Moody’s Touts Town’s Low Pension Liability, Warns About Debt 'Weakness'
It has been years since Newtown sought a review and upgraded municipal bond rating from Moody’s Investors Service.
The main reason for that, according to Town Finance Director Robert Tait, is because having a Aa1 rating — one step down from a perfect rating score — has helped Newtown regularly receive bond borrowing rates equal to or even better than other Connecticut AAA-rated communities.
For several years now, Newtown has consistently maintained a perfect rating score of AAA from another global financial service, Standard and Poor’s (S&P).
Plus, as First Selectman Dan Rosenthal said, seeking regular bond rating affirmations come with a cost. So avoiding annually seeking ratings affirmations from both agencies is simply saving taxpayers money.
However, since Newtown still has a number of bonds outstanding that were originally rated by Moody’s, Mr Tait said the town still receives an annual “issuer comment” statement from the agency. The latest comment statement contains some important details, either overtly stated or suggested in language familiar to Mr Tait.
As a result, he recently reported this information to the Boards of Selectmen and Finance, and along with Mr Rosenthal, shared them with The Newtown Bee for the benefit of taxpayers.
In the latest Moody’s Credit Overview, the agency states that Newtown’s credit position is “very strong — and its Aa1 rating is above the US cities median of Aa3.”
Key factors contributing to Newtown’s relatively high credit marks include “a very strong wealth and income profile, a sizable tax base, and an exceptionally low pension liability.”
Mr Rosenthal said the town has been working diligently to reduce its pension liability for years. He reports that as of July 1, after the latest union contract negotiations were finalized, every new municipal hire going forward will be offered participation in a defined contribution plan.
Beginning with municipal contracts negotiated back to January 2014, all new nonunion town hires began participating in a defined contribution plan, as opposed to the defined benefit plan the remainder of town pensioners were on at the time.
“As with similar statements from S&P earlier this year, now Moody’s has noted our pension system, which is well-managed and well-funded,” Mr Rosenthal said, adding the town’s pension position was actually identified as a positive attribute by Moody’s in this latest annual statement.
“I think our Aa1 is pretty good, so we should continue down the path of reducing our debt, trying to do more pay as you go, and perhaps taking a year off in our CIP [Capital Improvement Plan], and if nothing else, continue to reduce our reliance on debt,” the first selectman said.
The latest Moody’s report states that Newtown’s pension liability is “negligible and is slightly favorable with respect to the assigned Aa1 rating,” and is “materially below the US median.”
However, in the very next bullet point, Moody’s warns that Newtown’s debt burden “is a weakness relative to the towns with Aa1 rating,” and its “fund balance as a percent of operating revenues is much lower than other Moody’s rated cities nationwide.”
It is subtle points like this that Mr Tait said catch his attention.
“These are the things we have to concentrate on, and we’ve always said that — fund balance and debt — which we address in the CIP process,” the finance director explained. “Moody’s is saying our debt is affordable, but it’s a weakness against their rating criteria for similar towns. So, it’s like they are cautioning us on that.”
Mr Tait did clarify that due to Connecticut’s property tax system, municipal income is somewhat stable and predictable compared to municipalities in states or areas with no property tax system.
“So in many Moody’s rated communities, they must keep fund balances on account at ratios exceeding 30 percent or more,” he said.
“I think we should continue to let our fund balance grow,” Mr Rosenthal said. “You want to make sure you’re maintaining a proportionate relationship between your operating budget and fund balance.”
For the most part, the first selectman said, Newtown’s fund balance has grown organically, with excess end-of-year revenues being devoted to fortifying the account. Some revenues are also dedicated to a capital nonrecurring account to increase the town’s capacity to essentially pay cash — or eliminate long-term debt service for things like costly fire apparatus and heavy equipment for the Public Works Department.
“You always want to keep improving your fiscal measures,” Mr Rosenthal said, with the understanding that Newtown will never have — nor want — the kinds of Boston Post Road commercial corridors that pump substantial property tax revenues into a half-dozen affluent (Moody’s) AAA-rated lower Fairfield County communities.
“AAA S&P and Aa1 from Moody’s is pretty good,” Mr Rosenthal said.
When discussing the real impact of bond ratings, Mr Rosenthal said that during a February 2019 bond sale, Newtown was able to learn it would have “been well north of $200,000 more in bond debt service if our S&P” bond rating was just one point lower than its current perfect AAA score.
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