BOF, Council Codify Financial Practices Ahead Of Bond Agency Sessions

By John Voket

On the eve of Newtown seeking its latest municipal bond rating review, the Legislative Council put its formal stamp of approval on a set of financial best practices, many of which have been in place informally for years.

The new formal guidelines, which were unanimously approved January 26 by the Board of Finance and before that by the Board of Selectmen, will help pay down municipal debt faster, put money away for strategic capital purchases, boost the town’s undesignated fund balance to a level on par with similar communities in Connecticut, and even ratchet down the total percentage of capital borrowing corresponding to each year’s approved budget.

The council’s action came less than 24 hours before First Selectman Pat Llodra, Finance Director Robert Tait, Community Development Director Elizabeth Stocker, and possibly some observers, sit for a pair of teleconferences with representatives from Standard & Poor’s and Moody’s, two of the three financial organizations that issue municipal bond ratings. Newtown does not currently seek bonding evaluations through the third institution, Fitch Rating.

Currently, Newtown maintains the second highest rating from S&P (AA+) and Moody’s (Aa1), a status many officials would like to see elevated to AAA sooner than later, because it maximizes Newtown’s borrowing potential while minimizing the cost to borrow for capital projects — rates that have been at historic lows in recent years. The policies that completed the approval with the council February 1 were born in part from observations, constructive advice, and directives from the bond rating agencies and local bond council as Newtown has steadily sought lower and lower borrowing rates, while seeing its bond rating creep upward toward that perfect AAA credit score.

One of the most influential comments came from Moody’s, before Newtown went out to bond a set of capital projects in 2011. At the time, Mrs Llodra and finance officials saw that perceived warning on Newtown’s fund balance as the town’s most significant barrier to achieving a better bond rating, and as a potent red flag signaling Newtown’s present rating might be in jeopardy.

That information was discussed by officials during a lengthy meeting last February. Mrs Llodra told the finance board in 2011 that for the first time, Moody’s 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 last February 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. With that and other points gleaned from bond agency analysis over the past few years, the package of policies that were codified Wednesday were all viewed as progressive, positive, and also designed to minimize the burden on taxpayers and to set Newtown’s financial ship on a better course.

Mrs Llodra said the package of new policies will be presented to the rating agency representatives as Newtown’s newly ratified “financial plan.”

“It’s important to demonstrate at a government level, that we have a plan to manage resources in a prescriptive fashion,” Mrs Llodra told the council February 1. “It demonstrates Newtown has established a systematic approach to managing its resources.”

The first policy will annually reserve two percent of the municipal budget to a “pay-as-you-go” plan for capital items. The town has already used this practice to purchase heavy machinery, and in this year’s budget proposal seeks to establish a fund to begin replacing town motor pool vehicles.

The next formalized practice will budget for and transfer no less than 0.3 percent of the annual budget to the capital nonrecurring account. Another policy dedicates no less than 20 percent of any refunding (or refinancing) savings on outstanding bonds to pay down existing debt or be retained in the general fund.

Another policy will dedicate no less than 20 percent of any Grand List increase to the general fund, while another move will incrementally lower the borrowing cap for capital projects from its current ten percent of the annual budget to nine percent.

Finally, the town’s new fund balance policy increases the minimum in the undesignated account from what was five percent, to eight percent — with the maximum allowable limit of 12 percent.

Mrs Llodra said above all, she and the officials speaking to bond agency reps would stress the fact that Newtown has weaned itself off of using the fund balance to mitigate taxation in just a period of three fiscal cycles, and now has a policy in place that will see the balance match that of many other similarly-sized, AAA-rated towns.

Mr Tait said that, in considering a community for a bond rating increase, the agencies also look at the speed at which annual financial information is made public. The finance director noted that for two years running, Newtown was among the first or the first community in Connecticut to complete and post its annual audit.