund balances for tax relief, a practice from which Newtown is currently weaning itself. He referenced recent downgrades dealt to Monroe and Trumbull in part because they failed to stem the practice.

“Most taxpayers want to draw down on the fund balance to mitigate their taxes,” Mr Bernabe said. “But the ratings agencies still say ‘manage your bills and set aside at least ten percent of your budget in reserve.’ And don‘t forget, when you draw on your fund balance to balance your budget, next year you’re starting out under water by the amount [taken from the fund balance] the year before.”

Mr Bernabe told the finance board that the next hot topic among rating agencies will be tied to towns’ practices regarding the funding of pension plans and other post employment benefits (OPEBs).

Returning to the question of whether the town should consider either switching from Moody’s to S&P for its next bond offer to try and achieve a AAA rating, Mr Bernabe pointed to neighboring New Fairfield, which was able to achieve a two point upgrade with a switch to S&P.

But he then focused on the fact that Newtown, with its AA2 rating, received a rate of 2.27 percent in its latest bond issue — the single lowest rate on any bonding in the entire state this year for any town.

“Historically, Newtown’s rates have been closer to AAA-rated towns,” he said, adding that lately, investors are more interested in the town’s financial practices and performance than just the bond ratings. And that Newtown’s historically tight performance and practices are credited in numerous reports from Moody’s when justifying the town’s status, which also included a positive outlook in a previous bonding cycle.

“A total of $1.5 million saved in one year; a 2.2 percent rate... I’d say Newtown’s good pattern of financial management has paid off,” Mr Bernabe said.

“So if we go to S&P could we get a better rating?” Mr Kortze asked pointedly.

“You never know. Markets change, relationships change,” the bonding consultant replied. “Maybe it’s something the town should explore. I see a good chance for Newtown to move up.”

Mr Kortze said after the meeting there is no guarantee that a higher rating from S&P will qualify the town for better rates that a lower rating from Moody’s.

“It’s not a given that we will get better savings. The market has put greater validation on high ratings,” the finance chair added. “But today the reward frequently goes to the town with the best overall financial practices.”