Rating Upgrade Could Save A Quarter Million On First Bond Issue

By John Voket

While at least one member of the Board of Finance is anxious to meet with the town’s bond rating agency to pitch for an upgrade, the town’s new finance director and bond council are in agreement that good things can come to those who wait…especially to those who wait for an audit to be completed.

At Monday’s meeting, finance board member Joseph Kearney asked how soon the town could meet with Moody’s to report on a newly enacted charter provision permitting management of an unreserved fund balance.

That charter revision, which was also passed in April and is now in effect, removes what numerous town officials have described as the last barrier to a rating upgrade.

Finance Director Robert Tait told The Bee following the meeting that he wants to visit with Moody’s Investors Service in December, just ahead of issuing $22 million in bonding that was approved by voters in April. He said that if a bond rating increase to AA1 is granted at that time, taxpayers would enjoy almost a quarter million dollars in savings over borrowing at the current rating level.

Mr Tait said that by waiting until year’s end, he will be adequately prepared for the upgrade pitch with an administrative policy for the fund balance. The finance director said he would also have a completed municipal audit demonstrating that Newtown has conformed to all suggested practices the rating agency issued in a “positive outlook” before the last bond issue.

“In the positive outlook, Moody’s says the town maintains ‘financial flexibility.’ But up until the charter change, Newtown was building [financial] flexibility into a capital nonrecurring fund,” Mr Tait said. “Now we can show them Newtown maintains an unreserved fund balance in the general fund. That’s what they were looking for, wasn’t it?”

Although Moody’s already delivered several rating upgrades in fairly quick succession over the past decade, bringing the town to AA2 status, the agency reported that time after time, it wanted to see the charter changed to permit a fund balance to be carried forward and managed by the town’s finance authority.

The previous charter directed all surpluses be carried forward and applied as revenue toward the subsequent year’s budget, instead of relegating some or all of those funds to an account that could be tapped for future needs.

Mr Tait said another observation Moody’s made in its positive outlook referred to “increased voter resistance” to pass a town budget, because in 2007 that spending proposal was defeated three times before it was finally approved.

“[We can show Moody’s] that the budget passed the first time this year, despite large capital expenditures,” the finance director said.

During the finance board meeting, Mr Tait said the town would be best equipped to request an upgrade from Moody’s armed with not only the news of the first round budget passage, but a valid municipal audit showing the established nonrecurring fund balance, and an adopted policy that details how it is being managed.

“We want the audit to show the follow-through, putting capital nonrecurring money into the general fund earmarked as an unreserved fund balance,” Mr Tait said. “And they want to see how we are going to budget to accommodate future expansion [of that fund].”

That means producing not only a policy for managing the balance, but a five-year plan showing how the town will reduce or eliminate the practice of applying capital nonrecurring funds toward offsetting property tax increases.

“They not only want to see the fund balance [permitted] in the charter, they want to see a financial policy that will endure beyond the present administration,” he said.

Mr Tait said that policy will clearly define what the fund balance is, what the fund balance is intended to be used for, how the town will keep that balance in line with budgetary growth, and when to use it. He said the policy should be endorsed by the Board of Finance, and approved by selectmen and the Legislative Council.

“Moody’s also wants to see how we will address future financial liabilities while remaining flexible,” the finance director said, adding that it will be easy to show because Newtown fully funds its pensions, and it carries a relatively small number of retirees on its health insurance rolls.

Over the years, Mr Tait said Moody’s wants to see that the fund balance should grow and be maintained at between five and ten percent of general fund revenues.

“They don’t want to see declining reserve levels,” he said.

And he warned that even if Moody’s grants an upgrade in December, the agency could as easily reduce the rating if the town demonstrates it is using the fund balance for purposes other than emergencies. Mr Tait pointed out that for several years, New Milford used its fund balance to reduce taxation and it recently faced a bond rating downgrade.

Besides the undesignated fund balance, the finance director said he plans to also keep the capital nonrecurring fund for pay-as-you-go capital expenses.

“That way, if we need a $150,000 dump truck, we don’t have to bond it and pay it off over ten or 20 years,” he said. “Moody’s likes pay-as-you-go.”

While Mr Kearney wondered why the town needed to wait considering the charter change was already in effect, Mr Tait said the town’s bond counsel agreed that December would be the best time to seek the upgrade.

With that in mind, finance board chairman John Kortze said Mr Tait should expedite producing the new policy for managing the fund balance.

“That way the town will have time to adopt the policies we need,” Mr Kortze said. “We can go to Moody’s and reaffirm that we have made the extra effort before going out for the bonding. We can present the best offense.”

Vice chair James Gaston concurred.

“I believe we have satisfied the two issues that Moody’s addressed as potentially holding us back from a bond rating upgrade — the reserve fund charter change and passing the budget and bonding referendum on the first pass,” Mr Gaston said. “Clearly, there is strong public support for the financial positions of Newtown.”

Mr Kearney told The Bee following the meeting that the timing of this particular rating is critical.

“We will be going to market with a large bond issuance and any positive rating outcome will translate into significant savings to the town’s interest expense,” he said. “I believe we all feel that the timing is right given the stakes at hand to make our best effort using all available resources necessary to demonstrate to Moody’s that Newtown is worthy and overdue for a ratings increase.”