Bond Agency Point On Fund Balance Is ‘Shot Across Our Bow’

By John Voket

While the Town of Newtown completed another successful bond offering this week, the meeting local officials had with two rating agencies generated what was perceived as a written warning to local officials that continued use of the municipal fund balance to offset tax increases could result in a future rating downgrade.

On the other hand, Finance Director Robert Tait said that the town’s commitment to wean itself from the practice, while eventually reinvesting in the fund, bodes well for a rating increase to the coveted AAA status, possibly in the next three to five years.

The information was discussed at length by Mr Tait, First Selectman Pat Llodra, and the Board of Finance during a meeting February 14. Mrs Llodra told the finance board that for the first time, Moody’s Investors Service, which rated Newtown along with Standard & Poor’s prior to the latest offering, took a “shot across our bow regarding the fund balance” when it affirmed the town’s current AA1 rating.

“We’re not where other AA1 communities are,” Mrs Llodra said of the level of investment in the fund balance. “We need to pay attention to building it up again.”

Mr Tait said that ideally, the median level of a fund balance cushion should represent about nine percent of the overall budget, but the first selectman said Newtown should aim to reserve 11 percent if possible.

Finance board Chairman John Kortze confirmed that this was the first time a rating agency specifically referenced Newtown’s reliance on the fund balance to offset taxation. Mr Tait responded saying that the current budget proposal for the 2011-12 fiscal year reflects a zero dependence on tapping the fund balance for that purpose.

“The original plan this year was zero,” Mr Tait said. “It’s imperative we don’t deviate from that.”

Mr Tait also affirmed that Newtown is planning to begin fortifying the fund beginning in the 2012 fiscal year.

“We’ve got a five-year plan to take us to a AAA rating,” Mrs Llodra added.

Mr Tait confirmed that Newtown’s latest bond offering achieved a 20-year interest rate of 3.848 percent, which he said was positive considering that on the day of the offering, bond markets as a whole experienced an upward fluctuation in rates.

The town’s interest on short-term notes to temporarily cover expenses before bond funds are processed was 0.465 percent, Mr Tait said.

Ahead of the offering, the town conducted interviews and sought affirmations or increases in its bond rating from both Moody’s and S&P, which marked the first time in recent years that two agencies were consulted for that purpose. The manner in which the bonds were offered was also different, in that the offering was carried out like an auction versus a single bid process.

That resulted in seven participants making a total of 21 different bids to achieve the final sale and the 3.8 percent borrowing rate. The total bond offering was $14 million, while the short-term notes totaled $10.5 million.

Newtown’s bond consultant at Webster Bank, Barry Bernabe, also said Moody’s also affirmed the AA1 rating on the town’s $77.4 million in outstanding general obligation bonds. Mr Bernabe said according to Moody’s, “The AA1 rating reflects the town’s sizable equalized net grand list with above average wealth characteristics and manageable debt position.”

The rating also factors the town’s well-managed financial position, which has experienced reserve reductions over the past two fiscal years, according to Moody’s. Assignment of the MIG 1 rating reflects Moody’s expectation that the town will be able to refinance the short-term notes at their February 22, 2012 maturity, given the town’s strong underlying credit quality and history of favorable market access.

“Proceeds from the bond sale will fund various municipal capital improvements including $10 million for high school renovations,” Moody’s stated in the memo.