Moody’s: Outlook For Bond Rating Upgrade Is Positive

By John Voket

In late November, Finance Director Benjamin Spragg announced the latest Moody’s report on Newtown, which provided a positive outlook for yet another bond rating increase.

The current Aa2 rating and positive outlook bodes well for an uptick to Aa1 status in the next review, which could come as early as next summer. But the positive outlook comes with several caveats, which could derail the positive financial benefit, Mr Spragg warned in a memo issued to numerous town officials.

“Of particular interest is that they seem to imply that the town is in the Aa1 category, but there are a few issues so they decided to keep the positive outlook for another 6 to 12 months,” Mr Spragg wrote.

 “They would like to see the town’s aggregate financial reserve position — fund balance and stabilization fund — ‘institutionalized’ or formalized into a detailed policy approved by the Board of Finance and Legislative Council, to provide comfort that if management changes, the new management will abide by the current formal reserve policy.”

Mr Spragg believes if the town charter is revised, Moody’s rating officials will not want the aggregate financial reserve position of the town to deteriorate. Those Moody’s officials indicated while they do not think the community’s OPEB (Other Post Employment Benefits) will be a major issue, they want to see the actuarial report on this before any recommendation for a rating upgrade.

Finally, Moody’s officials were concerned that it took four budget referendums to get the budget passed.

“This is usually an indication that taxpayers are losing some of their ‘willingness’ to pay for some of the capital projects and/or municipal/school services that they are used to receiving,” the finance director concluded.

The latter detail has been an issue that finance board chairman John Kortze has mentioned at several meetings since the positive outlook was issued. He discussed his concerns with The Newtown Bee recently.

“Moody’s likes the fact that we have ample resources outside the general fund. The town is in a healthy financial position with conservative budgeting, but we have to maintain that,” Mr Kortze said, adding that general fund municipal surpluses are trending down universally.

He credits the steady trend and hopeful continuance based on the town’s ability to pay off debt long before it comes due. Mr Kortze said he takes issue with anyone who might be suggesting the town extend its borrowing initiatives from 20- to 30-year programs creating an artificial appearance of taxpayer savings.

“It would bring all our monthly payments down by 33 percent on those issues, but we can’t ignore what is in the headlines,” he said referring to the current national subprime mortgage debacle. “We should be ratcheting up our aggressive payback on these issues, which will enhance our conservative position in the eyes of the bond agency.”

Mr Kortze noted Moody’s recognition for the first time in its semiannual reports of the town’s ten percent debt cap, which the finance board watches closely with the help of its “red brick graph,” which charts predicted extensions to that cap based on capital borrowing proposals for the town and school district.

“I read this as a warning. We don’t have the commercial development of a Stamford or even a Ridgefield to cushion the town’s grand list. All we have is that debt cap,” he said.

Both Mr Kortze and Mr Spragg individually stressed the ultimate importance of getting the 2008 budget proposal passed on the first round. Both have suggested that Moody’s might have already been inclined to deliver a rating upgrade if the last series of budget proposals had not failed on the first three attempts.

“This should be a red flag to all the departments, boards, and commissions related to their individual budget proposals,” Mr Kortze said.

Mr Kortze pointed out Moody’s acknowledgement of an effective local Board of Finance, and an overall pattern of strong financial management. He also cautioned anyone in the community who might assume simply explaining the upcoming budget process will ensure its passing.

“The notion that explaining the budget ensures approval is inaccurate. You have to take every step necessary to disclose all the information, but even then the voters may still not approve it,” Mr Kortze concluded. “You can’t expect that explaining it will get it passed when you go back to the voters with a seven percent increase.

“We can only expect to get the next budget passed on the first round, and better ensure this positive bond rating outlook turns into a ratings upgrade, by bringing forward more reasonable levels of spending in the next budget cycle.”