Possible Bond Rating Downgrade Leaves Municipalities Worried About Roads, Bridges, Schools
Hartford Courant, October 19, 2017
By Matthew Ormseth
For John Elsesser, Coventry’s town manager, Monday’s announcement that his town was among 26 in Connecticut being reviewed for a bond rating downgrade left him fearing critical infrastructure projects — like repairing a local bridge with crumbling foundations — could become far costlier, or worse, go undone.
Moody’s Investor Service’s announcement left local leaders worrying Tuesday that any slip in their bond ratings — which gauge a borrower’s likelihood of repaying a loan — could force taxpayers to pay for significantly higher borrowing rates over the next decade.
Moody’s said Monday it was reviewing 26 towns and cities for downgrade, and a further 25 were assigned “negative outlooks,” a less grim prognosis. The investor service cited the state budget impasse as reason for possibly downgrading the ratings of Connecticut towns and cities, many of which have received far less state aid under Gov. Dannel P. Malloy’s executive order than they’d anticipated.
“The unfortunate thing is it really has nothing to do with the towns themselves,” said Matt Spoerndle, senior managing director of Phoenix Advisors, a Milford-based group that counsels about 70 Connecticut towns on bonds. “Many of the towns – not all of them, but most of them – are very well-run, conservative, fiscally responsible … and now, because of what’s happening with the state budget, it’s like the floor’s caving in from under them.”
Towns and cities regularly issue bonds to borrow money for new infrastructure projects, or to pay for the upkeep of existing ones. Investor services like Moody’s rate those bonds, which investors interpret as reflecting the likelihood of the town repaying those loans.
In Coventry, Elsesser fears a rating downgrade and subsequent hike in borrowing rates could force towns to put off critical infrastructure projects or repairs.
“It’s a first step toward a spiral of bad steps,” he said. “People are going to stop fixing things.”
Things such as Coventry’s Jones Crossing Bridge, he said, where earlier this month a road crew found signs of failing concrete in the ’s foundation. Or modifications the town is making to its schools, so they comply with the Students With Disabilities Act.
“It’s not like this school project is voluntary,” Elsesser said.
“Legislators have not done the job they were elected to do,” he said. “This is something that’s impacting us – the towns. And we’ve done everything we could to prevent this from happening.”
An increase in the borrowing rate as slight as a quarter of a percent “will definitely cost taxpayers more money,” he said. “You’re talking about a lot of money over a 20-year period.” And costlier projects could lead voters to oppose them, he warned, even ones as critical as cracked bridges.
Moody’s has yet to actually downgrade any of the towns and cities under review or considered to have a “negative outlook.” But if Moody’s does knock their ratings down a notch, it could spell a hike in borrowing rates, Spoerndle said, increasing the cost of building new infrastructure and maintaining what already exists.
“If these downgrades do happen, it will cost taxpayers in Connecticut significantly more money,” he said.
Who could be downgraded back to top
Municipalities under review for downgrade: Ashford, Bolton, Bridgeport, Colchester, Coventry, East Lyme, Ellington, Enfield, Groton, Hamden, Ledyard, Mansfield, Marlborough, New Haven, Scotland, Shelton, South Windsor, Sprague, Stafford, Stratford, Thompson, Torrington, Watertown, West Haven, Wolcott and Woodstock.
Municipalities that were assigned a negative outlook: Berlin, Bethany, Canton, Cheshire, Clinton, Columbia, Hartland, Lisbon, Montville, New Fairfield, New Hartford, New Milford, North Branford, Oxford, Plainfield, Plainville, Portland, Salem, Somers, Sterling, Thomaston, Wallingford, West Hartford, Wethersfield, Willington and Windham.
In Torrington, Mayor Elinor Carbone had drawn up a budget in May that, in the event of a serious shortfall of state aid, would rely on bond sales to maintain the town’s roads, sidewalks and roofs. That worst case scenario materialized this summer, she said, when Malloy’s executive order slashed Torrington’s Education Cost Sharing (ECS) grants from $24 million to $4.9 million.
Now, if Moody’s downgrades her town’s bond rating, Carbone’s bonding backup plan could become far more costly.
Any increase in the borrowing rate, multiplied out over a 15- or 20-year period, would be “extremely significant,” Carbone said.
“The rate that’s determined is the rate taxpayers could pay for over a decade. This is not some short-term, momentary thing – this has far-reaching consequences.”
ECS grants are “the most pressing concern” for Moody’s analysts, said Spoerndle, the bond adviser. If a town’s ECS grants are slashed by Malloy’s executive order — like in Torrington, where they’ve been cut by some 80 percent — analysts could interpret that as hampering the town’s ability to pay its loans.
“The ECS money is really the biggest chunk,” Spoerndle said, “and that’s the one they’re really withholding under the executive order.”
Earlier this month, Torrington joined two other towns and the Connecticut Education Association in suing Malloy over the $557 million in ECS cuts meted out statewide by his executive order.
In the wake of Moody’s announcement, as local leaders scrambled to make sense of what a “negative outlook” or “under review for downgrade” spelled for their communities, the consensus seemed to be that towns and cities were being pinned with the state government’s failure.
Carbone said Torrington had cut what it could and taken steps to remain fiscally sound, even as the state’s deficit widened. “We’ve done everything right,” she said.
But now, with Torrington’s education grants cut 80 percent and a potential rating downgrade in the works, her community finds itself in the unenviable position of having less money, and possibly needing to pay more to get more of it, she said.