Moody’s has downgraded Southampton Town’s bond rating from Aa1 to Aa2, a change that will affect how much the municipality pays in interest on money it will borrow in the future.
The agency, which is based in Manhattan, brought the rating down a notch because the town’s fund balance reserves have deteriorated, according to Town Comptroller Tamara Wright. The change in status will result in a small increase in the town’s interest rates on future bonds, she said.
The town’s fund balance—its assets minus its liabilities—fell from $16.7 million in 2007 to $10.6 million in 2008. Moody’s Investors Service looked down on that, according to an opinion it gave the town on February 17.
“The downgrade reflects the town’s deteriorated financial condition due to the use of operating reserves ... for one-time capital spending in recent years and two one-time accounting adjustments,” the opinion states.
In the past, the town used money in its operating reserves to pay for projects and to fix accounting errors, financial practices that contributed to the financial crisis the municipality found itself in last year. While the town comptroller’s office was implementing new, improved accounting procedures, it discovered that money had not been properly transferred to the accounts and funds that it should have, which led to a minor panic over the location of millions of dollars. Town officials later discovered that no money was missing, but that there is a $5 million deficit in the capital line of the budget.
The town’s self-imposed 5-percent limit on property tax increases is also poor policy in Moody’s eyes, as it limits the town’s ability to raise revenues by a substantial amount and also could lead to declines in revenues from taxes.
Ms. Wright said that she will be discussing the fund balance reserve policy with town officials in the future.
“I believe it is advisable to reconsider the General Fund Balance Reserve Policy,” she wrote in an e-mail. “The Town Board plans to do so over the next few months and will decide if any changes are in order.”
Town Supervisor Anna Throne-Holst emphasized that the downgraded rating is not the worst possible outcome following the recent fiscal crisis.
“It’s a minimal downgrade,” she said. “They had indicated that it would be far more of a downgrade than that.”
Standard & Poor’s, another credit rating agency, is in the process of reevaluating Southampton Town’s financial health. The town currently has a rating of AAA, the highest possible with Standard & Poor’s.
The highest rating Moody’s can bestow is an Aaa rating.
Moody’s and Standard & Poor’s placed the town on a credit watchlist in August 2009, a few months after the financial crisis was discovered, according to a press release issued by Ms. Throne-Holst.
The drop in rating may mean that the town will suffer a five basis-point increase in its borrowing interest rate, according to a press release written by the supervisor’s spokeswoman, Jen Garvey. That would equate to about a 0.05-percent hike in rates, Ms. Wright said. The comptroller said the average interest rate on bonds is about 3.5 percent, so with the new Aa2 rate, the town’s rates would climb to 3.55 percent.
Those estimates were provided to Southampton Town by its financial advisors, Munistat Services of Port Jefferson Station, Ms. Wright said.
The change in status—and resulting uptick in interest rate—will affect payments on the town’s bonds for road work, for example. Over a period of 15 years, the life of the $2 million bond, the 0.05-percent rate increase will result in an extra $8,115, or $541 per year, the town will have to spend, Ms. Wright explained.
The town’s affluent tax base and high home values prevented the bond rating from falling further than it did, according to the Moody’s opinion. Ms. Wright and the comptrollers’ office staffers were another key component in keeping the rating relatively high, the report states.
“The rating heavily factors a new management team’s swift and effective response to correct the town’s internal accounting procedures and controls ...” the opinion states. “The rating also reflects our expectation that management will be successful in restoring the town’s fiscal health ...”
Ms. Throne-Holst and Ms. Wright had been anticipating Moody’s announcement since they met with the rating agency in Manhattan several weeks ago.
Moody’s also took issue with the Town Board’s 2008 decision to lower the amount it keeps in its fund balance reserve from 25 percent of the operating budget to 15 percent. That move “weakened the town’s financial policy,” the opinion states.
Joseph Shaw, Executive Editor on Feb 24, 2010