Town of Hempstead got some good news last Thursday when Moody’s Investors Service notched up the town’s credit rating on its long-term general obligation debt to Aa2 from Aa3. At the same time, the agency raised the town’s outlook to Positive from Stable.
It was the town’s first rating upgrade since it began its long, slow slide from Aaa status in 2014 and is the first time the rating agency weighed in on the town’s creditworthiness since the downgrade to Aa3 in February 2017.
Standard & Poor’s upgraded the town’s GO debt to AA- (Aa3) in June.
The upgrade is significant for the town, since it will likely make it easier — and cheaper — to borrow, according to Town Comptroller Kevin Connolly. “And it makes us more attractive to investors,” he said.
Town officials described the upgrade as “a clear endorsement of the fiscally responsible budget put forth by the council members. Not only did we [the Republican majority] gain a bond rating upgrade, we avoided a significant tax increase embedded in the supervisor’s original budget.”
But the rating agency cautioned in its report that its analysis represents an opinion only and does not imply any endorsement or recommendation. “The upgrade has to do with the town’s improved financial position over the past few years, including 2018,” Moody’s Vice President and Senior Credit Analyst Robert Weber said. Moody’s only comment on the partisan wrangling that has characterized budget negotiations in recent, only going so far as to say that “overall, governance is strained.” And the agency refused to speculate on the medium- and long-term effect this could have on the town’s credit, except to say that “we will continue to monitor the overall governance of the town and its impact, if any, on the town’s credit profile,” according to Weber.
Moody’s standard disclaimer states that misuse of the agency’s credit information is “reckless and irresponsible.”
Chief among the town’s credit strengths, the agency singled out the town’s “large, highly diversified and wealthy [New York City] suburban tax base with manageable debt and fixed costs.” It also praised the town’s conservative fiscal management and its commitment to building reserves in accordance with its own fiscal policy.
The town’s $97 billion residential and commercial tax base is more than 10 times the national median for Aaa-rated municipalities, although Weber cautioned in the report that the tax base still is still 17 percent less than at the 2008 pre-recession high.
The upgrade reflected a “significantly improved financial position that will likely continue to improve as management works to replenish fund balance in compliance with the town’s fund-balance policy,” Weber wrote in the full report accompanying the firm’s news release.
Reserves are projected to increase to approximately $111.8 million at the end of 2018, from $79.9 million in fiscal 2017. The $26.9 million increase is nearly $6 million more than originally projected and is “due largely to continued strong sales tax and mortgage tax receipts,” Weber wrote. The 2019 budget projects
a further increase of approximately $8.4 million, despite a 3.75 percent reduction in the property tax levy. Despite the surplus, however, the town will remain more than $7 million short of its fund-balance policy, which provides for a reserve equal
to four months’ expenditure. The town expects to reach full compliance policy by 2020.
Recovery has been mixed since the low point in 2013, partly due to the “relatively built-out nature of the town’s tax base,” Weber wrote. Because of this, “future tax-base growth will be driven primarily by downtown redevelopment projects,” including the proposed $1.5 billion development of the area surrounding the Nassau Veterans Memorial Coliseum — the so-called Hub — and the controversial $1 billion hockey arena currently in development at Belmont Park in Elmont.
Construction is yet to begin on the two projects, and “failure of one or both to gain approval would have negative revenue and growth trajectory implications,” Weber said. “But this would
not, in itself, result in a rating action,” he said.
To balance the 2019 budget, “management anticipates the retirement of approximately 100 employees,” Weber wrote, adding that those retirements are not guaranteed. “Management believes that the terms of the town’s recent collective bargaining agreement make it likely they will realize the reduction,” he wrote. Management did not anticipate bonding for any separation payments, as it did in 2017.
However, “fewer people than projected taking retirement packages could pressure the town’s ability to meet operating and fund-balance projections,” Weber added as a caveat. “Failure to offset higher than projected payroll expense with increased revenues or savings elsewhere in the budget would be negative for the town’s credit profile,” he said, although it would not necessarily result in a rating action.
The town’s debt burden will remain “minimal” in 2019, at about 0.4 percent of 2018 full value. The town plans to issue some $50 million in new debt in 2019, after issuing more than $128 million in the 2018 fiscal year.
Future rating actions would depend on fiscal 2018 and 2019 results, as well as the continuation of conservative fiscal policies in future budgets, according to Weber. “Our positive outlook reflects our belief that within the next 18 to 24 months there’s a good chance that the rating will go up again” because of the addition to the town’s reserves and the expectation that the town will be fully compliant with its own policies by 2020, Weber said.