Expert Advises Finance Board To Keep Ratings High

By John Voket

A municipal bond expert was invited to speak before the Board of Finance December 10, to help clarify how the town might better protect its current AA2 bond rating or increase the likelihood of a future upgrade. In the end, John DeNoto of Webster Bank’s Treasury Group dispensed advice that was as much about common sense as dollars.

Mr DeNoto explained that his institution provides advisory support to both municipalities in advance of a bond offering and a unit that presents competitive bids on behalf of a syndicate on particular bond issues. He said both units function independently, and in his capacity, Mr DeNoto speaks with investors and financial advisors who are looking to buy into particular bond issues.

“When our syndicate wins a bid, it’s our responsibility to have the syndicate cut a check to the Town of Newtown, and the town is out of it,” he said. “Whatever happens after that is our responsibility.”

Due to the town’s tax- exempt status, Mr DeNoto said when the town issues a bond, it also issues a tax regulatory agreement to the Internal Revenue Service through bond counsel. That agreement reflects the amount, intended use and timeline for expenditure of the funds.

“The IRS rules do not permit the town to arbitrage those funds. The town cannot raise funds, have a tax benefit approved, and then take that money and invest it at some positive spread,” Mr DeNoto explained. “If proceeds are not used immediately, it has to be used over a specified period of time for [its specific] purpose.”

He suggested the IRS is extremely interested to see the town use its bond proceeds for the intended purposes, and that the bond market is extremely interested to see the town remains in good favor with the IRS on bond-related issues.

Mr DeNoto referenced an article in The Newtown Bee he read that stated the potential long-term tax savings in interest to the town for maintaining or increasing its bond rating. He explained that rating agencies hear a lot about the quality of management, growth, and track record of the town, along with the diversification of its tax base.

“The ratings agencies also look at patterns with regard to how often the budget is turned down. Monroe was downgraded two years ago for something like that,” Mr DeNoto said.

Finance board Chairman John Kortze asked the bond expert if he saw anything in the most recent Moody’s Investors Service positive outlook that was either a positive or negative for the town.

Mr DeNoto said ultimately, investors rely on the ratings.

“The ratings agencies have consistently said the level of financial management here is very good. The issues that have come up are the approval processes for the budgets, which have given them some concern,” Mr DeNoto said. “It really behooves us to try and maintain the rating or get us to bump up.”

He said in the current financial environment, there is little incentive to provide that bond rating increase.

Mr Kortze then asked the bond expert, from his perspective, to talk about the ramifications of changing the course of bond expenditures. Mr DeNoto reiterated the town’s bond counsel must attest to the IRS that funds that are delivered are being used for the stated purpose in the issue.

“You cannot change the purpose after the fact, even if it’s a legitimate purpose. For example, you can’t take bond money raised for [acquiring open space] land for police cars, even though it is a legitimate purpose,” Mr DeNoto said.

He said litigation that might occur as a result would be reflected in bond agency reports and would have some negative ramifications to the town.

Mr Kortze than asked about guidelines the town tries to enforce to protect its bond rating, and whether or not something more might be done.

“Newtown is perceived as a very good credit risk. Even in the investment community there is a perception that Newtown should be traded like a AA1,” Mr DeNoto said. “We can control the debt cap and address some of the rating agency issues to make the strongest case Newtown can for an upgrade.”