Exhibit AAA: Amidst credit chaos, Westport's top rating gets nicked
Updated 12:36 pm, Thursday, August 11, 2011
Following Standard & Poor's downgrade of the federal government's credit rating last week, local officials in both Westport and Fairfield still maintain a bullish outlook about their municipalities' stellar credit status.
"I believe we still have very strong credit," said Westport Board of Finance Chairwoman Helen Garten. "I never had any doubt about that."
Both towns retained the top AAA credit ratings from Moody's, but face some longer-term uncertainty after Moody's last Thursday assigned negative rating outlooks to the two municipalities and approximately 300 other public finance bond issuers nationwide. A rating outlook represents an opinion on the likely medium-term direction of an issuer's credit rating.
The negative outlook for Westport, Fairfield and the other bond issuers is linked to the negative outlook that Moody's gave last week to the federal government, although Moody's maintained the AAA rating for the so-called "sovereign." All of those ratings, however, will be evaluated on a case-by-case basis during the next few weeks, according to an Aug. 4 statement from Moody's. Favorable reviews could lead Moody's to change the two towns' outlooks to the higher level of "stable."
Prior to having their credit ratings confirmed, Fairfield, Westport and 160 other local governments nationwide were placed by Moody's on a watch list for possible ratings downgrades. Along with other Connecticut municipal officials, Fairfield interim First Selectman Michael Tetreau said he expressed dissatisfaction in a conference call Monday with Moody's representatives that the ratings agency compiled the watch list without indicating whether local governments could have higher credit ratings than the federal government if Moody's were to downgrade its status.
"The statement that best summarized it and was used repeatedly is, `Moody's, aren't you putting the cart before the horse?' " Tetreau said. "You raised the question, `Can a town or municipality be rated higher than its sovereign nation?' But before you answered that, you put 162 towns on watch."
In contrast, the town has received more laudatory news from Standard & Poor's during the last month. In July, S&P confirmed Fairfield's long-term AAA credit rating with a stable outlook, as the town secured a record-low interest rate of 0.19 percent for the sale of approximately $41 million in bond anticipation notes. On Monday, S&P said in a report that "we do not directly link our ratings on U.S. state and local governments to that of the U.S. sovereign debt rating," indicating that Fairfield could maintain a higher credit rating than the federal government.
"I am very confident that we have done everything within our power to take the best steps to preserve the AAA credit rating as well as what we thought was in the best interest of the taxpayers and citizens of the town," said Fairfield Board of Finance Chairman Thomas Flynn.
Dealing with the debt
With two of the highest debt levels in the state, the status of municipal finances is a major issue for both Fairfield and Westport officials.
Westport's debt-per-capita was approximately $6,400 in the 2009 fiscal year, the third highest in the state, according to a report from the state Office of Policy and Management. Fairfield was ranked No. 14 in the state with 2009 debt-per-capita of about $3,700.
Both towns' debt loads are dominated by bonding for recent school construction projects, such construction of Staples High School in Westport and the renovation and expansion work at the Fairfield Woods Middle and Stratfield Elementary schools in Fairfield.
"It's acceptable to have a higher debt level if you have strong reserves as we do and you have a sizable tax base," Garten said. "We've always kept our triple-A rating because we have the ability to pay."
Flynn also said that he supports his town's capital expenditures for the school system.
"We've invested the appropriate level into the school infrastructure," he said. "We've had some aging buildings and an increasing school-age population that has necessitated those investments in those buildings and in the school system."
While both towns saw their debt loads grow substantially during the last decade, those obligations are expected to soon stabilize, according to top officials.
Westport's long-term bonds and notes outstanding total will decrease by about $60 million during the next decade, according to a five-year capital forecast issued earlier this year by First Selectman Gordon Joseloff.
In Fairfield, Chief Fiscal Officer Paul Hiller said the town's debt service as a percentage of non-capital expenditures will hold at around 10 percent during the next five years. For the 2010 fiscal year, the town had a ratio of 9 percent.
Related to Fairfield's debt level, Moody's will also assess the fiscal impact of construction of the town's third railroad station, now estimated to be running from $2 million to $6 million over budget. Tetreau, however, said he thought that the ratings agency would take a generally favorable view of the project.
"The ratings agencies are much more likely to look at the Fairfield Metro train station and say, `Wow, you're building a long-term base for additional commercial tax revenue,' " he said.
Moody's, meanwhile, will evaluate Westport's financial condition during its outlook review amidst the backdrop of an undetermined liability for its town employees' Other Post-Employment Benefits (OPEB) fund. Board of Finance members expected a new actuarial report on that obligation by May, but the recently discovered omission of town employees from the town's last actuarial OPEB report has delayed a new analysis.
"We have not seen the number yet," Garten said. "We are still waiting for the number from the actuaries."
While acknowledging their towns' exposure to macro-economic and financial trends, officials in both Fairfield and Westport expressed confidence about steps taken locally to preserve their high credit standing and general fiscal health.
"We must continue to rein in expenses and retiree liabilities going forward," Westport Board of Finance member Avi Kaner said in an email. "We've made good progress on the expense side and expect to focus intensely on the retiree benefit side over the next few months."
In Fairfield, Tetreau and other administration officials will convene in September with members of the town's top boards for a capital planning workshop to draft an updated five-year capital plan, a document intended to help the town manage capital projects as well as its debt load.
"We've weathered the storm from the last few years," Tetreau added. "We've finished the last three years with a surplus. We've strengthened our reserves over the last few years. We have basically moved in the direction that any of the ratings agencies would want us to move."