Moody's Assigns 'Aaa Rating with Negative Outlook' to West Hartford

A report issued Wednesday from Moody’s Investor’s Services assigned the “Aaa” rating to the $15 million in General Obligation Bonds West Hartford is preparing to sell on March 1. The Town’s outlook, however, was revised to “negative” from the “stable” rating West Hartford typically receives.

West Hartford will also receive a rating from Standard & Poors, and that report will be issued on Friday. Town Manager Ron Van Winkle said that he has been informed by S&P that West Hartford’s rating will be “AAA Stable.” [Note: Aaa and AAA have the same meaning; rating agencies just use a different format.]

Van Winkle is pleased that West Hartford retained the Aaa rating from Moody’s, which it has held since the mid-1970s. Regarding the negative outlook, he said it should not affect the interest rate the Town receives, but does mean that Moody’s will revisit the rating and review the Town’s financial situation over the next 18-24 months. “Moody’s is concerned about how we will handle the storm costs,” Van Winkle said.

The Moody’s report reads, “The Aaa rating reflects the town's sizeable and diverse equalized net grand list (ENGL) and an above-average debt burden governed by a comprehensive capital plan. The negative outlook reflects a deterioration of the town's financial flexibility due to approximately $12 million of unanticipated costs associated with the clean up from Winter Storm Alfred, exacerbating budgetary pressures for fiscal 2012 and 2013. Future rating reviews will focus on the town's ability to offset these costs and maintain a financial profile consistent with a Aaa rating.”

In meeting with Moody’s as part of the rating process, Van Winkle said he informed the agency that the Town’s ultimate storm costs, anticipated to be around $3 million after FEMA’s reimbursement, would be paid out of the fund balance. Moody’s, Van Winkle said, was concerned that the $3 million withdrawal would “reduce the flexibility of that account,” which is intended to provide a savings account for emergency situations. He said he advised Moody’s that repayment of the $3 million withdrawn from the fund balance would be addressed as part of this year’s budget process.

"I am comfortable that we can address this, but perplexed about their concern regarding a plan to repay this quickly. We handled this the way we should have," said Mayor Scott Slifka, referring to the planned use of money from the fund balance to pay storm costs.

"Moody's seemed to have a preference for taking out a line of credit to repay these costs," said Slifka, who added that the Town is still waiting to find out the size of the bill once the FEMA reimbursement process has been completed. "I'm hopeful that the [$3 million] bill will be reduced," he said.

"The good news is that we are 'Aaa,'" said Slifka.

“We will still get an interest rate [on this offering of General Obligation Bonds] as low as we have ever seen. The [Moody’s] rating is too nuanced to make a difference,” said Van Winkle. However, had Moody’s decided to drop the rating to Aa, that would have had adverse effects.

The March 1 sale of $15 million of General Obligation Bonds was a planned sale to cover capital expenditures, and Van Winkle was prepared to have a discussion about the fund balance reduction.

“We were cognizant that withdrawal would bring us below the metric for our fund balance, and we spent a lot of time with them explaining why we were withdrawing the money,” Van Winkle said. “Rating agencies use metrics; it’s numbers, not opinions.” Moody’s concern is really how West Hartford plans to rebuild the balance to the Aaa level, he said.

“We raised the issue with S&P, too, and they understood,” said Van Winkle.

West Hartford pays a fee, about $20,000, to receive a bond rating from each outside agency. Van Winkle said the Town will have to consider whether or not it is necessary to receive ratings from two agencies, or if one would be sufficient.

Van Winkle said that the method for rebuilding the fund balance will be considered in the context of the upcoming budget discussion. It could involve taxes or sale of notes, he said.

Van Winkle will present his budget to the Town Council on March 13, and it will be adopted on April 23.

Town Council Minority leader Denise Hall certainly expects the "negative" outlook to impact the budget discussion. “It is gratifying that our Aaa rating was affirmed, but the Moody’s change in Outlook to negative means we have tough choices ahead of us. We are not immune to the problem being played out at the national, state, and local level everywhere; we cannot keep up with the rising costs associated with automatic contractual pay increases and providing employee and retiree pension and health benefits that far exceed the private sector. Collective bargaining and union arbitration make it next to impossible to enact the changes required to address the structural imbalance between the growth in our expenses versus the growth in our revenues,” Hall said. 

"The last damage from the storm is upon us, but we'll get through it," Slifka said.