Good news, bad news for city
Moody’s downgrades rating, one day after S&P affirms current rank
WEST HAVEN — Moody’s Investors Service, one of the two main agencies that rate the city’s credit, has downgraded West Haven’s rating by one notch — its second downgrade in two years — and given it a negative outlook.
But that came just one day after Standard & Poor’s affirmed the city’s current rating, gave it a stable outlook and removed it from S&P’s “CreditWatch” list.
Mayor Ed O’Brien, who will hand the city’s reins to Mayorelect Nancy Rossi on Dec. 3, chose to embrace the Standard & Poor’s view, while his finance director, Kevin McNabola, said the different ratings trends reflect differences in the two rating agencies’ priorities.
“I think (the S&P rating) reflects what we’re doing here,” said O’Brien, pointing out that “many towns were on CreditWatch” and “many of them got downgraded” by S&P.
“I think Moody’s is just a recalibration of what they’re doing in the state of Connecticut,” O’Brien said. “Moody’s is doing rating calls with many cities in CT because of the state budget.”
Rossi said it wasn’t much of a shock to her to see Moody’s downgrade West Haven.
“Sadly, it’s not a big surprise,” she said. “The financial condition of the city is one of the things that I did run on. Once I get sworn in, we’re going to everything we can to change the financial condition
of the city.”
The ratings came on Thursday and Friday, respectively.
McNabola said what Moody’s did in downgrading West Haven is consistent with what it has done with other municipalities that rely heavily on state aid. He pointed out Bridgeport and New Britain also were downgraded by Moody’s.
He also pointed out that Standard & Poor’s affirmed Bridgeport’s currently rating and gave it a stable outlook, just as it did with West Haven.
“Moody’s has put a heavy reliance on governmental funding that the cities receive that makes the cities vulnerable to future state fiscal challenges,” McNabola said.
He pointed out that “over 40 percent of our revenues here in West Haven come from the state of Connecticut,” which is a concern for Moody’s.
“I think S&P looks at is as, we’re definitely taking the right steps to fix the long-term imbalance,” McNabola said. “I think Moody’s is just a little bit more conservative ... and long term, and a little more focused on the state.”
Rossi, who works as a certified public accountant, said her concern is with the results from the last fiscal year, which ended June 30 and is just entering the audit process.
“I’m really concerned because I don’t know what’s going on for that year,” she said. “Now if we go and we deficit bond ... we’re going to end up with a deficit bond and we’re going to end up with a deficit for 2017” in addition to that, Rossi said.
City treasurer-elect Michael Last, co-chairman of Rossi’s transition team, also said the Moody’s downgrade was no surprise — and said the Rossi administration will respond just as soon as it takes office.
“On day one there will be a hiring freeze, there will be a spending freeze and we’ll have to take a look at the current year’s budget and make adjustments to try to reduce the deficit in the year going forward,” Last said.
Moody’s downgraded West Haven’s general obligation rating to Baa3 from Baa2, and assigned a Baa3 rating to the city’s expected $15.5 million in general obligation bonds to finance the deficit, as well as to $9.6 million in general obligation bonds for other projects. At the same time, it revised West Haven’s outlook from stable to negative.
According to Moody’s, “The downgrade to Baa3 reflects an increase in the city’s General Fund deficit since the time of our last review. Although deficit financing bonds will cure the majority of the deficit as of fiscal year end 2016, the city incurred an additional deficit in 2017 and remains challenged to effectively match recurring revenues with recurring expenditures.
“The rating also reflects negative positions in funds outside the General Fund,” Moody’s wrote. “The rating further incorporates the city’s sizeable tax base that will benefit from a significant pipeline of local development, wealth and income indicators that average relative to national averages but below average for the state and an above average debt burden with future planned issuance.”
The negative outlook “reflects the belief that the city will remain challenged to balance operations in the near term despite its expected qualification for additional state oversight from the recently established Municipal Accountability Review Board,” Moody’s wrote.
S&P Global Ratings, meanwhile, affirmed its BBB rating on West Haven’s bonds “and removed the rating from Credit-Watch with negative implications, where it was placed on Sept. 28, 2017. At the same time, we assigned our ‘BBB’ rating to the city’s series 2017A and 2017B GO bonds. The outlook on all ratings is stable.”
“Our rating action reflects the recent state budget enactment and its impact on our view of the city’s budgetary performance, coupled with the city’s continued efforts to improve structural alignment of revenues and expenditures,” S&P wrote.
“We also anticipate that as a result of deficit financing through the issuance of the series 2017A bonds, the city’s reserve position will improve to near-zero levels at the end of fiscal 2018,” S&P wrote. “While this would be a substantial improvement from the negative deficit position of greater than 5 percent of expenditures for the past seven years, we note available reserves will remain at levels we consider very weak.
“Despite our expectation that reserves will improve, we believe the city has not yet shown the ability to achieve and maintain structural balance in order to support reserve growth and that the implementation of certain initiatives supporting structural alignment remain uncertain,” S&P said. “We believe revenue and expenditure adjustments are unlikely to support a return to structural balance prior to fiscal 2019 and potentially could be later if projected property value growth is not achieved.”