Positive Outlook From Moody’s May Precede Bond Rating Boost For Newtown

By John Voket

Newtown officials went to Moody’s Investors’ Service in late December on routine borrowing business and came back with a glowing report that may bode well for a boost in the municipal bond rating in the next year. Currently Newtown enjoys an Aa2 rating from the agency, which is a leading international provider of independent credit ratings, research and financial information.

In a letter from Newtown’s Finance Director Benjamin Spragg to town officials, he notes that while guaranteed, “…a positive outlook generally means that a rating upgrade is likely in the next 12 to 18 months assuming the Town of Newtown continues to maintain financial stability.”

Areas to monitor include continuing to budget conservatively, increasing the Reserve Fund for Capital and Non-Recurring Expenditures in step with the budget expansion (through recurring revenues), identifying and managing the implied subsidy for other post-employment benefits related to the school board, charter changes allowing the designation of unspent surplus, and voter resistance to tax increases, Mr Spragg continued.

While reissuing the Aa2 rating on the town’s latest bond issue of $9.46 million, Moody’s extended the positive outlook on more than $58 million in outstanding debt, the report states.

Mr Spragg noted in speaking with Moody’s representatives in late December that Newtown is already employing practices and programs of financial management that are not yet in place in other communities that currently have the Aa1 rating.

While the intricacies of the municipal bond rating business don’t exactly qualify as exciting to the average taxpayer, Mr Spragg indicated that savings realized as a result of upgrades in the past and future have saved residents millions of dollars.

Running the numbers on one recent day with the assistance of Newtown’s bond advisor, he calculated the difference between debt service on the existing $9.46 million issue against the interest savings if the town had received an upgrade to Aa1.

“The town is currently borrowing $9,460,000 and the estimated savings would range in the $180,000 to $200,000 for the $9,460,000 borrowing based on a Aa1 rating versus the existing Aa2,” Mr Spragg said.

The savings begin to multiply dramatically, however, when one considers the savings on bonding for all projects on the town’s proposed five-year Capital Improvement Plan, he said.

“Interest savings would be incurred on all future issues, so the $89 million of borrowing proposed in the capital improvement plan would derive an estimated savings of approximately ten times that of the current borrowing or $1.8 to $2 million,” Mr Spragg said.

More Savings Possible

Finance Board chairman John Kortze said that the $2 million potential savings based on the bond rating upgrade would subsequently multiply over any existing bond issues the Town may want to call, which is similar to refinancing the existing debt at the lower rate.

“By reissuing $20 million in existing bonds, we could save another half-million dollars over the next 20 years,” he confirmed.

Mr Kortze said Moody’s latest report may represent the most favorable validation of Newtown’s sound financial practices since the community first requested a bond rating upgrade in the early 1970s.

“Every report we see from Moody’s has lots of good information, and it comes from a completely unaffiliated source,” Mr Kortze said. “We’re very happy about this report because it validates that we have a lot of procedures in place that we adhere to, which is making a positive impact and is helping the town tremendously.”

The finance board chair pointed out that even the cautionary details can be beneficial if one “reads between the lines,” and takes steps to address Moody’s concerns.

“Certainly an absence or change in the current way we are handling financial matters as a town would create a problem in the eyes of the bond agency,” he said.

Mr Kortze noted that the report echoes more global warnings that his board has been flagging for several months while deliberating on a proposed high school expansion.

“One thing that really sticks out in the report is the warning of slowing growth nationally, which translates to a slower growth of the tax base regionally, and here in Newtown,” he said, adding that a fiscal forecast provided by State Representative Julia Wasserman predicted slowing growth will likely result in a significant state budget deficit by 2010.

“This means less money coming down to towns as early as 2008 or 2009,” he said. Mr Kortze said the Moody’s report also mirrors the state report in calling for transparency and accurate reporting of pension liabilities.

“This is another area that is already starting to impact corporate, municipal and even state bond ratings,” he said. “We need to be sure these issues are under control.”

He said the average taxpayer should come away from the Moody’s report feeling even more secure that the town is managing its money well.

“It’s clear these positive reports and the continuing improvement in our bond rating have already saved taxpayers millions over the lifetime of our bond issues,” Mr Kortze said, noting that even the positive outlook can potentially benefit the town in subsequent borrowing.

Charter, Budget Concerns

“This report has so many good comments,” he said. Mr Spragg did say, however, that in order to best position the town for an increase, it is imperative that the current Charter Revision Commission proposes a change to allow the town to manage its fund balance.

“Once the charter allows the town to manage a recurring reserve, it will bode well for a Aa1 rating,” he said. “And Moody’s is also watching the budget process closely, and noted in this visit that they were aware the last budget took three attempts to pass.”

Mr Kortze has previously noted that neighboring Monroe recently had its bond rating reduced, in part because of perennial difficulties passing a budget.

First Selectman Herb Rosenthal said he felt gratified that the independent agency sees Newtown managing its finances so well compared to similar communities across the country.

“They seemed very impressed that we have initiated guidelines and stick to them,” the first selectman said referring primarily to a debt cap that should not exceed ten percent of overall spending. He pointed out that even though Moody’s representatives reviewed the proposed five-year capital plan, which incorporated nearly $100 million in spending proposals, the agency still issued the town a positive outlook.

If the town approves the needed charter revision and passes the upcoming budget proposal without opposition, Mr Spragg believes that Moody’s may extend the rating upgrade as early as next November or December.