Bond Rating Stays The Same—

Charter Provision May

Have Costs Town $750K

By John Voket

A charter provision that has been in place since 1961 was a major factor cited by Moody’s Investment Service in declining to grant Newtown an upgrade to its current bond rating. Town officials were hoping to realize as much as a $750,000 savings in interest against a bond package slated to go up for sale early next week, provided a recent review by the national municipal rating firm granted an upgrade from the current Aa2 to Aa1 or Aaa status.

Debt service on municipal bond sales is typically reduced slightly each time the administering municipality receives a bond rating upgrade. But in the case of next week’s $37.2 million bond sale, which will cover the cost of a new fire truck and two significant heating and air conditioning projects at town schools, the level of interest reduction might have saved as much as $750,000, according to Barry Bernabe, a municipal bond authority from Waterbury-based Webster Bank.

In anticipation of the upcoming bond sale, a contingent of town officials including First Selectman Herb Rosenthal, Finance Director Ben Spragg, Assistant Finance Director Donna Tomasko, and Community Development Director Liz Stocker accompanied Mr Bernabe as he went before Moody’s representatives early last week.

Armed with data on the solvency of town finances, information about pending economic development, and with evidence of certain Newtown demographic trends meeting or exceeding other higher rated Connecticut communities, all parties involved emerged confident that Newtown would likely enjoy a bump up in its bond rating.

But it was not to be.

In a letter to town leaders accompanying Moody’s written decision, Mr Bernabe wrote, “…the rating report is very positive and the analyst admitted that Newtown’s demographic position itself belongs in the Aa1 or even Aaa category. 

“The major concern that Moody’s has is the charter restriction prohibiting an undesignated fund balance, even though they mention a strong history of conservative fiscal management and an ability to manage within this constraint,” he continued.

Despite the lost financial advantage, Mr Spragg was upbeat following the announcement, saying that given the short list of Moody’s concerns, he was confident that a charter change, and perhaps some modest economic development initiatives, all but guaranteed Newtown would receive an upgrade in the future.

“That charter provision probably played the greatest role in Moody’s maintaining our current Aa2 rating,” he said Wednesday. “Moody’s doesn’t like the provision restricting the use of the town’s municipal fund balance.”

Calling in from a conference in Indiana, the first selectman said he obviously had bittersweet feelings about the action.

“I’m pleased about the positive feeling Moody’s had about how we control our finances; unfortunately a charter provision that was beyond our control affected our chances for an overall upgrade,” Mr Rosenthal said.

According to Mr Spragg, Moody’s apparently prefers municipalities utilize surplus funds to pay down debt, or to be designated to “rainy day” or undesignated funds that can help insulate the town financially in the event of a major economic downturn.

“A fund balance is very important to Moody’s,” Mr Spragg said. “They are very concerned about how well we are prepared to deal with bad times. And we can’t go to an unrestricted fund because the charter restricts it.”

Both Mr Rosenthal and Mr Spragg said the town created a measure of financial flexibility in relation to the charter provision, which stipulates any annual budget surplus be applied in its entirety as revenue toward the next succeeding budget. Years ago, the Legislative Council created a capital nonrecurring reserve fund, also referred to as a stabilization fund, which can serve Newtown in the same manner as an unrestricted fund, just under a different statutory name.

“We’ve typically used that fund to give some tax relief against the mill rate,” Mr Spragg said. “But it’s the fund balance they are looking for.”

Mr Rosenthal believed that Moody’s understood the town’s statutory restrictions, and granted previous upgrades based on the community calling the fund balance by another name.

“Maybe calling it by another name gets you all the way to a AA2 rating, but that’s as far as they’ll go without a charter change,” he said. “I would want the next charter revision commission to consider removing that provision.”

The town’s Legislative Council has been preparing to initiate a new charter review process for several months. In fact, the council voted to begin accepting applications from residents interested in serving on a Charter Revision Commission at its meeting Wednesday evening, December 1. (See related story.)

Mr Bernabe, who represents numerous Connecticut municipalities before the bond rating organization, explained that Moody’s looks at four criteria when considering a change in municipal rating status. Those criteria are management, economy, financial position, and debt position.

“When you look at Newtown’s financial position, you see the community has the tenth highest median household income in Connecticut, higher that Aaa-rated Greenwich. And all those ten communities, except Newtown, are currently rated Aaa,” he said. “Newtown is in that category and, in my opinion, deserves a triple-A rating.”

Town Board of Finance chairman John Kortze was also very unhappy about Moody’s decision.

“That charter provision is a mistake,” he said upon reading Moody’s report. “But I’m also concerned that if people read this report, it will give them an impression that we can afford to bond a lot more. But this positive outlook is based on the Capital Improvement Plans [CIPs] we have in place today.”

Mr Kortze said, however, that the town’s current rating is being maintained as a result of those CIPs and other financial procedures including a ten percent debt/spending ratio policy and the nonrecurring fund.

“The CIPs are a critical piece of the picture, and those plans are cited in why Moody’s thinks we are doing such a good job of managing our finances, and why we are in such good financial shape,” he said. “We also have a lot to be thankful for in having Ben [Spragg] in charge of our finance office, and the elected officials who voted to implement the CIPs and the debt ratio that have brought us to the rating we enjoy today.”