School Bd. Uncertainty On Capital Costs Could Affect Town’s Financial Rating

By John Voket

Glancing over the innocuous looking sheet detailing the latest modifications to the Board of Education’s five-year Capital Improvement Plan (CIP), one might dismiss the two final items on the list that substitute three simple letters for dollar amounts. But according to local financial authorities, those three little letters — TBD, for “to be determined” — are preventing the town’s financial managers from achieving a balanced plan for municipal spending, bonding, and debt service.

While some close to the issue may shrug it off noting the town is arguably in the best financial shape possible thanks to two bond rating upgrades in the past two years that have positioned Newtown to borrow and finance municipal projects at historically low interest rates, others believe the community may now run the risk of having those bond ratings reversed.

If this occurs, the town could become liable for millions of dollars in higher interest rates over the next 10 to 20 years, as well as effectively putting the town and its financial mangers on a “watch list” for the entire world financial community to see.

On Tuesday night, town officials including members of the Board of Finance, Newtown Finance Director Ben Spragg and First Selectman Herbert Rosenthal collectively put their foot down regarding the unspecified proposals. During a joint meeting of the boards of finance and education, town officials insisted school officials immediately plug real proposed expenditures into the school’s CIP and remove the “TBDs,” which according to finance board chair John Kortze have lingered on the district’s paperwork for far too long.

Deferring repeatedly to Mr Spragg, who sat in the front row during the joint meeting at the Reed School, Mr Kortze and other finance board members meticulously explained to school board members the ramifications of not being able to form a complete financial plan for the community, as well as the multimillion dollar gamble the town would take if it pushes up to or above recommended and self-imposed limits on annual debt service resulting from capital spending.

Mr Spragg repeatedly asserted that the town simply cannot make solid financial decisions while the proposed high school expansion and middle school auditorium/cafeteria expansion projects remain listed on the Board of Education’s CIP without proposed costs for the projects attached.

Newtown’s bond rating company repeatedly noted through three recent rating reviews that if considered on its own, and judged against all the positive attributes, the two “TBA” items would likely be of little overall consequence. But, as Mr Spragg pointed out, in the eyes of Moody’s Investors Service associates, the town already has a standing concern working against it: the fact that Newtown’s charter mandates the town apply unspent surpluses to the next year’s budget.

During the joint meeting Tuesday, Mr Kortze illustrated the point by reading from a 2004 correspondence from the rating firm.

In a December 8, 2004 memo from Moody’s announcing Newtown’s bond rating upgrade to Aa2, it notes, “…a credit weakness is the town charter prohibition on maintenance of undesignated fund balance which mandates the designation of unspent surplus on the subsequent year’s budget.

The memo continues: “The town has largely demonstrated the ability to manage within this constraint, providing assurance that prudent budgeting by the experienced management team can offset negative midyear events such as the recent state aid reductions.”

Yet another concern was developed in an up-to-the-minute review of the town’s financial standing which Mr Spragg conducted prior to Tuesday’s meeting. He discovered that when factoring in the anticipated projects already approved in this year’s CIP, the town will be less than $10 million under the aforementioned ten percent cap on debt service strongly recommended by Moody’s as a generally accepted guideline.

This prompted Mr Spragg to issue a memo warning that any potential increases to the town’s debt service to accommodate new projects or significant increases in projects already approved, “reduces the town’s budgetary flexibility,” in the eyes of Moody’s rating experts. He also noted that the upcoming revaluation which is expected to first impact the 2008/2009 fiscal cycle would likely make it one of the more challenging budgets to get passed, another pending development that the bond ratings company watches very carefully.

Any one of these elements, Mr Spragg stated, “will probably not be fatal to our bond rating.” But he said that considered comprehensively, the fact that the town cannot yet produce a bulletproof financial plan because of the TBDs on the high school and middle school expansion projects, the charter provision, the proximity to the cap on the recommended debt service, and the fact that the school district is proposing another $12.9 million in CIP spending, a financial disaster could be in the offing.

Mr Spragg said neighboring Monroe was just given a “negative outlook” by Moody’s because that community’s budget approval process was so protracted, and because the town continued to draw down on its fund balance to meet financial needs.

“This is the warning a town receives before a downgrade (in bond rating) is given if the town does not respond positively to the negative outlook,” Mr Spragg wrote. He further recommended that the town and Board of Education defer projects on a priority basis.

“There is a need for discipline when it comes to incurring more debt,” he noted. “Keeping debt-related costs within the guideline offers benefits to the taxpayers and may also reduce the likelihood of opposition to needed capital projects.”

School board member David Nanavaty inquired about how the board and town could keep debt service below the ten percent cap in the event student population numbers continued to expand.

“We have unanticipated growth that is going to continue to exceed our expectations,” Mr Nanavaty told town officials. “How do we deal with that?”

Mr Rosenthal said recent data shows growth in town may be slowing somewhat. Particularly, the first selectman said, the town has seen a drop off in building permits lately.

“But Newtown still remains one of the fastest growing towns in Connecticut,” he said

Mr Spragg added that the tool the town uses to address unanticipated growth or expenditures is the CIP.

“But I have to get back to these TBDs,” Mr Spragg said. “It’s very difficult when you have a high school expansion planned for next year, and we don’t know what it is. If we ignore it, and put together this great plan, then next year the plan will be blown out. This has to be taken care of now so we can plan. We’re handicapped by you not giving us information.”

“There are lots of ways to solve problems without spending 10…20…30 million dollars,” Mr Rosenthal added.

Despite the assertions that the Board of Education needs to step up efforts to complete its piece of the financial plan, several members following the session expressed gratitude and appreciation for the wealth of information they gained from the session.

School board member Paul Mangiafico went as far to suggest he would support regular joint meetings between his board and the Legislative Council, selectmen and the finance board.

“It’s clear some of this financial stuff is taking place in a vacuum,” Mr Mangiafico said. It’s a complicated discussion these intricacies of bonding and bond ratings, but the Board of Finance was very informative and the exchanges were very worthwhile.”

School board chair Elaine McClure said she took to heart the suggestions and recommendations made by town financial representatives.

It’s obvious we need to come up with high school numbers as quickly as we can,” she said.